11 Jul The Difference Between Good Corporate Governance and Bad
I immigrated to the United States from Germany almost 25 years ago, so I may be a little biased when I proclaim that United States democracy (despite all its pitfalls) truly does offer the world a model of equality, freedom, and fairness. I think its constitution and model of government are gifts to the world. But another gift the United States has given to us that is far less known and appreciated is its model of good corporate governance. I believe that what has been happening in some boardrooms in the United States is significantly changing the way major corporations operate for the better. In my opinion, some boardrooms in the rest of the world have been slow to catch on – to their shareholders’ detriment.
Gender Diversity in the Boardroom
Among many other factors, good corporate governance requires gender diversity in the boardroom. Until several European countries, including Norway and Germany, imposed mandated quotas for women serving on the boards of their largest corporations, this issue was largely ignored outside the United States. It is still common to walk into a German boardroom and see a group of older men sitting around a table without a single woman among them. In some countries, women make up as little as 5% of all directors, even at companies that target much of their product offerings at women! In the United States, women currently make up 22% of the board seats in Fortune 100© companies. That is certainly a step in the right direction. Over half of the world’s population is female after all. Women represent our employees, our consumers, and our family members. It should be obvious that their views matter and often provide invaluable perspectives in boardroom deliberations.
Not a Family Business
Many boards are also plagued with rampant nepotism, even at some giant corporations (think Korea or Japan!). Deeply held social mores sometimes encourage keeping a corporation in the family and stacking boards with family members. The problem with this state of affairs is that family members often (not always) lack the required skills or experience and rarely provide any meaningful challenges or insights to the chief executive or their fellow directors. When a family shares a single perspective, they tend to be blindsided by changing trends and have difficulty adapting. Effectively governed corporations make a special effort to recruit the best and most experienced board members possible. They know that inviting savvy, curious, contrarian individuals to their boards will give them a wide range of perspectives that can keep them sharp and help them see around corners.
“Noses In, Fingers Out”
This well-known adage leads me right to my final point about the difference between good and bad corporate governance. This difference, in my opinion, is perhaps the most important of all and may be one reason why some corporations continue to dominate and innovate and some do not. Effective boards tend to actively challenge their CEOs and take on an assertive role in helping to strategize on the company’s future path, without getting involved in day-to-day operations in any way. Some have called this method the “Noses In, Fingers Out,” strategy. Board members stick their noses in every aspect of the business, but keep their fingers out, allowing the CEO to steer the boat. Good corporate governance means directors will lob tough questions, give advice, and vote down measures they disagree with. They may even oust the company’s CEO if they don’t believe he or she is performing in the best interest of the company and its shareholders. When you do not see this type of contention in a boardroom, you may be looking at an indicator that the company is not governed effectively. Instead, directors in these companies are more likely to operate on the “Eyes Closed, Hands Out” method, meaning they close their eyes and stick their hands out waiting for their payment. In the worst boardrooms, a CEO will present a plan for a vote and each board member will ask a few questions to make sure everyone knows how smart they are. All will then vote to approve the decision and happily collect their checks at the door.
When board members do not challenge the CEO, or each other, they provide no value at all. Management needs to be held accountable by experienced, independent thinkers who have the ability to bring a much wider, more objective, and more diverse perspective to the proceedings. Oftentimes, board members can see the “forest” while a CEO and senior leadership team are mired in the “trees” of day-to-day business. In my opinion, this is where an effective director’s true value lies.
I encourage board chairs, nominating and governance committees, and chief executives around the world to look at what good corporate governance can accomplish. I am often asked why so many large American corporations continue to be so innovative. I am convinced this is one reason why. Think about strengthening your board. Diversify. Bring in outsiders. Encourage directors to really speak their minds and give the CEO the gift of their experiences and insights. Shareholders will thank you!
Michael Marquardt serves as a global business advisor to corporations in Asia, Europe, and the United States. He works closely with the CEO and members of the senior leadership team on issues strategic to the enterprise and advises Audit Committees and Boards of Directors on effective risk management measures, corporate governance, and emerging technology issues.