Mastering Global Corporate Governance / Edition 1

by Ulrich Steger, Peter Lorange, Fred Neubauer, John Ward, Bill George

Overview

Corporate Governance is the hot topic of the new millennium. Gone are the days when CEOs set agendas and earned 500 times more than average employees. Now, transparency rules. Corporations must establish new systems of accountability, and encourage long-term participation in decision-making by both shareholders and staff. Those that succeed will be better equipped to create wealth, solve complex problems, and compete in global markets.
The role of the directorate and the need to ensure an effective framework for its accountability to owners is paramount to success. In line with this thinking, Mastering Global Corporate Governance argues that one of the key responsibilities of the Board is leadership, and that the root of good corporate governance lies in the strength of a corporate leader. In particular, it focuses on two 'burning issues' for senior executives: how can the boards of global companies best lead their companies through the fundamental dilemmas that face all boards?; and how can Boards, entrusted with ultimate responsibility for the way a company exercises leadership, provide that leadership?

Product Details

ISBN-13:	9780470090411
Publisher:	Wiley
Publication date:	09/24/2004
Series:	IMD Executive Development Series , #1
Pages:	236
Product dimensions:	6.95(w) x 8.46(h) x 0.70(d)

About the Author

Ulrich Steger holds the Alcan Chair of Environmental Management at IMD and is Director of IMD’s research project on Corporate Sustainability Management, CSM. He is also Director of all Daimler Chrysler Partnership Programs, the Allianz Excellence Program and the Yukos Program. In addition, Professor Steger heads IMD’s Global Corporate Governance Research Initiative.
He is also a member of the supervisory and advisory boards of several major companies and organizations. He was a member of the managing board of Volkswagen, in charge of environment and traffic matters and, in particular, the implementation of an environmental strategy within the VW group worldwide.
Before becoming involved in management education, he was active in German politics. He was Minister of Economics and Technology in the State of Hesse with particular responsibility for transport, traffic, and energy. Before that, he was a member of the German Bundestag, specializing in energy, technology, industry, and foreign trade issues.

Dr Peter Lorange has been the President of IMD since 1 July 1993. He is Professor of Strategy and holds the Nestlé Chair. He was formerly President of the Norwegian School of Management in Oslo. His areas of special interest are global strategic management, strategic planning and entrepreneurship for growth.
Dr Lorange has written or edited 13 books and some 90 articles. He has conducted extensive research on multinational management, strategic planning processes, and internally generated growth processes. He has taught at the undergraduate, Master and Doctoral levels, and worked extensively within his areas of expertise with US, European and Asian corporations, both in a consulting capacity and in executive education.
He serves on the board of directors of several corporations including: ISS – International Service Systems, Christiania Eiendomsselskap, S. Ugelstad Ship owners, StreamServe AB, Pharmasoft AB, Intentia International AB, and Preferred Global Health. He is also a board member of the Copenhagen Business School.

Dr F. Friedrich Neubauer, Professor of Multinational Corporate Strategy and Planning at IMD, is German; he joined IMI, Geneva, one of the parent organizations of IMD, in 1973.
Fred Neubauer is author of several books (and numerous articles). Portfolio Management, originally published in German (1990), now appears in English, Slovenian and Spanish. His present research interests are concentrated in the areas of corporate boards and European management approaches. In the area of corporate boards he – together with Dr Ada Demb – has been involved in a large empirical study on boards. The results of the study were published by Oxford University Press in March 1992 (Demb/Neubauer, The Corporate Board: Confronting the Paradoxes). His latest book – The Family Business: Its governance for sustainability (Macmillan, 1998) – was published together with Alden G. Lank. It is based on a four-year study of governance issues in family businesses.
Dr Neubauer is also a consultant in the area of strategic management and corporate governance. In the course of his career he has advised a broad range of companies, among them several large multinational car makers, soft drink and fragrance corporations, internationally active banks, packaging equipment manufacturers, building material producers etc. He also conducts in-company board retreats where the whole board of a given company looks at its own performance as a board.

Professor Ward is The Wild Group Professor of Family Business at IMD, and also a professor at Northwestern University’s Kellogg Graduate School of Management (USA). He is director of IMD’s renowned ‘Leading the Family Business’ programme, in which he has taught since its inception in 1987. His teaching and research interests are in family enterprise continuity, governance, and sustainable strategy. His MBA and PhD degrees are from Stanford Graduate School of Business.
Ward has authored several books, including the bestselling Keeping the Family Business Healthy, Creating Effective Boards for Private Enterprises, and the just published Strategic Planning for the Family Business, as well as the Family Business Leadership Series (published in four languages) and numerous articles. He serves on the board of several companies in Europe and North America.

