The Future of Corporate Governance

The Future of Corporate
CCL 2012
Henrik Norinder
• in which we consider
– the frontiers of corporate governance
– beyond the frontiers of corporate governance
– new corporate governance policies and practices
– society’s changing expectations
The paradox of the unitary board
Corporate governance involves two countervailing responsibilities:
– performance: strategy formulation and policy making
– conformance: executive supervision and accountability
These two responsibilities potentially conflict
– “marking their own examination”
The two tier board resolves the dilemma with two boards:
– the executive board responsible for performance
– the supervisory board responsible for conformance
The paradox of the unitary board
The dilemma met in unitary boards by having independent
– with independence strictly defined to exclude any
– able to take an objective, independent view
– providing a counterweight to the executive
– independent directors also form the audit
A paradox
• The greater a director's independence the less
he is likely to know about the company
• The more an INED knows about the company,
the greater his potential contribution, the less
his perceived independence
10 core governance principles
1. The board’s fundamental objective is to build
long-term sustainable growth in shareholder
2. corporate management - critical role in
corporate governance
3. good corporate governance should be
integrated with the company’s business strategy
4. Shareholders have a responsibility to vote their
5. over-reliance on legislation and rules may not
be in the best interests of shareholders,
companies or society
6. a critical component of good governance is
7. independence is an important attribute for
board members but non-independent outside
directors can add expertise, diversity and
8. proxy advisory firms should be transparent and
9. the SEC should work with exchanges to ease the
burden of proxy voting
10. SEC and/or the NYSE should periodically assess
the impact of major governance reforms
Can outside independent directors be genuinely independent?
In unitary board countries:
- CG codes call for independent non-executive directors
- The codes define 'independence' in detail
But can any director be genuinely independent when INEDs:
- nomination came from existing members of that board
- had the approval of CEO and chairman
- feel commitment and loyalty to them
- have to form an effective team with the CEO and the other directors
- work closely with executive directors on strategic and other issues
- determine the issues they are supposed to be monitoring
- become enmeshed in the board culture
Can outside directors be genuinely independent?
In two-tier board countries:
• supervisory board consists entirely of outside directors
• but members of supervisory boards represent the
interests of stakeholder groups
So how can a supervisory board member apply
independent judgement if:
• their allegiance is to the groups they represent
• their interests may be in conflict
• the relationships within the board can be adversarial
Should CG be based on principles or rules?
In the United States:
- listed companies must obey SOX Act rules and SEC and
stock exchange regulations
- US accounting standards also rule-based
In the United Kingdom, the Commonwealth and 'OECDcode' countries:
- listed companies follow country's corporate
governance principles (comply with code or explain
why not) and international accounting standards
The rules versus principles debate has a long way to go
Should chief executive officer ever be board chairman?
In the United States - chairman and CEO of listed companies frequently a single individual
- independent directors provide constraints
In the United Kingdom, the Commonwealth and 'OECD-code'
- codes require roles of chairman and CEO to be separated
- avoids domination and risk-taking by a powerful individual
Which is preferable:
- a leader providing single-minded leadership
- shared responsibility with reduced risk
The duality question remains unanswered
How should directors’ remuneration be determined?
Top management of large listed corporations wield
enormous power.
Some claim directors pursue their own agendas and extract
huge rewards.
Major investors and investigative media have challenged
director rewards.
Concern that some rewards are excessive
– particularly when not related to performance.
Some even apparently rewarded for failure.
Should a retiring CEO ever become chairman of the board?
FOR allowing a retiring CEO to become chairman:
- Accumulated experience
- CEO known by fellow directors and senior managers
- CEO known and trusted by investors, customers, employees etc.
- Personal qualities - integrity, leadership, other skills - known
- Risks with a new chairman reduced
AGAINST allowing a retiring CEO to become chairman:
- Chairing the board different from being CEO
- Success as CEO does not guarantee success as chairman
- Past experience quickly decays in rapidly changing world
- Problems establishing good relations with the new CEO
The answer remains ambiguous
Should shareholders be able to nominate directors?
In 19th century, shareholders nominated directors.
Now in listed companies shareholders' interests vary.
• Directors choose new directors
• Shareholders' approve but do not nominate
• Recent proposals in US and UK for shareholders to
propose candidates
• Suggestion not welcomed in many board rooms
• Determining who joins the board is a power base
Should institutional investors exert power over listed
Calls for institutions to vote shares and “exercise power”
• Some fund managers prefer to 'vote with their feet’ by
selling shares
• Institutions first responsibility is to their investors
• Voting must be in the interests of beneficial owners
• Some regulators now require institutions to say if and
how they voted
• Institutions’ involvement in governance could increase
their risk
• They might be accused of receiving insider information
• Could they be held accountable if a company fails
Can external auditors really be independent?
Independent external auditor's role in corporate
governance is fundamental
But can the auditor be seen to be truly independent
of the company when:
• the company appoints the auditor
• the company pays the auditor
• the company is a client of the auditor
• the auditor may be economically dependent on
the client
Auditors serve two masters
- the shareholders and the directors
Potential conflict of interest satisfying the interests
- shareholders (an external check on the directors)
- the directors (working closely with them)
Audit of large companies world-wide dominated by
just four firms, which raises a number of concerns
Drivers of Change
US influences
- SOX, SEC, NYSE, other organizations
- institutional investors, CalPers etc
international drivers
- OECD, World Bank, IMF, other nations
- global economic crises
recognition of cultural aspects
- differentiation accepted
influence of China, India and Russia
recognition of complexity of ownership chains
development of new organisational forms
right of owners to nominate directors
disincentive to go public
governance of private equity, sovereign and hedge funds
societal expectations and government actions
drive for gender diversity on boards
demand for genuine independence of external auditors
new theories of corporate governance
need for a new paradigm of corporate governance
corporate collapse and CG responses
- fraud, company domination, economic problems
• Boundaries of agency theory recognised
• New research possibilities
- inter-personal relations and board behaviour
- board as team, board style and culture
- director interpersonal networks
- CG as an information process
- psychology of boards
- politics of boards - power as measurable force
- board leadership - traits and competencies
• New models, frameworks, concepts
- new insights, new thinking, better understanding
The implications
• New governance demands on organisations
• New ways of working for boards
• New challenges for directors and boards
• If the 19th century was
the century of the
• and the 20th century was
the century of management
• then the 21st century is
the century of corporate

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