Thinking differently about corporate governance

Written by Dr Roger Stewart • Online since 3.03.2016 • Filed under Press Release • From Issue 3 - March 2016 - August 2016 page(s) 20-21
Thinking differently about corporate governance

With an ongoing problem of codes of good corporate governance not meeting expectations, will calls for new, stricter regulations offer more of the same or yield different outcomes?

FOR two decades, corporate governance of public companies has been regulated by codes that dictate board membership, structures and numerous practices. The lingering problem is that codes of good corporate governance have not met expectations: public companies are not generally more successful than in the past, corporate failures have not diminished in frequency or magnitude, and corporate scandals continue unabated. The calls for new, stricter regulations are reaching a crescendo – will more of the same yield different outcomes? Investigation reveals that the main tenets of the codes are not substantiated by empirical evidence. Sumantra Ghoshal argued convincingly that a dystopian governance environment, characterised by distrust, was underpinned by self-fulfilling agency and transaction cost theories. Jay Lorsch and Robert Clark from Harvard were not the only scholars who warned about the high cost of code compliance and about something more ominous: directors’ focus on managing compliance has impeded their focus on ensuring the long-term success of their companies. Bureaucratic organisations are controlled in a codified, algorithmic kind of way with the consequences of inefficiency, sluggishness and loss of adaptability, the antithesis of what’s expected of public companies. Corporations are a tangled web of actively interconnected entities, purposeful people and processes enmeshed within even more complex social, technical and natural systems. Compliance with codes and rules is an inappropriate guide of goal-seeking and purposeful systems, such as public companies. Perhaps we should consider thinking differently.

Jeffrey Sonnenfeld understood what makes the boards of companies perform well: ‘It’s not in the rules or regulations – it’s the way people work together.’ There are three important co-determinants of  people working well together:

1. Common purpose, goals and a definition of success that invigorate and direct joint work;

2. Shared values that guide decisions and collaborative behaviours; and

3. Trust, which unlocks the shackles of ineffective control and unnecessary constraints, thus promoting efficient and effective co-operative work. Control and compliance with codes are appropriate for the mechanistic elements of directors’ duties – for example, compliance with accounting standards for compiling financial statements. However, adaptive governance structures and practices, and an enabling organisational climate are essential if companies are to pursue their business purpose and economic success with enterprise, while competing in a turbulent and unpredictable environment. Through intelligence, innovation and disciplined experimentation, directors and employees can learn and adapt – develop new strategies and goals, new operations and also new ways of designing, managing and governing the business.

Empirical evidence from 18 countries and 36 280 employees revealed that self-governance, grounded in trust, values and a purpose-driven mission, was far superior to both authoritarian and rules-based control in determining company performance. In this compelling study, performance was gauged by indices of value appreciated from a number of perspectives: financial outcomes, employee engagement and loyalty, innovation, customer satisfaction, ethical behaviour and reputation in society. Fundamentally, good corporate governance is about value – it is about aesthetics and ethics much more than it is about control from the top. Successful companies are highly valued because they achieve their economic goals as harmoniously integrated, efficient wholes that have a moral purpose, and also are in harmony with their society and environment. Self-governance grounded in trust is not a panacea.

There will always be some breaches of trust ... codes and laws will not prevent them. Good governance pursues enduring success and also strives to minimise the adverse consequences of the corporation’s operations and its inevitable demise. However, good governance does not guarantee enduring success: the lives of organisations are ineluctably finite and the causes mostly frequently are deeply rooted in the system that is the company. Corporate failures may be traumatic and tragic but, somewhat paradoxically, they may be necessary to make way for fitter companies and for the successful development of societies and their economies.

Here’s an alternative way of thinking about the corporate governance of companies:

• Appoint trustworthy directors, i.e. with proven competence and probity – perhaps the greatest challenge.

• Replace the codes with a short set of universal goals of good governance, expressed as deliverables, for example the Hermes Principles published in 2002 (below); and underpin these with the few universally applicable moral principles of good governance, expressed in unambiguous sentences.

• Self-governance: directors design and implement an evidence-based, adaptable governance system that is grounded in trust and consistent with the goals and moral values of good governance, but customised by the company to the organisation’s internal and external context.

• Orientate governance to the harmonious functioning of the whole rather than to the control of independently purposeful people.

• Shareholders and other stakeholders regularly evaluate the performance of directors and managers against the companies’ purpose, goals and the value they create, and act accordingly.

The Hermes Principles of Good Governance:

1. Honest, open dialogue.

2. Systems in place to identify value-maximising activities and skills.

3. Investment plans tested for long-term value.

4. Capital allocated to exploit core growth opportunities rather than unrelated diversification.

5. Cost-effective incentives to maximise long-term value.

6. Efficient capital structures to minimise long-term costs.

7. An accurate understanding of the strengths of the business model and of the forces driving growth.

8. Clear insight into why the company is the ‘best parent’ of any business.

9. Effective relationships with stakeholders; regard for the environment and society as a whole.

10. Measures that minimise the transfer of adverse costs to society at large.

(www.hermes.co.uk)

Reference: The HOW Report, downloadable at htpp://pages.Irn.

com/how-report.

Issue 3 - March 2016 - August 2016

Issue 3 - March 2016 - August 2016

This article was featured on page 20-21 of SABI Magazine Issue 3 - March 2016 - August 2016 .

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