A context of change, crisis and pressure
The interconnection of business and society has never been stronger, and the relationship between the two will continue to influence the global agenda in decades to come. Societal attitudes to business determine the ability to create wealth, to create jobs, and to act as a positive force for change. But the financial crisis and a series of corporate scandals have led many to question the role and values of business.
Society’s trust in corporations and their executives is dismally low, with the crisis in leadership fuelled by a relentless media cycle and a growing consumer influence through the global spread of information and viewpoints over the internet.
CEOs are scrutinized for their leadership and decision-making, boards are held accountable for the CEO’s remuneration, and companies are questioned about their sustainable strategy and social impact.
The hidden gift
But is this necessarily bad? The answer, despite the pressure this places on businesses and CEOs, must surely be no. For if the new world emerging through the current storm of change and crisis is one in which corporate governance builds not only business but also positively develops society while taking into account the environment, then such scrutiny can only be a wider form of positive governance in itself, there to remind businesses that they have a commitment to walking their talk.
Corporate governance and leadership can find opportunity in the challenges it faces
The daily demands on their time to cope with volatility and shocks, compliance, and an over-emphasis on quarterly results gives companies little time for sustainable value creation, and yet research reveals that organizations that focus on long-term performance perform better. For those companies who can successfully balance their short-term performance and long-term strategy, the 21st century will be filled with opportunity. Performance indicators such as employee satisfaction, innovation and brand health are fundamentals that will drive the performance of tomorrow’s enterprise, and it is essential for businesses to engage with all stakeholders, not just with shareholders, to address the question of trust.
Equally, data shows that family-owned businesses have outperformed non-family companies over the last decade, which leads to the conclusion that boards should act and think like owners, thereby improving their effectiveness, their industry knowledge and their level of engagement.
It is also time to look more closely at internal governance mechanisms, and the actors who bring these mechanisms into play: only excellence in governance will restore the trust of society.
The cultural perspective
This might hold true for developed markets in Europe and North America, but from an emerging economy perspective, the question is more likely to be Does corporate governance matter?
The debate over how companies are governed is as old as companies themselves. Corporate codes of governance, on the other hand, have developed more recently, many of them in the wake of various corporate scandals of the 1990s. With over 100 international codes and regulations that often focus on issues of shareholder rights, financial transparency, accuracy of disclosure, and accountability of the board, their interpretation varies from one country to another.
Governance and leadership oriented towards the wider perspective
With the assertion that businesses have to make profit in order to create wealth, the way in which businesses are governed, and the relationships between management, the board, shareholders and outside stakeholders impacts on many of the challenges faced by society as a whole. The purpose of corporations therefore is more than just maximizing profits and wealth; the well-being of all stakeholders should be considered.
Towards a governance mindset of collaboration, diversity and communication
The biggest test of corporate governance in any culture has been when things go wrong, such as bankruptcy or takeovers and the subsequent conflicts of interest between the board, workers, creditors and shareholders.
So how can businesses limit those conflicts of interest? Our suggestion is that governance should pursue an integrative approach, encouraging people to work more closely together - managers discussing with employees, shareholders collaborating with the board - to take into consideration all points of view, not just financial ones. Further, corporate boards will benefit from having a diversity of perspectives, which includes a higher percentage of female board members, and greater employee representation.
Good governance is not about rules - it’s about people
While most corporate governance conferences focus on shareholders and boards, few focus on the critical role of the CEO. The intense scrutiny of the media often overlooks the complexity of being a CEO, and how his or her decisions are impacted by the environment in which they operate. Context is very important for those decisions, and brings with it a better understanding of their leadership.
The idea of close cooperation is often met with skepticism, but this is in part a communication gap that influences public perception, and it is only through putting the human aspect back into the governance equation that businesses can find a common language with society.
A good board can never compensate for a bad CEO but a good CEO can compensate for a bad board. In this light, effective leadership must anchor its behaviour in values that set example and provide stability in times of crisis, among them the essential three of integrity, transparency and accountability. The latter are critical for good governance and more effective capital markets, as well as providing investors with visibility on matters such as remuneration and giving investors, and moreover rating agencies, more information with which to make decisions.
Ultimately, when companies take the initiative be it on issues of diversity or transparency, it pre-empts activism among shareholders, and avoids the introduction of onerous legislation and rules.
The business leaders of the future
Providing input to this White Paper, student respondents from across the world ranked environmental protection highest as the challenge in which business should be involved. There was also agreement that a company’s board of directors should have the most influence over CEO decisions and, in addition, well over half the students agreed or strongly agreed that government legislation is essential to ensure a balance between business interests and society. These attitudes among future business leaders are consistent with movement in the last 10 years towards a greater interest in ethics and social responsibility. Indeed, it is the moral courage that our students will learn at business school that can encourage them to stand up and question behavior in order to positively shape the interconnection of business and society of the future.
Professor Patricia Charléty, Ph.D., is head of the Economics Department at ESSEC Business School. Her areas of expertise include mergers and acquisitions, bankruptcy, and corporate governance.
Professor Atsuomi Obayashi, Keio Business School, received his Ph. D. from the University of Chicago. His areas of research include Industrial Organization and Microeconomics.
Associate Professor Sun Pei, Ph.D., School of Management, Fudan University, educated in China and the UK, teaches in Fudan’s Department of Industrial Economics. His fields of research include corporate governance, industrial policy, and strategic management.
Professor B. Espen Eckbo, Ph.D., Tuck School of Business at Dartmouth, was educated in Norway and the United States. An expert in the areas of finance and industrial organization, Eckbo is the founding director of the Tuck School’s Lindenauer Center for Corporate Governance.
Professor Pino Audia, Ph.D., Tuck School of Business at Dartmouth, is the faculty director of Tuck’s Center for Leadership. His fields of research include organization theory, strategy, and leadership.
Professor Dr. Ernst Maug, Ph.D., University of Mannheim, Business School. Professor of Corporate Finance since February 2006, Professor Maug’s current research is on various aspects of corporate governance, including executive compensation, mergers and acquisitions, shareholder voting, and board structures.
Salon de la Maison des Arts et Métiers
November 16-17, 2012