Corporate Governance 2.0

by Guhan Subramaniam for Harvard Business Review

Alhough corporate governance is a hot topic in boardrooms today, it is a relatively new field of study. Its roots can be traced back to the seminal work of Adolf Berle and Gardiner Means in the 1930s, but the field as we now know it emerged only in the 1970s. Achieving best practices has been hindered by a patchwork system of regulation, a mix of public and private policy makers, and the lack of an accepted metric for determining what constitutes successful corporate governance. The nature of the debate does not help either: shrill voices, a seemingly unbridgeable divide between shareholder activists and managers, rampant conflicts of interest, and previously staked-out positions that crowd out thoughtful discussion. The result is a system that no one would have designed from scratch, with unintended consequences that occasionally subvert both common sense and public policy.

Consider the following:

  • In 2010 the hedge fund titans Steve Roth and Bill Ackman bought 27% of J.C. Penney before having to disclose their position; Penney’s CEO, Mike Ullman, discovered the raid only when Roth telephoned him about it.
  • The proxy advisory firm Glass Lewis has announced that it will recommend a vote against the chairperson of the nominating and governance committee at any company that imposes procedural limits on litigation against the company, notwithstanding the consensus view among academics and practitioners that shareholder litigation has gotten out of control in the United States.
  • In 2012 JPMorgan Chase had no directors with risk expertise on the board’s risk committee—a deficiency that was corrected only after Bruno Iksil, the “London Whale,” caused $6 billion in trading losses through what JPM’s CEO, Jamie Dimon, called a “Risk 101 mistake.”
  • Allergan, a health care company, recently sought to impose onerous information requirements on efforts to call a special meeting of shareholders, and then promptly waived those requirements just before they would have been invalidated by the Delaware Chancery Court.
  • The corporate governance watchdog Institutional Shareholder Services (ISS) issued a report claiming that shareholders do better, on average, by voting for the insurgent slate in proxy contests; within hours, the law firm Wachtell, Lipton, Rosen & Katz issued a memorandum to clients claiming that the study was flawed.
  • The same ISS issues a “QuickScore” for every major U.S. public company, yet it won’t tell you how it calculates your company’s score or how you can improve it—unless you pay for this “advice.”

We can do better. And with trillions of dollars of wealth governed by these rules of the game, we must do better. In this article I propose Corporate Governance 2.0: not quite a clean-sheet redesign of the current system, but a back-to-basics reconceptualization of what sound corporate governance means. It is based on three core principles—principles that reasonable people on all sides of the debate should be able to agree on once they have untethered from vested interests and staked-out positions. I apply these principles to develop a package solution to some of the current hot-button issues in corporate governance. Read more here.

 

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