In a recent article on Train Wreck, Steve Tobak put forward the idea that corporate governance is a myth. He based that hypothesis on the assertion that there are no consistent and effective laws, methods and metrics governing public companies.
From my years of experience with public company boards and directors, I would agree about the lack of consistently effective laws or methods for governance. But I would also give a bit more credit to those who serve on corporate boards. I have worked with quite a few in my day, and most have been peopled with ethical and hard-working directors and have managed good standards of governance, often under trying circumstances...(read more)
Through my work in corporate governance, I have come to view governance as a social system that is very dependent on the qualities and characters of the people involved. I have also come to recognize the key elements of a successful board - and a successful corporate governance program. While I have been fortunate to witness some real success stories, I do agree with Mr. Tobak that such stories are not nearly as common as they should be. For that reason, I've outlined below what I believe are crucial factors for a successful board that truly serves its shareholders.
Straight Talking. The first requirement for a successful corporate board is a willingness to tell - and hear - hard truths. Good governance requires guts, and good boards are made up of brave and courageous people. I know about the sorts of boards that led Steve Tobak to write his article - the very sorts who would never dare to hire a consultant (such as myself) who might tell them the truth.
Knowing the Goals. To discharge their responsibility to the shareholder requires a board to understand what type of shareholders they have and what type of performance the shareholders are looking for. For a large listed company, this is no mean feat. Responsible, successful boards invest time and effort on communicating with their shareholders to ensure that investors understand the company's direction, goals, and likely outcomes with a keen awareness of their responsibility to represent the interests of minority shareholders along with those of larger investors.
Planning Strategy and Execution. Once the board has worked out what is acceptable performance for their shareholders, they reach the real challenge: ensuring that the company has a strategy that will deliver that performance. It is imperative that the board should contain individuals with a deep understanding of both the company's business and the industries in which it operates, as well as any geographic regions and key customer needs. It is also imperative that the board should be independent of management and capable of thinking through an independent line of analysis.
Defining Success. Boards must take responsibility for developing key performance indicators (KPIs) and ensuring that management report these diligently and accurately. Reporting must be comprehensive and timely enough to ensure that the board is aware of performance without being so cumbersome that it hampers management's ability to deliver. Developing good KPIs is more of an art than a skill, something that boards get better at with practice.
Building a Team. When the board has endorsed the corporate strategy, they then have a responsibility to ensure that there are sufficient skills within the boardroom for appropriate oversight of the strategy as management set about implementation. Sometimes the best person to add to a board is one who makes the other board members slightly nervous. It requires courage to recommend such appointments to shareholders, but a good chairman will seek out such directors, confident that they add value to the board, even if they do make his job more difficult.
Leadership on Compensation - both for the board and for executives. Many people consider "independence" in this sense to mean sufficient personal wealth that board directors need not rely on fees paid for board appointments. That is a sadly deficient definition. It is not uncommon for board members to become almost addicted to the status of his or her membership. There is a difference between loyalty to the board and a slavish desire to remain on the board.
My personal preference is for a board fee that adequately compensates board members are the risks and liabilities of the position as well as the considerable time and expertise that it requires. Like Mr. Tabek, I have found that stock and options provide incentives for board members to further their own interests over and above those of shareholders, although I know many ethical directors are paid in that manner and would never do any such thing.
The board must also give thoughtful guidance as to executive compensation. Again the issue of options, whilst intended to align interests with those of the shareholders, can provide perverse incentives. Boards need to ensure that executives are paid sufficiently well to stay on board, without risking an unacceptable transfer of wealth from the shareholders to the CEO.
Effective Oversight. Having decided on the remuneration mechanism, the board must develop a close relationship with the CEO so that they can oversee performance and ensure that ethical behaviour in the best interests of the company and the shareholder, rather than incentive-driven behaviour in the best interests of the CEO's pay packet. As Steve Tobak points out, it is easy for a board to condone behaviour that raises the share price in the short-term whilst undermining the long-term sustainability of the organisation. Good boards do not take the easy route, instead understanding the key attributes of the strategy and linking compensation to achieving strategic milestones.
These things can be consistently measured and compared across different companies - but of course they don't tell you whether or not the board members are ethical, independent and fiercely committed to the success of the company. You cannot legislate for ethics or commitment. All you can do is hire the best available board members, support them in their endeavours, and hold them to account through appropriate disclosure. However, if you do that, my experience suggests that you will get good governance.
