A discussion on Corporate Governance

An interesting MIT video on the topic of Corporate Governance.

Stewart C. Myers, Robert C. Merton (1970) Professor of Financial Economics,; MIT Sloan School of Management ; William F. Pounds, Professor Emeritus of Management; Dean Emeritus, MIT Sloan ; Adam Emmerich, Partner, Wachtell, Lipton, Rosen & Katz

Description: While they won’t directly address headline-grabbing corporate swindles (Enron! Tyco! WorldCom!), these speakers are well aware of the turmoil roiling away in boardrooms these days. William Pounds, long an insider within the top tiers of corporate life, makes a case that improving governance means having “the most appropriate and effective chief executive officer in place in every corporation.” All the things we’re concerned about, “integrity, transparency, high quality professional performance,” will fall into place if the right person occupies this central role. And don’t count on regulations and hard work by committees “to protect shareholders and employees from disappointment if the wrong person sits on top,” says Pounds. But the process of attracting the best candidate, the job of corporate boards, is tricky. Plus, says Pounds, we don’t really understand how boards work as organizations, so establishing best practices for recruiting and evaluating CEOs will require some serious research and data collection _ a good assignment for business students.
In Adam Emmerich’s very long view, which begins as early as the British East India Company, today’s business scandals represent mere bumps in the road for corporate governance. The modern corporation got its start in the 17th century, according to Emmerich, and the key notions of corporate governance have been in place since around 1911. There’s “an economic logic to corporate organization,” he says, which makes it a “very good system,” and one that’s been very stable. The most recent changes in governance emerged as reaction to the takeover wave of the 1980s, when courts compelled boards to take a more active and restraining role with CEOs. And the Sarbanes-Oxley law accelerates the trend of more active boards. But, wonders Emmerich, “does the enhanced degree of interaction between a board and CEO lead to a more effective CEO? Currently, the zeitgeist says we’re not worried about an effective CEO but about a dishonest CEO.” Emmerich conjectures that greater board activism might lead to less efficient public companies. He also notes a corollary trend of activism among large shareholders, including, hedge fund managers, and he perceives the possibility for conflicts of interest.

Host(s): Sloan School of Management, MIT Sloan School of Management

Worth looking at for anyone interested in this subject

Infonomics Newsletter for September – out now

Mark Toomey, author of Waltzing with the Elephant, the book on ISO 38500, has issued his newsletter for September. As always the newsletter is a good read with useful insights – this months includes a look at the outage at Virgin Blue.

Yet I think one of the most important statements in the newsletter is the change in the masthead’s sub-heading:-

Previously it was ‘Plain Langauge about Corporate Governance of Information Technology’

Now it is ‘Plain Language about Leadership and (Corporate) Governance of Information Technology‘

This is an important change. Effective Governance requires leadership. This leadership must , in my strongly held view, be founded upon a sound ethical framework and robust values of integrity and straight dealing. If it is not then the entire edifice of governance will be found wanting.

I think we should stop referring to Governance of Information Technology and refer instead to Leadership and Enterprise Governance, as I passionately believe that Corporate Governance and Information Techology Governance are inextricably entwined elements of the greater whole, ie Enterprise Governance.

Huljich and governance

Don Brash writes a defensive article for the NZ Herald on the Huljich mess. He claims that to compare Huljich to the finance company debacle is wrong.  He further states:-

KiwiSavers did not lose money as a result of Huljich’s actions

He notes Peter Huljich effectively compensated scheme members for losses on investments. Yet through the non-disclosure it can be argued that returns were mis-stated. It is legitimate to ask why this was done without full disclosure initially.

Brash takes a few sideswipes at comments made by Gareth Morgan and Carmel Fisher specifically, with some pointed comments about Morgan especially. Yet it seems to me, that he  may be missing the point.

If I was an investor in the Huljich fund I would have been looking to the board to have exercised appropriate supervision as part of their governance, such that they had adequate information regarding what was happening.

Questions arise as to just what oversight was being exercised? Was there adequuate governance?

Sir Adrian Cadbury back in the early 1990s in the Cadbury Report led the team that defined corporate governance:-

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies.  The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.  The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board’s actions are subject to laws, regulations and the shareholders in general meeting.

Over time this has come to be seen as including, as I have written elsewhere:-

ensuring that both board and management have appropriate information systems which deliver the reports and other information required to make decisions and monitor events, with an assurance as to the integrity of the information provided.

