Corporate Governance is Dead

I am sorry to be the bearer of bad news but it’s true. Corporate Governance as we know it is dead. Gone. Pfffft. As 2010 comes to a close, we must all come to terms with the fact that this old clunker has seen its day. Its rusted hood ornament and fins are of a bygone era, an artifact of another time.

Not to be confused with its evil twin, that mutant beast on a short corporate leash also euphemistically referred to as “corporate governance,” this latter day zombie is a corrupt, tired and wholly irrelevant concept that has no value in today’s world of investing.

Perhaps an explanation is in order. The corporate governance I refer to was once an important, vital tool for holding corporations accountable to their shareholders. Executives were threatened by the concept. Uttering the words corporate governance was akin to dissing one’s mother at the country club.

In its heyday, corporate governance was an effective weapon for reigning in corporate excess, challenging management on a range of issues and a platform for debating important issues effecting shareholder value and stakeholders as a whole. In the late 1980s, the Council of Institutional Investors was but a seed of an idea in the head of California’s State Treasurer, Jess Unruh. JP Stevens, a textile manufacturer was facing unruly mobs of shareholders at its annual meeting because of its abhorrent labor practices. Multinational corporations were called to account for their complicity in Apartheid South Africa. Corporate Governance was in its infancy. Things changed.

The 1990s saw Corporate Governance maturing a bit. Some of the youthful exuberance remained but there was a bit of seriousness injected into its core. CalPERS, the largest pension fund in the U.S. got on the bandwagon, waging battles in annual meetings and boardrooms across corporate America. The nascent idea that executive pay should somehow be tied to corporate performance was bravely advocated. Corporate Governance was now in its adolescent years.

The 21st century arrived and Corporate Governance was in full swing. Barrel-chested, dapper and full of itself, Corporate Governance had come into its own. “Adults” were referring to corporate governance in the same sentence as shareholder returns, valuations and other big and important investment terms. Ominously, executives and corporate lawyers were using the language of Corporate Governance in conversations about the public enterprise. Institutes were formed at major Universities, international conferences were held and Corporate Governance became a profession. Middle age had set in but a mid-life crisis was looming.

In the mid-2000s, the Corporate Governance binge was on. A new beast, the hedge fund, and its drunken cousin, the private equity fund, had embraced Corporate Governance not as a good in and of itself but as a means to an end, in this case profit maximization. Even more disturbing was the embrace of Corporate Governance by the governed – corporate executives and their ilk. Yes, NAMBLA had merged with Mothers Against Child Abuse.

Corporate Governance has begun a period of self-evaluation. One indicator of this is the recent spate of mergers in the proxy adviser world. ISS goes through its seemingly endless series of mergers and acquisitions. MSCI, now stuck with a minimally profitable enterprise is no doubt wondering how to offload this doddering venture. Governance Metrics merged with the Corporate Library. Recent reports have announced the acquisition of Proxy Governance by Glass Lewis. Each of these events speaks to the unspoken fact that there is little money to be made in the proxy advisory world. CalPERS is refocusing its governance work in a way that suggests that its adventures over the last two decades is winding down.

More importantly, the arcane discussions about executive pay, director responsibility and risk are proving to be ever more irrelevant in a world concerned about the influence of the corporate enterprise on society and the environment. Corporate Governance as a tool for addressing these problems has lost its edge. While these discussions remain important to the initiated, its backward-looking approach and its failure to influence the ills of global corporate conduct speaks to its ultimate irrelevance.

Like all things once good, Corporate Governance has seen its day. Now I’m off to get my shovel before things start to smell.

About John Richardson

John Richardson is the CEO of JMR Portfolio Intelligence, a Washington DC based human rights consultancy.
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6 Responses to Corporate Governance is Dead

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  2. Bob Monks says:

    Your “bad news” is over due and, thus, particularly welcome. Thank you for a coherent, well written, and fair analysis of the current state of affairs; I hope that there is “libido” to respond in a constructive way.

  3. Even if I do not think that corporate governance is dead, congratulations for this very well written history of Corporate Governance. I share your point of view : part of the “old” Corporate Governance is behind us. Nevertheless the new challenges of Corporate Governance are still very exciting : introduction of Say On Pay, engagement campaigns by coalitions of investors.

    I am still a bit confused about the merging process in the Corporate Governance and Proxy advisory businesses. On one hand I see it as a positive signal : investors need high quality research and high level of expertise, the box-ticking approach being over. On the other hand the merger process is also the result of the lack of profitability of the business (or as you write “there is little money to be made in the proxy advisory world”) : many investors are not ready to pay high level of fees or do not recognize fairly the value-added or the lower level of portfolio risk implied by the work of Corporate Governance or Proxy advisors. The fact that ISS has never sold its corporate service activity, despite criticisms of the potential conflicts of interest, but still remains the biggest player in the field of proxy advisory, tends to illustrate this pessimistic view.

