Corporate Governance Continues to Evolve
What's on the minds of the people serving on boards or hoping to be? What can be learned about corporate governance trends by knowing the answer? What do the issues business executives are wrestling with add to the picture?
Santa Clara University's Markkula Center for Applied Ethics provides quarterly programming for Silicon Valley business executives through its Business Ethics Partnership. Stanford University's Rock Center for Corporate Governance provides annual programming for board directors and others aiming to explore corporate governance hot topics. The Silicon Valley Director's Exchange, affiliated with the Rock Center, provides monthly programming on similar topics. I serve on the board of SVDx, staff the Markkula Center's Business Ethics Program and attended the recent Rock Center Director's College at Stanford. Listening is perhaps an underrated activity, but opportunities to do so at these programs in the first six months of 2015 reveal these trends worth watching for the remainder of the year and into 2016. They also helped to illustrate the shifts in corporate governance trends over the past decade.
Stakeholders matter even as shareholders grow more active
The pendulum is swinging back from concern solely with shareholders to a broader set of stakeholders, from the vantage point of the corporate boardroom, based on comments across a variety of topical discussions and panels. Board directors and governance scholars readily accept a board's role in protecting the interest of shareholders but can also now draw links to shareholder interests from the interests of other constituents, such as employees or the environment, when considering the impact of climate change.
The introduction of KKR's Green Portfolio, in partnership with the Environmental Defense Fund in 2007, is one example of direct ways environmental impact is being accounted for in business, but it is not the only way. Board directors are fully engaged on the impact to a company's long-term value not only of measures taken to ensure the company's sustainability, but the planet's as well. Thoughtful exchanges in discussions about public relations, mergers and acquisitions, and climate risk and opportunity as a disruptor suggest that directors accept that corporations need to account for broader interests because these interests do have an impact on shareholder value. Additionally, demographic trends, like the increase of millennials in the workforce, introduce a need to consider what those workers are seeking in their relationship with employers.
Diversity of perspective has long been supported in research and practice as a goal boards should pursue when assembling participants. Corporations are experiencing greater vulnerability to activist shareholders if an investor's point of view is not represented on the board in the current environment. The rise of LBOs and the reality that many activists are larger corporations than the ones they target highlight a balancing act being played out in boardrooms: acknowledge more stakeholders as their interests affect share price over time but be sure current shareholders feel first among equals. At a minimum, add active investors to the matrix of skills to consider when seating an effective corporate board.
Different mix of directors and skills sought
Governance gurus are savvy enough not to reduce diversity to simple "ought to dos" but also make the case for why it matters. The ability to reflect the markets served and bring a variety of decision-making styles and perspectives to the boardroom were points made in discussing traditional gender and ethnic diversity, though I heard a new one from DuPont CEO Ellen Kullman: "passport diversity," meaning directors from other countries, bringing an international point of view. Pragmatism is also appreciated: Kullman pointed out that jet-lagged international directors who are only coming in for brief visits driven by board meetings don't end up returning high value.
Throughout the sessions, the need for board directors to have political acumen as well as subject matter expertise and leadership experience was noted, first by Joe Grundfest, a Stanford professor. In order to balance the competing interests cited above and still fulfill the duties of a board director, Grundfest and others made the point strongly that directors today need some political abilities to fully meet the job's requirements. Captured in the single question of "should board directors speak to the media?"--a role traditionally reserved for management-- there was a marked shift in several discussions signaling a new belief that board members could be valuable spokespeople in certain circumstances.
Effects of the "on demand" economy
In plenary sessions to panel discussions, the business world's darling of the moment is the "on demand" economy. Even what to call it is up for debate, but the impact of companies bringing together suppliers and buyers of services is on the rise and pushing against regulations that the newly created companies cite as out of date. Executives at some companies make the case that it is ethical to ignore such regulations since legislators and courts are not keeping up with markets, referring to this choice as "selective law adoption."
The "use case" versus "balanced care" crowd would put Uber, for example, on one end of the spectrum, declaring it is a technology company, not a transportation company, and hinting of moving into other realms. The "use case" companies put the needs and the wants of the customer at the top of a list defining the company's values. Other companies fulfilling the matching of supply and demand express more interest in serving both the suppliers and users well through a set of principles applied to both and predicting stronger long-term returns as a result of this approach. These "balanced care" advocates believe this more even approach to both sides of the market is the true innovation offered by this growing type of business.
One point of emerging consensus is that the nature of work itself is changing, providing opportunities to re-evaluate corporate obligations to people traditionally thought of as employees and the relationship between worker and hiring firm. Given the trend of stakeholder care as a means to achieving shareholder return, treating the people doing the work poorly seems less likely to bring high returns over time, but this is a point of much debate in the conversations in the first six months of this year.
PricewaterhouseCoopers partner Sameer Shirsekar added four other trends to the mix of things driving this new kind of "on demand" business: urbanization, the demographic power of the millennials, resource scarcity, and app-based technologies.
Even investment bankers value "right relations"
Perhaps a most pleasant surprise was listening to a lead M&A investment banker making the case for ethical boardroom behavior, citing a string of recent Delaware court cases in the realm of investment banking rules that even the appearance of a conflict is problematic for bankers being hired to work on deals. This standard, one I am familiar with from print journalism, has not been widely accepted in banking but appears to be on the rise of normative behavior, based on discussions I listened to at Stanford's Director's college. One panelist pointed the audience to the work of Western Kentucky University's Jan Garrett, "Toward an Ethics of Right Relations." This work (and others) makes the case that to behave ethically requires us to consider the role we are acting in at the time and the covenants, rather than contracts, we have as a result of the relationships being entered into in that role. It was a refreshing conversation in a discussion about deal-making and one that trustees engaged in fully in related dialogue.
Governance as strategy
Throughout the winter and spring, trust and transparency have been words du jour for those trying to capture the current expectations held for those in governance roles. Increasingly, board directors, typically noted for their reticence and ability to hold confidential information, are suggesting sharing as much as possible as early and often as possible as one important corporate behavior to rebuild public trust in business.
Along with these hot topics, the very definition of governance itself is shifting. Strategic direction has typically been an accepted area for boards to engage. Increasingly, how the boards are structured and run have themselves become tools of strategy, based on the anecdotes and data shared by directors and management alike. CEOs appear to be increasingly receptive to the notion that a more engaged board is today's business reality, and they are looking for the most effective way to capture that engagement to the benefit of the company's interests.
If I had to make a slide to summarize simply the trends in governance so far in 2015, it would include these:
• Multiple stakeholders matter
• Political ability is valued
• Right relations count
• There are ethics of matching supply and demand
• Governance is a tool of strategy
Compared to 10 years ago, overall, I believe there is a shift in governance emphasis from compliance to ethics. In my opinion, that's a positive trend, requiring a board director able to handle more complexity. This and other shifts over the past decade are captured in this table.
|Primary Functions||Advising Management Regulation compliance||Setting Strategy Risk scenario-building|
|Relationship to Management||Friendly||Professional|
|Boardroom Environment||Country Club||Association Meeting|
|Conflicts of interest||Disclose and Ignore||Avoid|
|Director's career phase||Retirement||Working Life|
|Skill emphasis||Subject Matter Expertise||Political Acumen|
|Corporate Goals||Going Public||Staying Private|
|Ownership||Distributed, though not as broadly as 1995||Closely held|
Ann Skeet is director of Leadership Ethics at the Markkula Center for Applied Ethics.