Emerald Group Publishing Limited
Copyright © 2011, Emerald Group Publishing Limited
Article Type: Guest editorial From: Corporate Governance, Volume 11, Issue 5
The biggest bankruptcy in US corporate history in 2008 and the following financial crisis – the like of which had not been since the Depression of the 1930s, and which soon became an economic crisis – dramatically revealed that corporate governance is not working under the current framework. We must rethink corporate governance and ask fundamental questions as to how to make corporate governance more effective.
Others may say that the crisis was only an accident, that there was a unique and extraordinary set of circumstances at play that led to a temporary disruptions and discontinuities of the market function. There was no real chance to foresee these events and their consequences. We have to learn our lessons; deficiencies will be fixed and – after a short while – the system will work again as usual. In fact it is just a matter of technical adjustment to fix the problems. But also, other corporate failures like the dot.com and Enron crises resulted in a substantial amount of new governance regulations and recommendations. Following this guidance to the letter have apparently not been effective in creating sustainable value nor in preventing corporate collapse – as the crisis has shown.
We are in fact facing a crisis on multiple complex levels of governance that are highly inter-linked and inter-dependent. The crisis of governance is present from the level of global economy, to industry sectors (like the financial sector, with others maybe soon to follow), to the level of institutions (like rating agencies and regulatory bodies) and finally to the level of corporate governance of companies. The governance crisis is ultimately a crisis of trust in institutions at all these levels and it already caused serious political consequences. The enhancement of governance on the corporate level is important to regain trust and is vital to overcome the crisis in the long term.
This Special Issue of Corporate Governance is produced by the Academy of Business in Society (EABIS) together with the Belgium Governance Institute (GUBERNA) and builds on the content and insights of the 10th EU Corporate Governance Conference organised as a two-day conference by GUBERNA in partnership with EABIS, ecoDA, Vlerick Leuven Ghent Management School, ECGI and the European Commission. The Conference took place in Brussels on 6 and 7 December under the Belgium Presidency 2010.
The 10th EU Corporate Governance Conference and its contributors wanted to dig deeper into the underlying root causes and to assess critically the basic international governance assumptions. This, of course, has serious consequences for the corporate board, directors’ duties, board effectiveness and shareholder monitoring which where main areas for the EU corporate governance conference.
A crisis of knowledge
The economic crisis also showed that we are facing a crisis of knowledge. This was as much acknowledged by the EU Commissioner for Research in front of the elite of the economic policy research community when he wondered to what end more than 100m of research funds on economic policy were spent recently only to end up with a complete surprise of market failures and governance failure. How rigorous was our research? How relevant was it? What is the deep quality of our research if we do not question the cognitive limits of our guiding paradigms, he asked. We have to be courageous enough to ask ourselves similar questions in the field of corporate governance.
While the framework of principal agent theory and the efficient market hypothesis remained unquestioned, more financial reporting was added, audit committees were strengthened, greater independence of directors was insisted on, more financial expertise of committee members was developed, mathematical risk models were put in place, fair value accounting was introduced, and more variable remuneration was introduced.
However, as we know from research, structural features of corporate governance, often he subject of academic research, are poor indicators of the quality of governance. The unique circumstance of the firm in a specific global industry sector requires unique features of governance, board leadership and board performance.
Boards are faced with new challenges of overseeing business risk management, worrying about regulatory risk or the risk of non regulation, considering systemic risks in the industry sector, managing the broader social and political context, maintaining the license of the firm to operate, restoring and maintaining trust and confidence, discussing with management the macro trends which will affect the business models of the firm like geopolitical shifts, climate change, demographic change etc.
In economics, we are discussing the demise of the efficient markets hypothesis, the theories of great moderation and stochastic equilibrium and even rational choice theory. In governance overall, we are discussing the role of the firm in the economy beyond profit maximisation, the role of the firm in society beyond CSR programmes and the role of the firm in the polity, beyond lobbying. In strategic management we are discussing the demise of the primacy of shareholder value.
A British economist and former Dean of Said Business School at Oxford University warned in 2004 at the EABIS Colloquium at Vlerick in Ghent that the set of assumptions underlying the “shareholder value movement” had brought about a managerial pre-occupation with financial performance alone, to the detriment of creating real and sustained economic value. He stated that these assumptions were misleading, not delivering on their own promises and undermining the credibility of free enterprise and the market system. He demonstrated his case with plenty of empirical evidence, which showed how firms like Daimler, ICI, Marks & Spencer and others actually destroyed shareholder value by abandoning a stakeholder-oriented value creation strategy in favour of a strategy of shareholder value maximisation through short-term stock value maximisation. This leaves us with the open question of whether we have learned.
Have boards failed to perform their duties?
Most governance recommendations focused on structural board elements, such as splitting the roles of chairman and CEO, the (minimum) number of independent directors and the type of board committees. These recipes have apparently been insufficient to foster sustainable corporate value creation.