The definition formulated by Cadbury has stood the test of time. It provides clear delineation of the respective roles of owners, directors and managers. Further, it makes reference as well to the over-riding governance of the law and regulations. Increasingly, it has been argued that this includes to the community at large.

In general are boards of directors putting in place appropriate governance? Are they ensuring that they have the information, advice and knowledge which they require in order to exercise their governance function?

Are NZ boards as alive to governance issues as much as they should be? Are they managing their risk exposures in this area properly?

Interestingly the Herald runs an article by Brian Gaynor today looking at the mixed track record of politicians making the tranistion to business.

What I find interesting is why given the critical nature of governance in the corporate world today and the fact that as former politicians these people should be well aware of the need to be well informed with a complete information flow that the record should be so patchy.

Gaynor on South Canterbury Finance

Brian Gaynor in his NZ Herald column today takes a good look at South Canterbury Finance.

SCF has grown very rapidly as Gaynor notes and this chart shows:-

Gaynor’s analysis throws up some interesting questions, especially in the areas of direction, related party loans and governance.

Directors and company performance

James Surowiecki writes on financial matters for The New Yorker. recently he wrote a piece on the performance of company boards of directors.

He began:-

When Citigroup and Bank of America held their annual meetings last month, shareholders were in an understandably surly mood. Even as the companies’ C.E.O.s apologized for past failures and vowed to do better, shareholders blasted the executives for their incompetence, and talked about the need for dramatic change. Yet, after all the venting and repenting was done, something weird happened: every member of each bank’s board of directors was reëlected to office.

Surowiecki then proceeded to discuss the issue further. He noted the move to appoint more independent directors in recent years, but commented:-

The academics Sanjai Bhagat and Bernard Black, for instance, have found no evidence that simply appointing more independent directors improves corporate performance. And, while increasing diversity was, in theory, going to break up the old boys’ club and make boards less deferential, the benefits have proved more elusive in reality. James Westphal, a business professor at the University of Michigan, has found that professionally diverse boards are actually less likely to challenge the C.E.O. One reason is that even “independent” directors are typically nominated not by shareholders but by the C.E.O. or by other board members, who, not surprisingly, tend to prefer directors who will be cheerleaders for the firm and won’t rock the boat. It also doesn’t help that independent directors are sometimes inexperienced, which makes it harder for them to take on management, or that they’re often chosen for name recognition.

This may be the case, but it may well be that despite calls for them to be more pro-active major shareholders have not pushed for change.

The Way We Live Now

Apparently this satirical novel by Trollope is rated as #1 on a list of 50 Books for Our Times by Newsweek,(H/T Nicholas Carr).

I read the novel years ago. Then a couple of years ago UKTV here in NZ ran the TV series starring David Suchet as Augustus Melmotte. excellent performances and dramatization.

Thinking about it, the selection is clear. Trollope dealt in the novel with greed, cupidity, media amongst other matters. In many ways the plot parallels where we are today.

Indeed, Melmotte can be seen as a prototypical Bernie Madoff.

If you have not read the book do so. The TV series is worth a look as well if you can find it on DVD or online. Mmany of the characters have counterparts today and will resonate with readers and viewers.

This marvellous Victorian satire is, I suggest, relevant today with it’s timeless tale of greed.

Considered by contemporary critics to be Trollope’s greatest novel, The Way We Live Now is a satire of the literary world of London in the 1870s and a bold indictment of the new power of speculative finance in English life. ‘I was instigated by what I conceived to be the commercial profligacy of the age,’ Trollope said.

His story concerns Augustus Melmotte, a French swindler and scoundrel, and his daughter, to whom Felix Carbury, adored son of the authoress Lady Carbury, is induced to propose marriage for the sake of securing a fortune. Trollope knew well the difficulties of dealing with editors, publishers, reviewers, and the public; his portrait of Lady Carbury, impetuous, unprincipled, and unswervingly devoted to her own self-promotion, is one of his finest satirical achievements.

His picture of late-nineteenth-century England is a portrait of a society on the verge of moral bankruptcy. In The Way We Live Now Trollope combines his talents as a portraitist and his skills as a storyteller to give us life as it was lived more than a hundred years ago.

Are you a member of the club?

I came across this Economist article on networks. It contrasts the old style networks such as those based on university, school or other affiliation with on-line networks such as LinkedIn, Xing and the like.

