Posts Tagged 'Harvard Business Review'

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.

 

Shareholder Capitalism Is Dead

by John T. Landry for Harvard Business Review, July 21st, 2011.

The verdict is in, and it serves as a convenient end point for the era of shareholder capitalism: Say-on-pay has been a dud.

Fewer than 100 corporations, about 1.5%, lost these mandatory but nonbinding votes on executive pay practices. Most got well over 90% in favor. Say-on-pay may have led some to modify their practices before the votes, but it’s clear that executive worries of investor interference have not played out.

Why does this matter now? Most investors, including the big institutional players, have long tolerated rising compensation. Pay started taking off in the 1980s, at the beginning of the era of shareholder capitalism. Companies were putting renewed focus on investors relative to workers or society. Shareholders were fine with paying executives more if that boosted their returns.

At some point, though, the tail started wagging the dog. Shareholder returns and executive pay diverged after the market bust of 2000. Since 2001, shareholders have typically made nothing on their stock after inflation, while executive compensation has continued its long boom. For a variety of reasons, stock-based compensation is no guarantee that pay will rise and fall with stock returns. Even the Great Recession, blamed partly on compensation practices, now looks to be only a hiccup in the pay rise.

Another data point is the decline in dividends since the 1990s. Companies now generally pay out far less than half of their earnings, the lowest in decades. Cutting dividends might make sense if firms were growing rapidly, but that’s hardly the case these days. (continue reading… )

News Corp and Questions Boards Need to Ask

by Rob Kaplan for Harvard Business Review, July 18th, 2011.

Much has been written and said regarding News Corp and its activities in the UK, and serious questions have been raised about the leadership and culture of this company. Some of these questions have been directed at the company’s board of directors: did it properly fulfill its independent fiduciary responsibilities in overseeing this global organization? While there is a temptation to pile on, I would prefer to comment on what can be learned from this situation.

This and other leadership crises of the past few years raise several key questions for boards of directors. In particular, how does a board really know the leadership style of its senior operating management and the culture of the company for which it has fiduciary responsibility?

Most boards do a good job of evaluating their CEOs and senior leadership teams based on specific operating metrics. Unfortunately, these same boards often have very little process in place to judge the leadership style, daily behaviors, and cultural norms being established by their senior operating leadership. As a result, board judgments are frequently based on observing senior management in relatively formal presentation settings and receiving narrative information regarding company culture — typically from the CEO. Too often, by the time directors realize there is a culture or leadership style problem at the company, it is too late to have prevented real damage to the business, reputation, and careers of senior executives.

I would suggest that boards need to regularly ask themselves whether they have a firm grasp on the operating style and role modeling behaviors of their senior leadership teams. If after candid debate and discussion they realize they don’t have a firm grasp on these questions, they need to assert their independence and consider actions which would allow them to get a better reading. (continue reading… )

Turn Your Group into a True Team

by Linda Hill and Kent Lineback  for Harvard Business Review, June 28th, 2011. 

Are the people who work for you a real team?

It’s easy to extol teamwork, but not every group is a team. In fact, most teams we see, aren’t — because their managers focus on building the most effective relationships they can with each individual who works for them. They spend their time managing person by person, paying little attention to collective performance. They rarely use their groups to diagnose or solve problems. And when issues arise that clearly affect the group as a whole, they tend to handle them one on one.

In taking this approach, they’re overlooking an important management tool: the powerful influence that social dynamics in a real team can exert on the behavior and performance of its members.

What is a team and what makes it potentially such a valuable instrument of leadership? A team is a group of people who do collective work and are mutually committed to a common team purpose and challenging goals related to that purpose.

Collective work and mutual commitment are the key characteristics. By going beyond mere cooperation and coordination, collective work produces more innovative and productive outcomes that exceed the simple sum of individual efforts. Mutual commitment means members hold themselves and each other jointly accountable for the team’s performance. They not only think and act collectively, but the social and emotional bonds among them are compelling. They share a genuine conviction that “we” — the potent concept behind every team — will succeed or fail together, and that no individual can succeed while the team fails. (continue reading… )

Case Study: Culture Clash in the Boardroom

by Katherine Xin and Heather Wang for Harvard Business Review, June 20th, 2011.

