Economic turbulence. Deep cuts and falling forecasts. Faltering markets. Plunging revenues. Sharp new peaks of unemployment. As Europe and the world enter our fifth year of seemingly unrelenting crisis, with little visibility for the future in the medium term, the need for vision — for clarity and perspective; for steady and balanced leadership — could hardly be more obvious.
Companies, like fish, rot from the head down. Poor leadership at the top cascades through every level of management, and this decomposition accelerates at times of rapid change and sudden threats — such as those we're undergoing now, in 2013.
Conversely, good governance is every corporation's most powerful competitive lever. By ensuring transparent processes throughout all operations, it builds corporate reputation and confidence. Corporate governance is about creating the conditions for what every economic actor should seek: the long boom — long-term, sustained, nourishing growth.
Moreover, in a context of intense globalization, as the Internet helps every kind of business and political issue go global but government largely remains a local (or at best regional) affair, corporations are becoming the only truly global actor. This magnifies their responsibility, and therefore the impact of their governance. It makes good corporate leadership a challenge that can benefit — or damage — an enormous number of communities.
So do we have the right rules in place for corporate governance today? Are we selecting the right people, and are our boards structured for maximum positive impact — so that our CEOs can receive appropriate guidance and our shareholder meetings become forums for genuine and constructive dialogue?
“A genuine leader is not a searcher for consensus, but a molder of consensus,” said Martin Luther King Jr. Because of its key role in supervising and setting the framework for a company, it is crucial that the board's authority be acknowledged to be greater and more solemn than that of management. For this, the choice of corporate board members is absolutely vital. But first, before the members are selected, two questions should be answered, and they go deeper than they may seem: what is the board's ultimate goal — who does it work for? — and who sets its rules.
A shareholder-only model?
The first fundamental question of corporate governance is whether or not it is guided exclusively by the interests of shareholders. There is of course a fiduciary responsibility for the board to act in the shareholders' interest, and indeed a moral one, for their financing ensures the dynamism (and sometimes the survival) of the company. But if this is the board's only goal, all the mechanisms of management will be shaped to maximize share value, in whatever time frame is deemed relevant.
This ignores what I would argue is the broader and more important point. A corporation is in a sense a living organism. It has to adapt, shift, and take on new elements. Its sustained existence is an important goal. Many stakeholders depend on the corporation — including employees, suppliers, clients, and the communities in which it operates. Working with this perspective gives the board a very different outlook. It can aim to foster great leadership and management that will create improvement for all those stakeholders.
Ultimately, of course, there may be no clash between the two approaches, because in the long term shareholders will be satisfied by sustained performance. But in the short term, there may be discordance between them. The “shareholder-only” model is based on simple — sometimes brutal — math, while the “stakeholder-inclusive” model spans a range of criteria, many of which are qualitative judgment calls. It is more ambitious and more complex, but it is also a much deeper model, which grasps that sustained corporate benefits are truly possible only in healthy societies in which people feel confident and secure.
Ever more detailed rules
The second fundamental question involves the regulatory framework in which boards operate. Successive crises and corporate scandals have led to demands for compliance with ever more detailed rules or codes — “comply or explain” soft law, or “hard law” like the Combined Code and the U.S. Sarbanes-Oxley Act, which was passed in 2002 following the Enron debacle.
However, as all of us know, when you build a 15-foot-high wall, you can count on someone to follow up with a 16-foot- high ladder. New regulations will probably not protect for long against corporate malfeasance. (Let's not forget that despite Sarbanes-Oxley, and despite all kinds of warning signals, Enron was followed seven years later by the biggest fraud of all time: Madoff). But they can create burdensome and counterproductive obstacles that stifle the dynamism that drives a strong economy.
I would argue that regulatory standards should articulate broad goals, and guide behavior through general principles, rather than focusing on specific rules that are so detailed that they become indecipherable and ultimately lose sight of their objective. Substance should prevail over form.