“An active, open online network is far more competitive in today’s globalised business environment than local, closed networks such as alumni groups or freemasonry,” argues Reid Hoffman, founder of LinkedIn. Online networks’ most compelling advantage, in addition to openness and efficiency, is the chance they offer to connect across borders and among different sorts of people.

I think that is true based on my own experience. Yet as the final paragraph in the Economist article notes:-

Nevertheless, the old structures will not fall away soon. Indeed, Mr Serfaty argues that online networks can reinforce offline ones. A graduate of HEC (École des Hautes Études Commerciales de Paris) might use the school’s own website to look for any alumni working at, say, Google, he says. But using Viadeo’s tools, he can also do a broader search for anyone who attended HEC and knows someone working at Google, so the network becomes more powerful. Online networks make it easier to gather information on firms and their employees, argues Jean-Michel Caye, a specialist in human resources for the Boston Consulting Group in Paris. But if you want to influence a big decision or secure a job, he says, “it’s still the old networks that really count.”

As always, it seems that who you know still counts.

In a small country such as NZ, that may be even more the case. Which may not in fact be an equitable or healthy situation.

Should being a member of the ‘club’, whatever that ‘club’ is, be a determinant in the 21st century?

It seems to me that there are some potential governance issues in this regard, which perhaps need to be given more thought.

Nigel Lawson:Defending capitalism

Nigel Lawson, former UK Chancellor, has an interesting article in the FT on remedying an aspect of the economic crisis. He begins:-

That capitalism has been shown, in practice, to be endemically flawed should come as no surprise. That is the nature of mankind. What is more important is that history, notably the history of the world after the second world war, has demonstrated beyond dispute that every other system of economic organisation is far worse. So capitalism both deserves to survive, and will survive, just as it did after the even greater economic disaster of the 1930s.

Lawson mounts a robust attack on proponents of protectionism. Lawson strongly defends capitalism in his analysis, whilst other commentators crow at what they see as a defeat and Lawson sees as part of the economic cycle.

Lawson writes in this regard:-

It is essential, both in the US and in Europe, that this is resolutely rejected. The first and most important requirement for the future of capitalism is the preservation of globalisation, and the massive benefits it confers on mankind, in particular in the developing world. There are, inevitably, costs of globalisation; but they are hugely outweighed by the benefits. So resistance to protection, whatever arguments may be used in its favour, must be rigorously maintained. Nor is this an exclusively economic argument. It is a moral imperative, as well. Moreover, a trade war with China could well have unpredictable, and potentially highly damaging, political consequences.

Lawson before becoming a politician was a highly regarded financial journalist. He has not lost his skill with words.

In the remainder of the article he argues that this crisis has been exacerbated by the failure to maintain the separation between commercial and investment banking that largely prevailed until the late 1980s. He calls for countries to re-introduce the equivalent of the Glass-Steagall Act.

Lawson suggests that commercial banking should be supervised and investment banking left to face the risks of the marketplace.

He argues:-

The overriding reason why this separation is essential is straightforward. It is only a commercial banking crisis that poses a systemic risk and can lead to the sort of mess we face today. It is folly to allow core banks to be in a position where they can be brought down by exciting but highly risky investment banking activities. But the idea that this can be prevented by judicious regulation of investment banking activities is a chimaera. In the real world, that is not possible: either the investment bankers will outsmart the regulators, or the regulators will respond with damaging overkill.

Thus investment banks should be left to their own creative devices, and subject essentially only to the discipline of the marketplace.

A stimulating article.

Insuring toxic bank assets, not a good idea

The provocative, but always interesting Willem Buiter explains why, in his view, insuring toxic bank assets is throwing good taxpayer money after bad private money.

We have yet to face this problem in NZ, though perhaps Mascot may be our trial run.

As usual Buiter’s piece is well worth a look.

Buiter notes:-

Like its American and Dutch counterparts, this toxic asset insurance scheme is without redeeming social value: it is inefficient, unfair and expensive to the tax payer. Apart from that it is great. There also are superior alternatives available: full nationalisation and, best of breed, the ‘good bank’ solution.

Not one for stinting in his comments.

Responsibility

Stephen Franks, lawyer and former MP, has some interesting comments on governance at his blog. He starts by discussing the climate of opinion/convention as it relates to Ministerial responsibility in New Zealand. He then extends his thinking to the corporate world.

He poses a number of thoughtful questions concerning governance and responsibility.

Hat-tip – Jim Donovan