Back to the drawing board: what is corporate governance?

Have you noticed how frequently the term 'corporate governance' is bandied about these days? References are commonplace in magazine articles, research papers, codes and regulations; and the term is frequently mentioned in everyday conversation. However, the term is used in different ways in different contexts, to the point that there are a plethora of understandings of what governance in a corporate context is or might be.

This lack of consensus of what corporate governance is has all sorts of implications for boards of directors in practice—not the least of which is the confusion it causes. Are boards to pursue performance or conformance outcomes (or both), for example?

This well-written article (recently published in the New York Times) highlights some of the issues that boards and shareholders have to deal with as a consequence of the ambiguity. These include whether chairman–CEO separation increases company value or not; whether the number of independent directors is material to improved company wealth outcomes or not; and, that some investor groups see corporate governance as a means of controlling boards.

The original basis for boards (a proxy, following a separation between ownership and control of decision-making), as espoused by Berle and Means in 1932, appears to have been lost somewhere along the way. That corporate governance is now considered to be a panacea for the ills of the business world (or so it seems) doesn't help either. 

​The board governance community appears to have two options: to persist with seemingly flawed (structure, process, policy) assumptions in search of consensus (and risk further 'governance wars'), or to return to the drawing board to re-assess what corporate governance actually is.

If we return to the drawing board, the most important tasks of the board (setting of strategy and oversight of management in pursuit of shareholder value) could provide a useful foundation of any re-assessment—so long as the socially-dynamic interactions that occur in boardrooms and the competencies of effective directors are incorporated in the analysis. An interesting possibility might be to re-conceive corporate governance is a multi-functional mechanism that is activated by boards in session and through which business performance outcomes are pursued.

​Might a mechanism-based conception be a useful starting point from which to re-conceive what corporate governance might actually be and how boards might influence business performance? Quite possibly. In fact, this possibility is one of the main outputs of my doctoral research. I'll be able to discuss it in more detail after the thesis is examined. If you'd like to join the mailing list to learn more, or to explore its application in practice, please let me know.