The selection of new board members would do better to focus on personality — on the ethical integrity, competence and courage of the individual — rather than obsessive compliance with a number of formal criteria that supposedly assess independence.
After all, taken literally, the application of all the independence criteria could lead to an absurd situation: The most independent board member of all would be someone you found walking down the street, with no ties at all to your company, industry or sector, and who remained on the board for so short a time that he or she never developed any new link with your company at all. I fail to see the advantage of taking on such an individual.
Freedom of judgment
The essential objective is a very simple one: Board members should have maximum freedom of judgment, and they must therefore be free of conflicts of interest. The notion of “related parties” is an important one. Bankers who work with the corporation, lawyers, consultants — people who may have intrinsic conflicts of interest with aspects of new strategies or business plans — must be avoided.
I am also, speaking personally, in favor of separating the roles of CEO and chairman, and creating either a completely distinct management board or a two-tiered board of directors. Separating roles and bodies creates spaces for air, and this brings not only new perspectives but also a healthy mutual observation. In Europe — particularly Germany — the supervisory board (Aufsichtsrat) is maintained separate from the management board (Vorstand), while in the United States — curiously, because the American system of government is constructed around checks and balances — CEOs most often do double duty as chair.
Other than that, it seems to me that there is little benefit to persnickety and confusing regulations about “independence” that cut out of the equation people with real expertise and value. The selection process for board members would do better to focus on ethical integrity, in the Greek sense — integra, whole: a person who acts with fairness and honesty, without regard to popularity or self-interest. If rot begins at the head, it almost always stems from ego, from bullying, from blind obstinacy, from weakness and fearfulness, from dishonesty — and these are flaws of character, not position.
The rationale for diversity
It can also be important to include geography and other kinds of diversity (including diverse professional skills) when selecting board members. Again, the key notions here are balance and perspectives. A board that is clumped up with people from one profession, one region and one gender will almost certainly fail to fully grasp the interests of employees, clients, customers and shareholders from other backgrounds. It is foolish for any corporation to deprive itself of guidance from a variety of sources.
At the same time, it must be clear that diversity is not an end in itself; it is a tool to enrich the board's debates and decision-making process. The simple addition of labels — one woman plus one gay person plus one artist plus one lawyer — is a nonsense recipe: What we seek is real diversity in point of view, personality, approach, scope and expertise.
So much for what constitutes a good board member; what is a bad one? There are many different kinds. One is the bully, who wants to impose his will on the board and indeed the corporation; he (usually a he) is a frustrated CEO. Another is the very intelligent person who says nothing; he or she fails to contribute, from snobbery or reticence. A third is the person who is not bold enough to speak up and say he or she has not understood a topic well enough to form a personal judgment. Board members must be able to set aside their egos and be clear-sighted enough to seek assistance when they need it.
The most important decision
So a board must be strong, and must have a sense of its own authority and purpose. But its most important single decision will be to name the CEO, and paradoxically, here the most important element is the need to step back: to empower the CEO to lead. Time and again I have seen boards refuse to select a strong personality who will create, defend and persuade strategy. The board worries that it will be sidelined; that a strong leader will shake up the existing structure and culture. Often a board is ruled by one or two activist members who, like medieval barons, camp on the high ground and try to manipulate a weak king — to make the CEO a muppet, or as we would say today, a drone: a small metal robot that can be directed from afar.
We have chosen our ideal board: It is made up of men and women of integrity, with diverse professional and geographic backgrounds. They are fearless and yet modest in their ambitions, capable of setting aside their personal egos.
Now, how should they operate? How should their work be structured?
The work of committees
If corporations are a little like living organisms, their governance is necessarily an art of change — of listening to all, moderating goals, reconciling clashes of interest. Building an effective board is a process. And although this system is not yet universal, my experience leads me to conclude that boards function best through four committees, keeping an open option for a fifth.
• The audit committee needs to have sufficient competence and authority to impose financial transparency in all the company's accounts. Perhaps no other factor can so powerfully ensure the healthy and fluent functioning of a corporation, for among its other benefits, transparency also generates clear visibility on the nature of financial risks and how to mitigate them.