    Nevertheless we can dream to build a better Corporate Governance world in which :
    – Proxy advisors are fully independent, work only for investors and refuse any paid services for issuers;
    – Investors recognize the value of independence and accept to pay for it;
    – Investors improve the quality of their votes country per country and not only in their home market, recognizing the value of local expertise;
    – Investors develop their own governance philosophy, do not rely only on proxy firms advices and decide themselves for each voting decisions,
    – Investors are willing to act collectively and to engage with companies (not only in their home market);

    That is what PROXINVEST is building with its partners of European Corporate Governance Service (ECGS Ltd) : to provide proxy reports made by local experts refusing any money from issuers, to educate investors on corporate governance specificities in each country and to provide assistance for investors to engage and dialogue with issuers.

    To conclude, what we are all looking for is to build a strong and responsible investors’ side with a long term view, able to challenge companies on corporate governance and shareholders rights issues. The challenge for coming years will be to make corporate governance engagement by investors more effective, not to leave corporate governance in the sole hands of executives. The experience of Proxinvest and ECGS in France and Europe is that executives still threaten the concept of corporate governance and especially the sentence of the general meeting of shareholders and if “there is little money to be made”, there is still so much fun to enjoy…

    Loïc Dessaint
    PROXINVEST (Paris)
    Associate

  4. Many things have been declared ‘dead,’ based on recent experience. For example, political conservatism in the U.S. was declared dead by the media and most commentators only two years ago; four years before that, liberalism was likewise ‘dead.’ In Europe, socialism was ‘dead’ in 1991; British-style liberalism in 1997. The best one can safely say, at least until the dusty coating of history has covered something to a reasonable depth, is that it seems to be ‘moribund.’

    Before one declares something called corporate governance even at risk of needing a priest for the last rites, one should define it carefully. The Cadbury Report defined corporate governance as “the system by which corporations are directed and controlled,” a definition which is frequently employed by other authors. I haven’t noticed the corporate mode of organization on the wane in our society, and I assume that most if not all of these entities are both directed and controlled, (although occasionally a specific situation gives one pause.) Companies will continue to need advice in all related areas. Clearly, the brief comment broadcast here and about the Internet must be referring to something far more specific.

    If the author means to say specifically that shareholder activism motivated by concerns about corporate governance is dead, one must assume either: that the concerns which once motivated shareholders have been forever remediated, or that these concerns are no longer of interest to shareholders, and are unlikely ever to be of interest again. I would submit that the first assumption is extremely unlikely, given that no one has succeeded in changing human nature in at least the 5,000 years of recorded history. The second, if true, is only true so long as the the concerns underlying the first remain in abeyance and/or fully discounted in share prices.

    While there is some evidence, at least in the U.S. and the U.K., that these elements have been fairly well discounted over the past nine years, there is no reason to believe that this is the case because either (a) investors have become permanently more rational, or (b) managers and directors have become permanently less self-interested. On the contrary, it has been demonstrated that the reason governance issues or the lack of same seem to have been discounted in share prices is because investors became expected to pay attention to them, due to the excess returns gained from paying attention to these issues during the preceding 15 years. This was due to the efforts of corporate governance activists, of proxy advisors, and the occasional muckraking financial news item. If governance activism is in fact temporarily moribund, then after a while investors will cease paying attention to it, just as at regular intervals they cease paying attention to book value, return on invested capital, or, in bear markets, growth potential. This means that there would again be an excess return to be made from paying closer attention to these same governance issues: board independence, transparency, protection from rent extraction, and fair treatment of minority shareholders.

    It seems that what the author is decrying instead is the loss of missionary enthusiasm among the first generation of activists, and the decline of a rational link between the governance concerns of investors and the proper management of a business. It is indeed arguable that the present governance ‘industry’ is a victim of its own successes: there is increased emphasis upon compliance with increasingly minor infractions, the area has become bureaucratic and legalistic, divorced from investment concerns, exploited by some for purposes entirely contrary to the original intentions of its foundation, and the whole area has become overlaid with layers of complex regulation, particularly in the U.S.

    However, the U.S. is not the whole world, the new regulations will not cover all possible attempts to circumvent them, the majority of large corporations are not the whole of all investible propositions, and investors may be counted upon to ignore or eventually forget all lessons not recently acquired from personal pain. Corporate governance watchdogs will continue to be needed the same way that police will always be needed; because some individuals will try to cut corners no matter what the environment, and many more will begin to ignore or even participate in whatever is going on whenever it seems that is what most of their contemporaries are doing.

    As Prof. Frentrop has demonstrated, governance activism goes back to the first corporation, the Dutch East India Company, and began as early as 1609. It will be needed in some form as long as some people manage assets on behalf of others.

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