What is Corporate Governance?
Corporate governance encompasses a series of mechanisms and rules that dictate how a company operates internally. It specifies the rights and responsibilities of the company’s executives, including its board of directors, and defines an organization’s reporting and decision-making structure.
The goal of a corporate governance system is to align the interests of all internal stakeholders, providing a good mechanism to support the company in the execution of its strategy and serving as a tool to deal with executive misbehavior and ethical violations.
There’s no current agreement with respect to what makes corporate governance effective and supportive of a company’s interests, and most systems in place are unfortunately plagued with group interests, misalignment and short-term myopia.
For example, many board members nowadays are elected every year, which contrasts with management’s need for long-term vision. How can a board member elected for only one year adopt a long-term view?
Public companies already have enough short-term myopia in trying to satisfy Wall Street’s demanding analysts and investors, who want bigger numbers every quarter, so if the board is also short-sighted it makes the job of the CEO and the executives in charge an uphill battle.
Short-term focus is a real roadblock to long-term growth, and one of the reasons why Michael Dell took Dell Computers private in 2013.
He needed to restructure the company in response to the new challenges the company faced, but realized he couldn’t do it if he had to worry about quarterly reports and investors all the time.
Corporate governance with staggered boards, where only a third of the members are elected every year, enable a longer-term view of the company but are widely opposed by shareholder activists who claim that this structure makes companies unattractive for unsolicited offers and hostile takeover attempts, since the acquirer would have to wait longer to replace the target’s board.
In trying to execute a company’s long-term view, an effective corporate governance system can be your best ally or your worst enemy.
That’s why you must closely watch the way this system is structured and how the board of directors is staffed if you really care about getting things done. If you find that the structure is not appropriate, then you must find ways to push it in the right direction.
In the end, if you go through the hard work of creating a good strategy but can’t do your job to implement it, that’s just as bad as having a lousy strategy.
Behind the story of any country that’s gone through a major change towards progress you’ll find a leader who took the bull by the horns and restructured the incumbent system into one that would allow him to do his job.
Just be careful when you open that door, because in the same way that you may try to get rid of your board, your board may try to get rid of you.
Wu, Sun. Strategy for Executives, this book can now be downloaded for free here.
The Economist Explains. Why does Michael Dell want to take his company private? The Economist. February 2013. URL: https://www.economist.com/blogs/schumpeter/2013/02/economist-explains-why-michael-dell-taking-company-private
Subramanian, Guhan. Corporate Governance 2.0. Harvard Business Review. March 2015.