Bill George is Professor of Leadership and Governance at IMD and also Visiting Professor of Management at Ecole Polytechnique Fédérale Lausanne (EPFL). He was Chairman of the Board of Medtronic, the world’s leading medical technology company, from 1996 to 2002 and Chief Executive Officer from 1991 to 2001, having joined Medtronic in 1989 as president.
He was named Director of the Year 2001–02 by the National Association of Corporate Directors and Executive of the Year 2001 by the Academy of Management. Mr George is a board member of Novartis and Target Corporations. He also serves as a director of American Red Cross, Harvard Business School, Carnegie Endowment, Allina Hospitals, Minneapolis Institute of Arts, and as Chair of Minnesota Thunder Pro Soccer.
He was an executive with Honeywell from 1978 to 1989 and Litton Industries from 1969 to 1978. From 1966 to 1969 he worked in the US Department of Defense. He received his BSIE with high honors from Georgia Tech in 1964 and his MBA with high distinction from Harvard Business School in 1966. His book, Authentic Leadership, was published by Jossey-Bass in 2003.

Read an Excerpt

Mastering Global Corporate Governance

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John Wiley & Sons

ISBN: 0-470-09041-3

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Chapter One

Now that Everything is in Place, Does it Matter?

It's a familiar pattern: a scandal erupts followed by a public outcry, and leads to a political push for new regulation - and rueful sinners search their souls and promise to better themselves.

Rarely has this pattern worked as perfectly as in the corporate governance 'reforms' of 2002. Barely known to a broader management audience, let alone the public, corporate governance rocketed to the top of the political agenda. It will take lawyers and courts years to sort out the practical relevance of the new regulation, especially in the USA, propelled through Congress by the urgent need to 'restore investors' confidence' (a noble translation for the hope to drive share prices to previous heights).

Remorseful top executives gather in blue-ribbon panels, creating 'codes of conduct', best-practice recommendations, guidelines, handbooks, etc., with a rabbit-like growth rate. Consultants and academics have not been able to resist the temptation to jump on the bandwagon: boards are probably now one of the best surveyed and researched economic institutions ever (we plead guilty here, too). And ethical advice is being dispensed by the score.

Whether mired in scandal or not, in today's interconnected world, all countries move on corporate governance in the same direction (only the 'rouge states' and notoriously corrupt countries miss out). Greece, for example, used theopportunity to try to shed its emergent market image. South Africa combined its corporate governance efforts with black empowerment. In the European Union, the commission made yet another important announcement. The list could continue nearly indefinitely. The reaction was quickest in the USA, because the most dramatic collapses happened there and created probably the provisions with the maximum bureaucratization of corporate governance. In Asia and especially Japan the response was slow, as always, but will continue (probably even when the US again switches course).

Everything is now in place: independent directors, committees of all sorts, CEOs and CFOs who are now held accountable for the figures they release (weren't they before?), auditors who should by now be watchdogs rather than lapdogs, and companies around the globe will report to which code of conduct they adhere.

Will it help placate angry shareholders and a concerned public beyond having a placebo effect? Maybe up to a point, but there are three items of bad news.

The first is that there is no evidence that any of the corporate governance structures, such as stipulations concerning the proportion of independent directors, equity ownership of management or any of the other remedies recommended (e.g. eliminate the former CEO from the board), have had any detectable impact on board performance. A revealing example is General Electric, undoubtedly one of the most successful US corporations, which in past decades had a fairly poor corporate governance structure, in light of today's standards (see Box 1.1: GE's corporate governance reforms).

Box 1.1: GE's corporate governance reforms

The corporate governance standards of General Electric (GE) under its most admired management hero, Jack Welch, are best illustrated by considering the changes his successor, Jeff Immelt, pushed through (mostly in early 2003) after GE lost approximately 50% of its market capitalization. These changes were the following:

Strict implementation of the Sarbanes-Oxley Act (e.g. Audit and Compensation Committee)

Two-thirds of GE's directors should be independent (under a strict definition of independence)

A lead director, who advises on the committee chairs and the board agenda

Three 'executive sessions' (of independent board members) per year

A 'strategy retreat'

Every director should visit GE's businesses on a yearly basis, thus interacting directly with operational management

A self-evaluation process for the GE board

Increased responsibility for the audit committee, as well as greater financial disclosure of GE, especially its many and complex SPEs (Special Purpose Entities)

More variable compensation, and under stricter conditions, for management and board members.

