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    EURAM'15: Is it time for a new paradigm?

    Accountability Conferences Governance Research Societal Wellbeing
    Professor Thomas Clarke, of UTS Sydney, opened the corporate governance track of the European Academy of Management 2015 conference by discussing both the history and the future of board research. In so doing, he asked the question as to whether boards and board research were on the cusp of a paradigm shift. 
    Looking back 83 years, Clarke called on the memory of Berle and Means, and their oft-cited work that explored the separation of ownership and control. Berle and Mean envisaged a collective and collaborative approach (between shareholders, boards and managers) to the achievement of various business goals. The article has been accorded seminal status by many researchers, yet it has been largely usurped in more recent times by agency theory (one of the most debilitating ideologies of moderns time, according to Clarke), a contribution that conceives an individual and separatist view where shareholder primacy is the primary (even only) goal. 
    In looking ahead, Clarke asserted that new a model is required because the world is on the cusp of a massive disruption caused by climate change. A continuation of the extant approaches will simply accelerate the demise of many economies. In calling for a zero-emission post-carbon economy, Clarke said that boards of directors have a key role to play. However, they need to be farsighted, determined and courageous. He called out Chandler (1967) and Stout (2012) as highly influential thinkers in this regard, and contrasted their theses with that of the more commonly cited Jensen and Meckling (1976) (who promoted agency theory). 
    The challenge for boards in the future is to return to the ideas of Berle and Means, for history suggests that their ideas were largely correct. Whereas the 19th Century was characterised by production and the 20th Century by marketing and consumption; the 21st Century will, more than likely be characterised by sustainability. Boards need to embrace this if they are to oversee the fundamental changes needed to make the transition. Whether boards will be prepared to look inwards, to re-invent themselves and the way they work is the first challenge to be surmounted. Clarke's thesis suggests that failure to act on this initial point may consign boards and the very companies they oversee to the very place they wish to avoid—the scrapheap.
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    IGW'15: What place does regulation have in #corpgov?

    Accountability Conferences Governance Performance
    The session that followed the challenging commentary of Silke Machold explored the place and role of regulation in corporate governance and, more specifically, in decision-making:
    • Ilya Okhmatovsky, a Russian based in Canada, observed that much attention and scrutiny on corporate governance usually follows scandals and abuses from within the boardroom. However the regulatory response that inevitably follows—hard law and additional compliance requirements—rarely results in better decision-making or company performance outcomes. In fact, the direct regulation of decision-making appears to be impractical (and potentially, nonsensical) because it constrains board autonomy and innovation, and it often leads to another round of subversive activity. Okhmatovsky suggested that a balance between external regulation (to outlaw certain actions and conduct) and internal policies (aligned to the purpose of the company) is more likely to lead to the performance outcomes desired by boards and shareholders. He has recently commenced a study to determine whether his hypothesis is supported in reality, or not. I look forward to reading the results in due course.
    • Jean–Phillipe Denis, a Parisian scholar, asked whether the company failures experienced around 2000 (Enron, Worldcom, etc.) and 2007–2008 (GFC) were, in fact, predictable events Drawing on the title of the movie, Denis looked back to the future. He suggested that equity inevitably becomes overvalued, and that many boards, shareholders and regulators do not learn from the past as they should. Further, Denis noted that provisions built on an agency theory of board–management interaction did not prevent the circa–2000 failures. Nor did the responses to those failures (Sarbanes–Oxley) prevent the GFC. Consequently, what hope should we have that the most recent set of measures (Dodd–Frank and UK Corporate Governance code, amongst others) might prevent failures in the future?
    Neither speaker argued for more regulation, not did they argue for less. Rather, the challenge was a call to learn from the past and to do things differently. The thought-provoking proposal left delegates with much to ponder.
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    IGW'15: Governance in emerging markets (panel discussion)

    Accountability Conferences Governance Performance
    A panel of three very capable thinkers offered conference delegates insights into boards; board practice; and, continuing tensions between calls for corporate governance reforms in emerging markets, vibrant cultural differences and inconsistent capital market pressures. a summary of the insights and comments offered by panel members Thomas Clarke (UTS, Australia), Anderson Seny Kan (Université de Toulouse, France) and David Zoogah (Morgan State University, Baltimore, USA) follow:
    • Clarke observed the many emerging markets had, in fact, emerged. They have become powerful in their own right. However, varieties of capitalism exist (the BRICS economies were compared and contrasted), all of which stand in contrast to the Anglo–American model  of hard legal and regulatory structures, and market oriented corporate governance.
    • Seny Kan suggested the boards are 'social spaces' and that culturally appropriate tools are required to 'govern' such spaces. The emergence of post-colonialism has seen a marked reaction against colonial forces in many cases, thus leading to some very stressed and complicated situations. A regime of practices may be required to 'normalise' practices within each economy, but not to (re)impose Anglo models that simply don't fit the cultural context particularly well.
    • Zoogah took a slightly different perspective, by comment on something he called the 'natural resource curse'. The catalyst for the entry of many big firms into so-called third world emerging economies has been natural resources. this has brought employment and economic growth, however in many cases the modus operandi has been exploitation not endowment. Firms have failed to embrace the grand challenge of tidying up, or by sharing the wealth created in any equitable manner. 
    While the three panel speakers observed many idiosyncrasies between emerging markets and with developed Anglo–American economies, a common thread emerged during the discussion. In most cases exogenous forces have held much of the power but this is starting to change. The role of the company in each economy is pivotal, both to the effective and fair operation of markets, and to contribute to the well-being of all citizens. 
    While the panel members did not explicitly focus their comments directly on corporate governance, the linkages and implications for boards were clear: that company leaders and boards have a crucial role to play in the development of emerging economies, and that role needs to be taken seriously.
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    On strategy: "A palette of plans"

