Bob Tricker

Corporate Governance
Principles, Policies and Practices 2e
Chapter 18
The Future of Corporate
Governance

The Future of Corporate Governance

in which we consider
the frontiers of corporate governance
beyond the frontiers of corporate governance
new corporate governance policies and practices
societys changing expectations

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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
Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

The paradox of the unitary board
The dilemma met in unitary boards by having
independent directors:
with independence strictly defined to exclude any
interests
able to take an objective, independent view
providing a counterweight to the executive
directors
independent directors also form the audit
committee

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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

Tricker: Corporate Governance 2e

Report of the US Commission on Corporate Governance

2010 10 core governance principles
10 core governance principles
1.
2.
3.
4.

5.

The boards fundamental objective is to build longterm sustainable growth in shareholder value
corporate management - critical role in corporate
governance
good corporate governance should be integrated
with the companys business strategy
Shareholders have a responsibility to vote their
shares
over-reliance on legislation and rules may not be in
the best interests of shareholders, companies or
society

Tricker: Corporate Governance 2e

Report of the US Commission on Corporate Governance

2010 10 core governance principles

6. a critical component of good governance is

transparency
7. independence is an important attribute for board
members but non-independent outside directors
can add expertise, diversity and knowledge
8. proxy advisory firms should be transparent and
accountable
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
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CG frontiers some unresolved issues

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

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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
Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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 'OECD-code'
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

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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' countries:

- 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
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CG frontiers some unresolved issues

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.

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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
Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

Should institutional investors exert power over listed
companies?
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
Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

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

Tricker: Corporate Governance 2e

CG frontiers some unresolved issues

Can external auditors really be independent? (contd)

Auditors serve two masters
- the shareholders and the directors
Potential conflict of interest satisfying the interests of:
- 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
Tricker: Corporate Governance 2e

The future of corporate governance

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

Tricker: Corporate Governance 2e

The future of corporate governance

Drivers of change (continued)
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

Tricker: Corporate Governance 2e

The future of corporate governance

Theoretical developments
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
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The future of corporate governance

New organisational forms
Complex groups seen as dynamic networks
- not static structures, organic not mechanical
Organisations defined by information networks
- not legal boundaries

New typology of corporate entities defined

New forms of societal organisations developed
- linking equity companies, non-government
organisations and community groupings
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The future of corporate governance

New governance practices and processes (1)

Board leadership recognised as fundamental

Quantifiable corporate governance norms
(beyond codes of best practice)
Reporting on compliance with norms
- to regulating authorities (sanctions)
- to all stakeholders likely to be affected
Information and control systems
- directors better access to knowledge
- stakeholders better access to information
- greater transparency
- data, information, knowledge
Tricker: Corporate Governance 2e

The future of corporate governance

New governance practices and processes (2)
Director performance
- better measurement linked with remuneration
Better protection for investors
21st century board
- more flexible less formal and rigid
- more transparent less secretive
- more transient, more participative, less bounded
New ways to govern (Shann Turnbull - Australia)
CG applied to SMEs, partnerships, joint ventures,
cultural, sports, health, housing entities
Tricker: Corporate Governance 2e

The future of corporate governance

Societys changing expectations of entities
Society expects more of corporate entities
Balance performance with conformance
- need for entrepreneurial risk-taking
whilst protecting stakeholders
Measure corporate governance
- CSR KPIs as well as long-term $ profit
Sustainability
- UN sustainability initiatives too diffuse
- taken up at country level
Tricker: Corporate Governance 2e

The future of corporate governance

Societys new expectations of directors
Higher levels of professionalism
Continuous learning and personal development
New focus on trust
- honesty, integrity, openness
- balance CSR with wealth creation
Corporate leadership
- in governing body and committees
Corporate leadership
- in society

Tricker: Corporate Governance 2e

The future of corporate governance

The implications
New governance demands on organisations
New ways of working for boards
New challenges for directors and boards

Tricker: Corporate Governance 2e

The future of corporate governance

New governance demands
Acceptable wealth generation
meeting market and societal needs
socially responsible
socially accountable
strategic risk management

Business as societal partnership between

individuals, enterprises, and the state

Tricker: Corporate Governance 2e

The future of corporate governance

New ways of working for boards
New board styles
- more transient, flexible, and adaptable
New board level information systems
- new ways to access knowledge
- internal and external information
New communication systems
- between directors
- between board and management
- between organisation, investors, and other
stakeholders

Tricker: Corporate Governance 2e

The future of corporate governance

New challenges for directors
Continuous learning
The learning board
Board review
- strategy for director development
Chairmans leadership role
Continuous self-development
www opportunities access information,
new learning opportunities, new tools
Professional developments
Learning from experience
Every directors personal responsibility
Tricker: Corporate Governance 2e

The future of corporate governance

If the 19th century was

the century of the entrepreneur

Tricker: Corporate Governance 2e

The future of corporate governance

If the 19th century was

the century of the entrepreneur
and the 20th century was
the century of management

Tricker: Corporate Governance 2e

The future of corporate governance

If the 19th century was

the century of the entrepreneur
and the 20th century was
the century of management
then the 21st century is
the century of corporate governance

Tricker: Corporate Governance 2e