This is one of the homework readings discussed in my TMBA’s Corporate Governance course. Good food for thought, even for non MBAs. For an original copy of the Standford article, click here.
Back in 2011, David F Larcken and Brian Tayan of Stanford’s Center for Leadership Development and Research proposed that there are seven myths surrounding the success of Corporate Governance: the quality of the structure of the Board, CEO overpayment, executive pay for performance plans, vetted succession planning, strict regulation, well-informed voting guidance, and leveraged best practices. Why are these myths worth discussing? Because they shift the focus from how the business is run to who runs the business. Ultimately it is the people who make up a corporation those who govern it. The success of the enterprise depends on their ability to do what is best for the corporation and the industry as a whole, not just for themselves.
What was interesting about these myths is that they are all driven by perception, especially those surrounding CEO compensation. News outlets comment quite frequently on how they believe that corporations overpay CEOs, even if they are not performing, quoting salaries as multiples that illustrate the unfair discrepancy between lower level employees and the CEO. This depiction is inaccurate because it leaves out the risk/reward associated with the higher executive positions; underperforming can lead to being blacklisted from the industry, losing your livelihood, among other side effects. Many of the CEOs are compensated with stock and bonuses to ensure that they are vested in the company’s performance, becoming minority shareholders and stakeholders beyond their job role. If we didn’t pay these people attractively, corporations would need to provide other ancillary benefits, like a Wow factor, to entice industry leaders to take a gamble at running their business. What is a fair value? That will depend on the corporation’s values.
This is why the quality of the Board members’ character is more important than the structure of the Board. Oversight, regulatory or internal, will not ensure that the decision making process is sound because politics, personalities and experiences will all play an active role in how the entity is governed. The leadership’s judgment and biases will influence decisions more than the corporate agenda. A bad Board will not have adequately vetted succession planning, will not necessarily be aware of problems affecting the business (like employee morale and union disputes) which will not be reined in or solved by strict governmental regulation. A lazy Board and CEO may rely too much on outsider influence, such as consultants, to issue mandates and recommendations for voting, that will not enhance the shareholder value because they are not well versed enough about their own enterprise to determine that the advice is not sound. Making the CEO solely responsible for the deeds of the enterprise is not fair either, regardless of how much we compensate them, since it takes the effort of all of those involved to make the corporation not only ethical, but profitable.
We have to see beyond the myths to clearly understand why corporate governance is a living breathing organism that has to be fed appropriately, and protected, to survive the ever changing business climate. Doing what is right for a corporation requires that all the parties involved, as well as the public and consumers, understand the mission and vision of the enterprise, as well as the consequences of not planning for the success of those involved. Even though this was written 7 years ago it still applies today. Business leaders take note, the future of corporate governance lies in all of us making ethical decisions and socializing those with the public to accurately depict the business world and not glamorize it or demonize it. In the end, it is us as leaders and stakeholders who add value and make the company what it is today, not just the CEO or the leadership, which is the greatest myth of all.