Archive for the ‘Better corporate governance’ Category
On Friday 28 September 2012, fellow blogger Christine Mallin and I were on High Table at Clare, the Cambridge college founded in 1326. We were there to celebrate the twentieth anniversary of the refereed research journal Corporate Governance – an International Review.
The current editor1, William Judge (Old Dominion University, Virginia) recognizing the high standing of the journal in academic circles for its rigour, expressed the hope that in the future corporate governance research could become more relevant to the policies and practice of the subject.
Chris Mallin (Norwich Business School, University of East Anglia), who was editor from 2001 to 2007, described the heavy workload involved in editing a refereed journal, the challenge to meet deadlines, and the important contribution of referees.
Having been the founder-editor in 1993, I told stories of the early years. The genesis of the journal had come many years earlier. In the 1970’s audit committees of independent outside directors had become popular in the United States, not least as a hedge against potential litigants, who eyed auditors’ insurance-backed ‘deep pockets’ for damages. In 1978, Deloittes in London had asked me to consider the relevance of audit committees to the UK. I discovered that, although in principle they might be a good idea, in practice they would not work in Britain because the concept of independence among non-executive directors was unknown. The resultant report was published as The Independent Director2.My interest in boards and directors had been kindled.
But that spark was fanned by my experiences as Director of the Oxford Centre for Management Studies, a company limited by guarantee, whose governing body consisted of an equal number of heads of Oxford colleges and leaders of British business. I was astounded by the incredible behaviour of some members, who wielded power, with prejudice and passion. This was not the rational decision-making or analytical management theory we were teaching in the management centre. I realised that governance was different from management. It was about power.
The opportunity to explore the subject came with a subsequent five year research fellowship at Nuffield College, Oxford. I titled the resultant book Corporate Governance3, but wondered about that phrase ‘corporate governance’; after all I had called the trust set up to fund the research the Corporate Policy Group. My worries were not resolved when I sat next to a visitor at High Table in Nuffield, whom I learned later was a professor of ancient English. Commenting, rather stupidly, that I had just written a book, he asked the title. “Corporate Governance”, I said. “You mean corporate government?” he queried. “No,” I replied, “its corporate governance. I looked the word up.” “My dear fellow,” he said, “governance, good gracious, governance, that word has not been used since the time of Chaucer.” It turned out that was not strictly true, but I did lose some confidence. Subsequently, Sir Adrian Cadbury was gracious enough to say that the book had introduced him to the phrase, which he used for his seminal report4, which, of course, was the forerunner of corporate governance codes around the world.
The Oxford publisher Blackwells then approached me to edit an academic journal on the subject. The first edition of Corporate Governance – an International Review was published in January, 1993. Members of the distinguished editorial board included Adrian Cadbury and other authors who would make major contributions to the subject including Thomas Clarke, Philip Cochran, Ian Hay Davison, Ada Demb, Charles Handy, Jay Lorsch, Fred Neubauer, Bernard Taylor, and Steven Wartick.
On a less anecdotal note, I hoped that in the future, Corporate Governance – an International Review could become a conduit to link today’s parallel universes of corporate governance research and corporate governance practice. I concluded with thanks and best wishes for every success to the publishers, subscribers, editors, members of the editorial board, reviewers, and, of course, the contributors, for the next twenty years.
10 October 2012
1 From 1 January 2013, Alessandro Zattoni (Bocconi University, Italy) and Praveen Kumar (University of Houston, USA) will become joint editors. William Judge will remain on the Editorial Advisory Board
2 Tricker, R. I., The Independent Director, Tolley, London, 1978
3 Tricker, R. I., Corporate Governance – practices, procedures and powers in British companies and their boards of directors, Gower, Aldershot, UK, 1984
4 Cadbury, Adrian (Chairman of the Committee), The Financial Aspects of Corporate Governance, Gee, London,1992
A great deal has been written about the cause and effect of the nuclear power station disaster at Fukushima Daiichi, which followed the Japanese tsunami and earthquake. No doubt more will be said in the future. But relatively little attention has been paid to the governance of the company behind the Fukushima plant. This case and commentary look at some aspects of the governance of the Tokyo Electric Power Company (TEPCO). The material comes from the second edition of Corporate Governance – principles, policies and practices due in 2012.