Editors’ Note: This fictionalized case study will appear in a forthcoming issue of Harvard Business Review, along with commentary from experts and readers. If you’d like your comment to be considered for publication, please be sure to include your full name, company or university affiliation and email address.

The room was already packed when Liu Peijin walked in. His flight from Shanghai to Chongqing had been delayed, and he’d fretted about missing the training. But fortunately he’d gotten there in time. Liu knew his presence was important. As the president of Almond China, he wanted to show his Chongqing colleagues how much he cared about the topic under discussion: ethical business practices.

Taking his seat, Liu nodded at the head of HR, who was running the training. The two went way back: Both had been with their German parent company, Almond Chemical, since 1999, when it first established operations in China. Since then Almond China had set up two joint ventures with local partners — the only way foreigners could do chemical business in the country. One was a majority ownership — Almond controlled 70% of the stock. The other was the Chongqing business, in which Almond had a 51% stake and the Chinese directors, representing Chongqing No. 2 Chemical Company, were very active.

Liu sat next to Wang Zhibao, the vice president in charge of sales for the joint venture. Wang had a skeptical look on his face. He was good at his job, having closed several key deals that had kept the business afloat during its early years. But he was also at the center of a conflict between the joint-venture partners: The Chongqing executives were increasingly vocal about how difficult it was to operate according to European standards, particularly the rules against gifts and commissions. Such incentives were commonly accepted in China and routinely employed by Almond’s competitors. Trying to do business without them, Wang argued, was foolhardy. “This is China, not Europe,” was his refrain.

But the line between these practices and breaking the law was a fine one. As a company headquartered in Munich and listed on both the Frankfurt Stock Exchange and the New York Stock Exchange, Almond was required to adhere to the U.S. government’s Foreign Corrupt Practices Act (FCPA), which specifically forbade the bribing of foreign government officials by U.S.-listed companies. (continue reading… )

 

A “Stewardship Code” for Institutional Investors

by Ben W. Heineman, Jr., for Harvard Business Review, January 18, 2010.

The role of shareholders in corporate governance has become one of the hot-button issues following the credit melt-down and economic crisis. Would more active involvement by shareholders have helped to prevent or lessen the crisis?

Broadly speaking, there are those who believe that short-term institutional shareholders — with concern about making their own quarterly or annual numbers, with opaque governance and improper incentives for fund-managers — are part of the problem, and that they have been one of the causes of short-sighted, risk-indifferent behavior by financial institutions.

On the other hand, there are those who believe that longer-term institutional shareholders are part of the solution — that increased shareholder involvement in governance, not just through exercise of market power, is essential to creation of sustainable, long-term corporate value, and to holding boards of directors and senior business leaders accountable. Such shareholder proponents advocate regulation or voluntary corporate action on key issues like “say on pay” or “proxy access.”

A “third way” emerged late last year in the UK — a “Stewardship Code” for institutional investors.

While not fully developed, it is an interesting and potentially controversial approach which puts new responsibilities on the investor and investee communities. But amidst the UK furor over the government’s decision to impose a 50% “super-tax” on bonuses over £25,000 in the financial sector, it has not received the attention it deserves…(continue reading)

How Women Have Changed Norway’s Boardrooms

by Kate Sweetman for the Harvard Business Review, July 27, 2009

It takes an open mind to incorporate the lessons that Norway can teach the rest of the world about the value of women on corporate boards. Two years ago, most publicly-traded Norwegian boards themselves had to be forced by law to accept women in any sort of real numbers. Traditional feminists (if there is such a term!) who believe that men and women are not only equal but the same may be tempted to reject the positive differences between men and women that the Norwegian board members say they experience. And men in charge of corporations everywhere who have genuinely tried to on-board women and either 1) not found them, or 2) found them lacking will have to re-examine how well they actually tackled that task…

To read the complete article please click here.


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