    Accountability Governance Leadership Strategy
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    Every now and then, a great article crosses my desk—one that seems to lift itself off the page, as if to command attention. This is one such article. Writing in The Economist, Schumpter comments on an idea promoted by Boston Consulting Group: that dexterity is increasingly important in today's fast-paced world. The assertion is that modern companies need to be adept at skipping nimbly between strategies or types of strategies (or to commit to multiple strategies simultaneously). Five types of strategy are identified, as follows:
    • Classical: find a niche and develop a plan to achieve dominance
    • Adaptive: try many things and back those that work
    • Visionary: the 'blue-ocean' approach of creating a new market based on a compelling idea
    • Shaping: partnering with others to achieve both scale and reach
    • Renewal: whole reshaping of the business (often to defend against pending failure)
    The article makes plan the challenge moving between strategies, especially with management reputations and careers on the line. One option to resolve this challenge might be for boards to focus directly on leadership and strategy because the task of developing strategy has become so important to business success. A return to the historical conception of strategy--strategos, the art of command—is appropriate. (Many business academics and boards of directors consider strategy to be an important task of the chief executive.) If boards become more strategic, by contributing expertise and challenging strategic options, then 'ownership' of both strategy and the outcomes that flow is likely to move to where it actually belongs--in the boardroom.
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    Martin Wolf at ICGN'15: "Let a hundred flowers bloom"

    Accountability Ethics Governance Leadership Management Performance Societal Wellbeing
    Martin Wolf CBE, Associate Editor and Chief Economics Commentator at the Financial Times, delivered a rousing keynote talk to wrap up the final day of the ICGN annual conference. After observing that the limited liability, joint-owned corporation had been the cause and consequence of almost all economic activity over the last two hundred years, Wolf posed and commented on four questions. He qualified his comments by saying that he expected they might raise some profound questions. Indeed, some of Wolf's comments were controversial—the evidence being the questions asked by some members of the audience after he finished speaking.
    What is a limited liability corporation? They are a semi-permanent entity designed to outlast small-medium enterprises (because founders retire—the corner store conundrum) and markets, and they are a construct for the consolidation of relational and implicit contracts. Their genius is the importation of older hierarchical forms (to get things done) into the market system. With scale comes efficiency, endurance and effectiveness (but not always!).
    What is their purpose? The apparent purpose of the LLC is to generate economic value. However, this is insufficient. Wolf asserted that LLCs should also pursue a wider remit, by seeking to 'add value' in social terms (through the provision of payments for services rendered—wages and salaries—for example).
    What is their operational goal? The oft-quoted goal, of maximising shareholder returns, is far too simplistic, according to Wolf. It is selfish and can only lead to failure elsewhere in society. Rather, the operational goal of LLCs needs to include ethical constraints to protect all participants and in so doing ensure the good of society (at no point did Wolf pursue or even imply any form of Marxist agenda).
    Who should control them? Economically, shareholders bear residual risks following corporate activity and, therefore, shareholders should possess control rights. Wolf challenged this commonly-held view as folly because shareholders are unable to exert full control over the affairs of the corporation. Managers may manipulate the affairs of the company, sometimes to the detriment of shareholders and other stakeholders. Short-term incentives, implemented to motivate managers towards the maximisation of shareholder returns, rarely position the company for longer-term success.
    Wolf concluded by saying that LLCs are a wonderful construct. However, he went on to say that the two associated doctrines (of shareholder control and value maximisation) are unhelpful because they are too short-sighted. He told the shareholders in the room that "it is in your interest not to control the corporation completely". Other parties—large bondholders, for example—also bear residual risks. Why would they not have decision rights?
    Wolf's comments were demonstrably controversial (amongst some of the audience at least). However, the poor reputation of big business amongst the general populace suggest Wolf's comments might be closer to the 'truth' than what many in the audience might care to admit. 
    Wolf closed with this demanding challenge: A better approach might be "to let a hundred flowers bloom", so that the best [control] model might rise up and be applied for a given situation—the beneficiary being society at large.
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    ICGN'15: The demands on boards in the future

    Accountability Conferences Governance Performance Strategy
    The second panel discussion of the third (and last) day of the ICGN conference looked to the future. The topic brought together many of the discrete threads from earlier conversations. Here are some of the takeaways:
    • Directors' expectations of themselves are climbing. About 30 hours per board per month is now considered to be average. The trend towards much higher levels of involvement and accountability is well established.
    • There appears to be a significant difference between the amount of time that the directors spend working on the boards of publicly-listed companies and private-held firms. PLC boards tend to be 'low touch' with a monitoring and compliance emphasis, whereas PHF boards tend to be 'high tough' and the focus is on strategy and business performance. 
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    • Boards need to get far more involved with the consideration of strategic options than most do now (cf. my research, which suggests that an active involvement in strategy development is crucial).
    • Most shareholders and institutional investors 'know' that boards need to be involved in strategy development (per the survey result below), yet precious few boards actually take the task of strategy development and strategy management as seriously as the survey suggests is required.
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    • Directors need to be fully informed on all material matters. Suggested channels included formal due diligence; asking probing questions of rhe chair executive during board meetings; eliciting information from multiple sources; asking for information to be presented in a particular format.
    • Boards need to be high-trust environments, whereby directors are free to debate the issues (heatedly sometimes) in the pursuit of an agreed company purpose and strategy.
    • One panel member took the position that expecting that 'board involvement in 'strategy' might be expecting too much from directors (even though directors have a duty of care to make enquiries and become adequately informed.
    These takeaways demonstrate that boards are starting to thinking about future business performance. However, there is much work to do, both by boards to determine an appropriate division of labour between the board and management, and by shareholders to express their wishes more clearly than perhaps now is the case.