A more aligned view on board duties is one of the first elements to consider. An effective board is collectively responsible for the success of the company (UK Combined Code) and should do all that is necessary to reach the corporate goal (Belgian Company Law). However straightforward these definitions may be, their application in practice needs to be embedded in a clear view of the corporate goal in general and board duties more specifically. Are directors primarily responsible for promoting the interests of the shareholder, the principal of the firm? As assumed legally in many jurisdictions, directors are only accountable to shareholders for performing their fiduciary duty. However, others state that directors should give priority to the corporate interest, even if this is different from the interests of shareholders. Their guidance should be to foster sustainable value creation with respect for all relevant stakeholders’ interests.
A second line of reflection relates to what really matters to reach effective decision making. Besides publicly disclosed compliance statements, board effectiveness evaluations are necessary. Such examinations should pay attention to what really counts: i.e. the board process, director attitude and behaviour as well as board culture.
In non-profit boards, board dynamics is emerging as a significant element, with strong group cohesion and a combined culture of high trust, high challenge and high engagement associated with improved performance potential. There remain under-researched subtleties in relation to board actions which set the tone for the organisation, and the development of “under the surface” board member relationships, internally outside formal board meetings and externally across welfare institutions in a fast-moving public world where multi-level and networked governance is becoming the norm.
Have shareholders failed?
There is widespread concern regarding insufficient shareholder monitoring and an overly short-term vision of many shareholders. Is the assumption that (institutional) shareholders can and will monitor the corporations that they invest in correct? Can a stewardship code turn their short-term trading mentality into a long-term investment strategy? We are in great need of a much more nuanced and realistic picture of what shareholders can and will do as to the long term sustainability and success of the corporation they invest in. Shareholders come in all shapes and colours, even the institutional ones.
Moreover, many (continental) European countries operate with a controlling shareholder, thus demanding totally different governance guidance (e.g. prevailing recommendations ignore the challenges posed but also the opportunities offered by a combination of shareholder and board monitoring by insider shareholders). Interesting lessons could also be learned from the completely different governance focus of unlisted companies. Therefore, we need to differentiate corporate monitoring and align governance recipes with the shareholding structures in place.
The structure of this issue
The structure of this Special Issue follows the sessions of the corporate governance conference to answer the big challenges of corporate governance (please find the complete program at the end of this issue)/
Recipes for a multitude of board practices instead of a one-size-fits-all
Neville, M., “The role of boards in small and medium sized firms”.
Warburton, A.J., “Do fiduciary duties matter?”.
To what extent do/must board duties include stakeholder expectations?
Schepers, S., “The role of board and CEO in managing societal and political intangibles”.
Spitzeck, H., Hansen, E.G. and Grayson, D., “Joint management-stakeholder committiees – a new path to stakeholder governance?”.
Lessons from corporate and financial crises
Lin-Hi, N. and Blumberg, I., “The relationship between corporate governance, global governance, and sustainable profits: lessons learned from BP”.
Board duties and board effectiveness: the case of executive remuneration
Pryce, A., Kakabadse, N.K. and Lloyd, T., “Income differentials and corporate performance”.
How to measure what really counts?
Strebel, P., “In touch boards: reaching out to the value critical stakeholders”.
Behavioural approach towards corporate governance (EABIS session)
Mostovicz, I., Kakabadse, N.K. and Kakabadse, A., “Corporate governance: quo vadis?”.
Boardroom effectiveness: reconfiguring the position of non-executive directors and chairmen
Bukhvalov, A. and Bukhvalova, B., “The principal role of the board of directors: the duty to say ‘no’”.
Kakabadse, A. and Kakabadse N. (2008), Leading the Board: The Six Disciplines of World Class Chairmen, Palgrave Macmillan, London.
1. The conference programme can be found at end of this Special Issue.
The Guest Editors would like to thank EABIS Academic Director David Bevan for additional review support and EABIS Project Assistant Elena Urizar Mayora for her coordination of putting this special issue together.
About the authors
Lutgart Van den Berghe is Executive Director of the Belgian Governance Institute – GUBERNA and Extra-Ordinary Professor at the University of Ghent (B) and the Vlerick Leuven Gent Management School. Her main topic of interest is corporate governance (including the role of Business in Society). In the school, she serves as an Executive Director and Chairman of the Competence Center on Entrepreneurship, Governance and Strategy.
Abigail Levrau holds a PhD in Economics from Ghent University. Her thesis focuses on the determinants of board effectiveness. Since 1997 she has been working as a researcher for the Belgian Governance Institute (GUBERNA). She has been involved in different corporate governance research projects in both the private and public sectors. She is also a Lecturer in training programmes for directors.
Naomi Chambers joined the University of Manchester in 1999 as Senior Fellow in healthcare management and was promoted to Professor in 2008. Her teaching and research interests are diverse and include leadership in healthcare, doctors in management, primary care, commissioning practice, board governance, action learning for personal development and organisational change, and international comparisons in healthcare.
Joris-Johann Lenssen is a Research Manager at the Academy of Business in Society (EABIS). He holds a Diploma from the University of Marburg in Political Science, Sociology and Peace and Conflict Studies. He joined EABIS in 2009 and is working on several projects related to corporate governance.
Lutgart Van den Berghe, Abigail Levrau, Naomi Chambers, Joris-Johann Lenssen