Is the Corporate Governance Debate out of Control? the Currently Over-Heated Debate about Corporate Governance Needs to Get Back to Basic Principles and to Its Roots. and These Principles Are Fundamentally to Do with Stewardship of Shareholders' Property. (Corporate Governance)

Article excerpt

I am concerned about the way in which the debate on corporate governance has evolved. The subject has become a "monster" and one that has become difficult to control! It has attracted the interest of a range of groups--some of whom have a very poor (or even hostile) appreciation of business--and it's fair to say there is much misinformation and confusion on what we really mean when we talk about "corporate governance".

Directors can rightly claim to be perplexed and concerned as to where this will all end up! For example, reflecting personal risk and public perception, will commercial judgement and entrepreneurial flair be cannibalised by policies, regulations and laws? Will honourable failure in competition become a cause for public humiliation, or something worse? Will technocrats replace commercial skills as a key criterion for boards? Will an 'A' for compliance become the primary concern of boards and wealth creation (performance) a second-order concern? These are real issues for investors and directors.

Better definition needed

Any discussion on corporate governance should start with a clear sense of what we mean by the term? What failures are we trying to address? What do we really mean when we talk about 'corporate social responsibility'? Do we understand cause and effect? Do we understand the role of culture? What is our objective? What are the desired outcomes? Do we understand the real cost/benefits of proposed solutions? In thinking about corporate governance, these tests apply equally to all business entities of "economic significance", be they private or public (including cooperatives), whilst recognising that businesses are not a homogeneous form and a rigid one-size-fits-all approach will do more damage than good.

The primary purpose of business is the legitimate goal of making an economic profit by meeting the needs of society, whilst respecting the rights of others to do the same. A business must compete, innovate, motivate and compensate (capital and labour) and it must do all four well if it is to succeed over the long-term.

What are shareholders looking for?

The answer is simple: investors expect a return on their capital commensurate with the risk they are taking. Given future needs, investors want to see their stock of wealth grow. No one saves to have less in the future. A company's corporate governance emphasis and arrangements should therefore recognise that investors want their wealth to grow through stock price appreciation and dividends.

It follows that investors have this simple instruction to boards: manage the assets of the business in a way that maximises long-term value. Keep true to this simple principle and with good governance the business will succeed.

There will always be business failures. Risk taking is essential if success is to be sustained and the discipline of failure is crucial to a vibrant economy. Creative destruction is a reality and there is no disgrace in honourable failure in business as in sport. People make mistakes--honestly made and if quickly addressed, there is nothing wrong with that.

Investors (and boards) will continue to be concerned about how to 'govern' behaviour, attitudes and corporate culture. There is no magic solution here or safe proof protection. In all of this, the alignment of interests is very important. It goes to the heart of stewardship.

Central to the alignment of interests are incentive arrangements. For that reason the structure of incentives is a legitimate topic of interest for investors, but that doesn't mean that individual privacy rights have to be violated or commercially sensitive information unnecessarily released. How is more important than what. Investors need to know how their agents are paid eg, fixed versus variable, links to performance criteria that are meaningful to wealth creation, cash versus equity, etc. Good quality information can be provided on the structure of incentives without disclosing what someone is paid and surely it's the insight provided by quality information that really counts. …


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