Fifteen Eighty Four

Academic perspectives from Cambridge University Press


Dynamic companies, the governance paradox and the board of directors of the future

Jordi Canals

Innovative companies are a critical pillar of dynamic societies. The modern firm is a formidable institution that offers valuable solutions to citizens’ problems, creates jobs, fosters scientific discovery, speeds up innovation and spreads prosperity. While these achievements are true, there is also evidence of frictions and crises in the corporate world related with firms’ governance.

After the 2008 great recession, many governments introduced stronger regulation and standards of behaviors for boards of directors and senior managers. Moreover, the number of new codes of corporate governance approved since then around the world has skyrocketed. Despite all these efforts, most of the recent corporate crises still have their main roots in corporate governance failures. In a nutshell, regulation or the voluntary adoption of best governance practices do not seem to work. Many well—known companies, including Boeing, Deutsche Bank, Facebook, GE, Intel, Thyssen, Uber, Volkswagen, Wells Fargo or Wirecard, among others, have gone through the very painful process of governance crises despite increasing regulation.

Today’s dramatic disruptions in the world economy are creating more strains on governance. Technology transformation, deglobalization, rising geopolitical risks, climate change and social activism have coalesced to create unique challenges to companies and society. The rise of different types of activist’s investors brings additional pressure on firms. At the heart of corporate success there is efficient management and effective corporate governance.

Over the past two decades, most corporate governance reforms have been pursuing a better protection of shareholders. Shareholder primacy is well-ingrained in most national jurisdictions. Nevertheless, improving firm’s governance has a deeper reason: companies are very important social institutions that produce multiple benefits to different parties. They are a key pillar of what makes a flourishing society, in cooperation with rule of law, respect for human dignity, effective institutions, competent governments and successful educational systems. Society needs good corporate governance as a foundational pillar.
Why is good corporate governance so elusive? One of the reasons for this paradox is that most research on corporate governance has focused on a single set of questions: the relevance of some structural conditions –board structure and composition, shareholders’ rights or board’s accountability- and their impact on corporate performance. There is no doubt that these questions are relevant, but they are not the only ones.

There is a need to consider some other key dimensions of governance. The first is that companies are not static institutions: they are part of a wider system –with shareholders, customers, people, suppliers, governments, and capital markets- with different expectation, actions and dynamics that affect the company performance. Companies interact with other competitors to win customers’ minds and market share. The simple prescription that companies should maximize shareholder value is not enough in this more complex world.

The second dimension is that at the heart of good governance there is a board of directors that works with a CEO and a senior management team to take the company to the next level. Board structure and composition are important elements of effective boards. Nevertheless, in the real world, how the board works and how effective it is in collaborating with the top management team to lead the company may be even more powerful drivers of governance. The evidence also shows that companies that had a great board structure and composition according to some corporate governance standards, fell into irrelevance. Boards’ structural factors are not enough.

In “Boards of Directors in Times of Disruption”, I try to understand these challenges by looking in-depth into the dynamics of boards of directors in companies that were facing critical choices. Based on the evidence observed, I present a model of boards of directors that could be more effective in governing companies in a time of large disruptions. This model highlights the relevance of corporate purpose in the firm’s governance and the effectiveness of the board reviewing and supporting it. It explains the critical role of the board in nurturing leadership development and choosing and growing the next CEO. This model dissects the indispensable cooperation between the board and the CEO and senior managers to work on corporate strategy and adopt –when necessary- effective corporate transformation. It discusses why the board effectiveness does not depend so much on its structure, but of its work as a high-performance team. It presents the role of corporate culture in governance and its interaction with the board of director’s culture. Finally, this model introduces a new perspective and process on how to assess holistically the firm’s overall performance and impact.

The evidence of the companies discussed in this book suggests that good governance is not easy but can be achieved by competent boards of directors that adopt a notion of professionalism and service to their companies. Effective boards of directors are an essential pillar of dynamic companies that aim at having a positive impact on society.

Boards of Directors in Disruptive Times by Jordi Canals
Boards of Directors in Disruptive Times by Jordi Canals

About The Author

Jordi Canals

Jordi Canals is the IESE Foundation Professor of Corporate Governance and President of the IESE Center for Corporate Governance in Barcelona, Spain. He has published widely on corp...

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