Equally important may be more on the symbolic side: GE's century-old, forbidding, dark wood-panelled boardroom was replaced by an airy meeting room with daylight.

(For details see GE's website: ge.com/en/commitment/governance/ highlights.htm)

1 Sarbanes-Oxley Act was passed in 2002 and is also known as the public accounting reform and investor protection act. Its intention is 'To improve quality and transparency in financial reporting and independent audits and accounting services for public companies, to create a Public Company Accounting Oversight Board, to enhance the standard setting process for accounting practices, to strengthen the independence of firms that audit public companies, to increase corporate responsibility and the usefulness of corporate financial disclosure, to protect the objectivity and independence of securities analysts, to improve Securities and Exchange Commission resources and oversight, and for other purposes.' (sarbanesoxley.com)

2 'Directors will be considered "independent" if the sales to, and buys from, GE are less than one percent of the revenues of companies they serve as executive officers, and if loans provided by GE to a company they serve as executive officers, and loans received by GE from such companies, constitute less than one percent of the total assets of such company. Moreover, if a GE director serves as an officer or director of a charitable organization, the GE director will be considered "independent," if GE donates less than one percent of that organization's annual charitable receipts.' (See GE website.)

Disney multiplied its sales and profit over two decades by nearly a factor of 20, with what a somewhat cynical observer called the 'typical' US board: the CEO, his eight friends, a woman and an African-American.

The 'black box' of corporate governance obviously defies any simple input-output relationship of the following kind: increase your number of independent directors (or any other input variable) to increase the output (in this case, financial performance). The reverse today makes more sense: Disney's CEO Michael Eisner had to relieve three friends from their board duties - a teacher, an actor and his architect - after it became obvious that the previous success factors of Disney's strategy were no longer valid. But corporate governance advocates will be hard pressed to identify and isolate any lasting impact on Disney's or GE's share price. As often, markets punish laggards, but rarely reward front-runners.

The second piece of bad news is that corporate failures will occur again. A market economy is not foolproof; on the contrary. If companies do not take risks (with a certain risk of failure), there would be no rationale for profits greater than the cost of capital. A market economy compared with other systems reveals mistakes early, forces their correction and limits the overall impact through decentralization and risk diversification. But some companies will go bankrupt due to the inability to make a sufficient response to the mistakes they unavoidably made.

All the big blunders in the past - e.g. Swissair, Vivendi, Kmart, Tyco, etc. - were due not to a lack of corporate governance structures or misapplied accounting rules, but rather a flawed strategy or a mistaken implementation. Never was a company ruined due to a failure to properly apply technical accounting rules or a lack of corporate governance structures. Rather, it was the other way around: when the strategy failed to deliver the promised and often unrealistic results, top management first began to 'massage the numbers', moving from the 'creative', to the misleading, to outright falsifying.

Enron was the most spectacular example for this pattern. First and foremost, it had a risky, verging on speculative, business model, which did not deliver on the excessively high expectations created. Somewhere along the line, Enron began cheating to cover up results delivered by the real economy.

But beyond these examples of obviously flawed business strategies (sometimes with the benefit of hindsight), it should be clear that top management and the board can err, despite having a best practice corporate governance system in place. After all, the more diffusely structured problems are, the more they tend to move up the hierarchy, eventually reaching the board. The information for the decision is often ambiguous and biased. It can be interpreted in different ways. There are a large number of influencing factors, such as unknown competitive responses and shifting macroeconomic conditions, creating complexity with little certainty of any one outcome (especially as in most cases many influencing factors - e.g. the reaction of competitors - cannot be controlled). Even the best-founded judgement can be wrong, and this cannot be prevented by any corporate governance structure (and in my view, it is even dangerous to encourage this illusory belief).

If our reasoning is correct, it has important implications for the corporate governance discussion. It shifts the focus from structure and the tendency of 'ticking boxes' to the content and context of corporate governance and its decision-making process including influencing factors, biases and the potential traps. Such an approach can add greater value for the practical work of corporate governance and its key institution, the board. However, before we go on to elaborate upon the content of corporate governance in this chapter and the rest of the book, there is a third piece of bad news.

