The Coming Revolution in Corporate Governance

Article excerpt

Most of the talk about better corporate governance has focused on the independence of directors and the separation of the CEO and chair. Not so, argue these authors, who point out that the most important factor is board process -- how boards work and reach the decisions they do. Improving process will not only improve board governance but will prove that there really is a link between a board of directors and a firm's financial performance.

"Directors are like parsley on fish decorative but useless."

-- Irving Olds, former chair, Bethlehem Steel

Writing in the autumn 1994 issue of The Ivey Business Quarterly , Donald Thain, Professor Emeritus of The Western Business school (as it was then called), unleashed a scathing attack on the Toronto Stock Exchange Corporate Governance Report. This attack was unique in two respects. First, almost no one commenting on the Report (soon referred to as the Dey Report after its chair, Peter Dey) agreed with Thain; most other commentators thought the Report was rather good. And second, Thain's comments were essentially irrelevant as the Report continues to be used as a foundation upon which other reports on governance of Canadian corporations are built. Indeed, the Report itself has been revisited twice - once formally and once informally.

The essence of Thain's criticism of the Dey Report was that its findings and recommendations were not based on any serious research about corporate governance and that it did not take the problems in governance seriously enough. As a result, the recommendations of the Committee, in Thain's view, were based on opinions rather than fact and did not deal with some of the really difficult questions of corporate governance in Canada: Wrote Thain: "For some reason ....the mandate 'to conduct a comprehensive study' was lost, and given the political power of those who control

corporations, the deeply entrenched old board culture and the strong resistance to change in the status quo , change in corporate governance, no matter how obviously needed, will be difficult and controversial. ... As it stands, the TSE report is at best a dubious and controversial beginning point for dialogue."

As very recent history has shown, Thain was prescient. By any definition, the decade of the nineties has not been a particularly good period for corporate governance in general and for research or regulatory change in governance in particular. While a number of books on the topic have been published, they, like the Toronto Stock Exchange Report, are based primarily on the experience of the authors and the availability of data concerning boards in annual reports and other public records. Consequently, the regulations that have been developed to govern corporations in the 1990s have been based on very limited knowledge about the factors influencing corporate decision-making.

While Thain is probably correct in his view that there is far too little knowledge about how boards make their decisions to permit the drafting of appropriate regulations to improve corporate governance, and that a great opportunity to start obtaining such information was lost when the Dey commission did not undertake fundamental research in the area, he is probably wrong that the situation will not change. Indeed, in spite of the strong resistance to change and the support for thestatus quo , which is probably as strong now as it was ten years ago, there is a very good chance that some very revolutionary changes in governance will begin to take place in the first decade of this century. As we suggest in this article, it will happen for three reasons:(i) the tremendous fall-out from recent failures in corporate governance in the United States; (ii) recognition that the reforms which were touted as being so significant in the 1990s were relatively innocuous; and (iii) most importantly, by far, path-breaking new research on the factors impacting on board decisionmaking. …