Corporate governance should not be difficult. The owner is in charge. When you have more than one owner, you first agree on how decisions are made. If you don’t like how decisions are made, don’t become an owner. If you do become an owner, and decisions are not made according to your agreement, you have recourse to the legal system. This is the same for any agreement. End of story.
It is not quite that simple when dealing with the general public, and there should be some guidelines; but we need to be careful not to assume that non-sophisticated investors are stupid. Unfortunately, the general trend is to treat the public precisely that way. And that is abundantly confirmed by statements by the political, educational, and regulatory elites. Moreover, the measures demanded by these very elites to protect the public largely reveal their own ignorance of what is needed. Of special concern is the tendency, by those who presume to know it all, to think that one solution applies to all situations.
Rather than trying to micro-manage how decisions are made, regulators should demand that more emphasis be devoted to what is really needed: full disclosure of the decision-making process. Full disclosure should be provided without any prejudgment as to what is or isn’t in the best interest of investors, and regulators, in particular, should not inject any comments beyond pointing out that no regulator has made (or can make) any such determination.
That is not to say that good corporate governance is of no consequence. On the contrary, it is essential to achieving and maintaining shareholder value. What is objectionable is the dictum on how to be good, not the desired result. But let that rather be a competitive advantage for those who seek it.
Empirical research has shown that owners are best served electing corporate boards that can and will act as a check on management. Some management participation on the board appears to be beneficial, as does some (limited influence) management ownership. And proper management and director incentive compensation (usually in the form of stock options) can increase shareholder value. Even making an award of the chairmanship an incentive for the CEO can be seen as beneficial to shareholders.
Conversely, there is little, if any, evidence that 100 percent independent directors increase value, nor that non-CEO chairmen are a must, nor that fully independent nominating, auditing, and compensation committees are necessary. Rather, the quality of the directors and committee members are all-important, and that they are devoting sufficient time to their respective duties.
Even the so-called stupid general public could have figured that out (probably long before the elites are ready to admit the same).
Given the current micro-management by regulators, however, corporate governance must include not only business risk management, but also regulatory risk issues, such as the level of acceptable exposure to fines for non-compliance, how to train the organization to recognize these issues, and how to compile and analyze data to monitor the same. Although technology has allowed efficient regulatory risk management, the net effect of these measures on shareholder value is more likely to be negative than positive, due to time and personnel constraints. Isn’t that precisely the opposite of what was intended?
In addition to deciding on the core code of corporate governance, shareholders should be involved in setting the tone for the organization. In particular, that includes issues relating to corporate responsibility (the external view) and to personnel management (the internal view), which are closely related.
Ethics is part of this, but not the sum total of it: management style and corporate culture are other aspects. Again, technology should be used to track and measure their reach and impact.
Finally, shareholders, through their elected board members, are the arbiters of the corporate vision and how well corporate development, sales, and fulfillment activities support the same, whether or not reflected in current shareholder value. This, again, requires proper use of technology to collect and analyze data. CEO compensation should be tied into this evaluation, as well.
All said, good corporate governance requires integration of these functions. Such an holistic view can and should be seen as a competitive advantage. As always, the devil is in the details, but shareholders do not need regulators to point that out, nor which details are good or bad. Shareholders are not stupid, not even when they are “just” the general public.