• The compensation committee, which should not only define the pay of top managers but also set criteria for that pay which are explicitly linked to the company's goals. These should be clear, transparent and demanding benchmarks that are well understood, because a system that is openly grounded in more pay for better work according to clear goals is vital to ensuring internal perspective on the goals of any company and the promotion of its talent
• The nomination committee, which focuses on the future of the men and women of a corporation and the choice of new managers. Why is it separate from the compensation committee? Because talent is the major resource of any corporation, and this system creates two angles: one, a perspective based on reward for existing performance; and the other, a vision of the future that relies not only on compliance with the egos of various key managers but also the real interest of the corporation
• The strategy, governance and risk committee. It is generally accepted that the full board has overall responsibility for risk oversight, alongside its oversight of strategy. But in view of the size, complexity and geographic spread of most major corporations, it seems to me self-evident that a standing committee is the only way to ensure that this role is effectively performed. Particularly in today's rapidly shifting digital universe — when every corporation is global and cyber-security a critical issue — the committee for strategy and risk fosters an integrated, enterprise-wide approach to identifying and managing risk, and pushes for constant improvements in the quality of risk reporting and monitoring, both for management and the board
• Finally, ad hoc committees can and should be formed when the board needs to take the lead on unpredictable crises, whether they are natural catastrophes, a takeover attempt, or the arrival of an activist and potentially threatening shareholder. If the board does indeed seek to take into account the interests of all stakeholders — rather than shareholders or the CEO alone — it will almost certainly have a different view from that of management and shareholders, and this is where the beauty and tension of the concepts of separation and balance really become clear.
A unique moment
Styles vary, depending on countries and traditions, but shareholder meetings can be more than a space for regular rubber-stamping of management decisions. I like the idea that the meeting of shareholders is a unique moment in the life of a corporation. We don't live in an ideal world, and it's normal that differences of opinion exist; they should be expressed. Only dialogue can help resolve them, and it's absolutely necessary to nurture a rich and open dialogue, not only during the annual shareholder meeting or other exceptional events but yearlong.
Vivid, dynamic shareholder meetings push greater transparency and discuss vital topics. They become a real locus for sharing points of view and press for measures that are healthy, bringing in fresh air and light — I'm thinking here of say on pay, for example. In French law, it is said that the associates of an enterprise are linked by affectio societatis, the desire to create bonds of partnership. It is thus natural to seek to form a living relationship that pools the interests of the corporation with those of its shareholders and other stakeholders.
The arrival of an activist shareholder can be viewed as an aggression; indeed, it can upset the easy and habitual order of things. Still, the eruption of an activist who asks hard questions in the shareholders' assembly can inspire the board to take a new look at strategy and the real, long-term interest of the company, as opposed to the entrenched positions of one or other person in management.
Management can be wrong. Managers can be too fearful, too stubborn or too blind to restructure and modernize for the future. A board with the capacity for strong judgment and clear vision, and which has the authority to make a decision that reorients the company, is perhaps the corporation's most precious asset.
Respect for the interests of all
A strong code of governance is not an end in itself, and neither is a strong board. Its only reason for existence is to develop rules of good conduct and a framework of respect for the interests of all stakeholders. Public scrutiny — which is intensified by the always-on spotlight that the Internet creates — reinforces the obligation for respect, integrity and responsibility across all levels of the corporation, for particularly in difficult times such as these, a company has obligations to the broader community — including, but not limited to, employment.
In reality, many — if not most — of the company leaders whom I know are viscerally attached to ethics, fairness and a sense of social responsibility. They, like the corporations they lead, contribute extensively to their countries and communities. They can do this because a strong and decent board, made up of intelligent, curious and ethical men and women, is shaping the relationship between their numerous parts and setting a course for harmonious dialogue and progress. Today more than ever, as economic cycles lurch and pitch and storms break over our heads, we need that strong, understanding hand at the helm of our corporations. â–