The corporate governance discussion in public has now departed from how to best organize accountability and responsibility at the helm of the company. It has moved on to a more fundamental debate about corporate roles in society, basic attitudes and behaviours in businesses, which are perceived as more powerful than governments. Few understand the irony that 'the biggest peacetime wealth transfer in history' (Warren Buffett) occurred under the banner of shareholder value - to the detriment of shareholders and the benefit of some high-level corporate officers. Others see this already as the emerging of new class warfare. This time rather than workers versus capitalists, it is knowledge workers versus shareholders (although few CEOs fit the usual description of a knowledge worker as an expert professional with a specific know-how).

But for the broader public, the current corporate (mis-)behaviour is simply a question of greed and lack of accountability in exercise of power. 'Corporate governance is for me just the question, how can you tame the excessive greed and egregious abuse of power in the big corporations. We cannot allow spoiling the rest of society - it would blow up the whole of social fabric', stated an NGO leader voicing the opinion typical in non-business circles. Politicians - ever sensitive to shifts in public mood - do not stand on the sidelines. The result is simple: the age of deregulation is over; re-regulation is the new game in town. The Bush Administration, which can hardly be labelled anti-business, pushed more pages of regulation to the Federal Register1 in 2002 than any other government in any given year in US history. In Europe, the shift will be slow, because new regulations have tended to overcompensate for the abolishment of old prescriptions. And media scrutiny of corporate deeds (and especially misdeeds) will not go away. Since CEOs have started competing with film divas for public attention, they are now subject to the same media rules: you are twice as long 'written down' as you have been 'written up'.

What are the main implications of this - somewhat brief - evaluation of the current corporate governance debate? As discussed, it means we need to avoid the dominant focus on structures. After all 'structure follows strategy' is one of the most fundamental wisdoms of management. First, you have to be clear about your corporate governance strategy and its leadership contribution. Just as in any other business function, how to add value remains the key imperative. This requires first and foremost examining - as in any other strategy formulation - the corporate governance context and content and clearly defining the goal to be achieved. (The current dominant goal appears to be keeping the CEO out of jail, which we consider as necessary, but merely complying with the law is insufficient. For this purpose alone, a board is probably not necessary.)

After this consideration, we look at structures and processes appropriate to achieve this goal. In particular, the processes for decision making, the method of cooperating and contributing to provide leadership require greater attention than the formal structure indicators, which dominate the current debate.

Therefore in this chapter of the book we try to adopt a value added corporate governance focus. In Chapter 2, we analyse where corporate governance failed in the strategic dimension, rather than the structural or formal dimension. We use the Swissair case as a template for this analysis, and derive the four fundamental dilemmas that each board has to confront.

Based on this consideration, in Chapter 3 we analyse the fit between the business environment (context) and the corporate governance clusters identified, and we explore and critically review one basic assumption of many codes of conduct - that there is a best practice of corporate governance. This is also where we discuss issues of board leadership and working processes in greater detail.

Chapter 4 deals with the specifics of corporate governance in global companies, confronted with many different rules and regulations that find themselves very much in the public spotlight due to their sheer size (DaimlerChrysler serves as an example here).

In Chapter 5 we look ahead and discuss some of the nagging questions of corporate governance.

(Continues...)

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Table of Contents

Contributors.

Preface and Acknowledgements.

Introduction – A Roadmap for the Book.

PART I: GLOBAL CORPORATE GOVERNANCE– ISSUES, FRAMEWORK AND EVIDENCE FOR BOARD LEADERSHIP (Ulrich Steger).

Chapter 1. Now that Everything is in Place, Does it Matter?

Chapter 2. How can Corporate Governance Fail?

Chapter 3. Shedding Some Light into the Black Box.

Chapter 4. Managing Complexity in Global Corporate Governance.

Chapter 5. Some Nagging Questions.

PART II: THREE BURNING QUESTIONS FOR BOARDS.

Chapter 6. The Role and Responsibilities of the CEO (Peter Lorange).

Chapter 7. Performance Evaluation of Corporate Boards and Boards of Directors (Fred Neubauer and Helga Krapf).

Chapter 8. How Governing Family Businesses is Different (John Ward).

PART III: LEARNING FROM PAST EXPERIENCE.

Chapter 9. Cobra versus Commerzbank, War at the Helm of Elicore, and National Life (Commented by Bill George).

References.

Notes.

Index.