The TEPCO case study
In an unlikely outburst, Naoto Kan, the Japanese prime minister, shouted “What the hell is going on?” to executives of the Tokyo Electric Power Company (TEPCO) following Japan’s worst nuclear crisis at the Fukushima Daiichi nuclear power plant, after the tsunami and earthquake on 11 March 2011. Were the directors or the corporate governance systems and procedures at fault?
The company appeared to have a commitment to sound corporate governance. As it stated on its web site:
“At TEPCO, we have developed corporate governance policies and practices as one of the primary management issues for ensuring sustainable growth in our business and long-term shareholder value. We believe in strengthening mutual trust through interactive communication with our valued stakeholders, including shareholders and investors, customers, local communities, suppliers, employees and the public, so we can move forward toward solid future growth and development. Therefore, TEPCO considers enhancing corporate governance a critical task for management and is working to develop organizational structures and policies for legal and ethical compliance, appropriate and prompt decision making, effective and efficient business practices, and auditing and supervisory functions.”
The TEPCO web site explains the company’s corporate governance processes:
“The Board of Directors currently comprises 20 directors, including 2 outside directors. Also, TEPCO has seven auditors, including four outside auditors. The Board of Directors generally meets once a month and holds additional special meetings as necessary. Based on interactive discussion with objective outside directors, the Board establishes and promotes TEPCO’s business and oversees its directors’ performance. TEPCO has also established the Board of Managing Directors, which meets once a week in principle, and other formal bodies to implement efficient corporate management through appropriate and rapid decision making on key management issues, including those deliberated by the Board of Directors. In particular, we have established internal committees to deliberate, adjust and plan the direction of the whole Company across a range of key management concerns, including internal control, CSR and system security, as well as stable electricity supply.”
“For more appropriate and quicker decision making, TEPCO also has the Managing Directors Meeting generally held once a week and other formal bodies to efficiently implement key corporate management issues, including those to be discussed by the Board of Directors. In particular, the Board has inter-organizational committees such as the Internal Control Committee, CSR Committee, System Security Measures Committee and Supply and Demand Measures Conference to intensively discuss directions of key management issues across the entire company.”
But behind the reassuring corporate governance explanations on the TEPCO web site lay a different reality. The company’s opaque handling of the situation at the stricken plant was widely criticized. The extent of the danger was minimized and the full extent of the damage only gradually became apparent, as the risk severity level was gradually increased to rank alongside Chernobyl as a most severe nuclear accident.
The effects in Japan included damaged to fishing and agriculture through radio-activity in sea and soil, disruption in manufacturing as power supplies were rationed, and longer-term strategic concerns about the future of nuclear power generation. Around the world, the effects included slow-downs in production as supplies of parts from Japan dried up, concerns about the safety of Japanese produce, and serious questioning about the safety and strategic future of nuclear power.
TEPCO’s handling of the incident exposed failings in its risk management systems. The company had a history of safety violations: in 2002, it falsified safety test records and in 2007, following an earthquake, its Niigata nuclear plant had a fire and a leak of radioactive water, which were concealed.
In fact the board was dominated by inside directors, qualified by their seniority within the company. Out of the 20 directors, 18 were insiders, whilst of the two nominally outside directors one of them, Tomijirou Morita, was chairman of Dai-Ichi Life Insurance, which was connected financially with TEPCO. In 2008, Tsunehisa Katsumata, the company president at the time of the 2007 problem, was elevated to chairman, being replaced by Masataka Shimizu, another career-long TEPCO employee. TEPCO had never appointed a head from outside the company.
At first glance, the web site seems to reflect a company strongly committed to sound corporate governance: ‘corporate governance policies and practices a primary issue’, ‘interactive communication with our valued stakeholders’, ‘corporate governance a critical task’. So how to account for the discrepancies between the company’s alleged concern for corporate governance and the catastrophic failure of its Fukushima reactors?
Some clues can be found in the web site explanation of the company’s corporate governance. Notice the emphasis on ‘management’: ‘corporate governance is a primary management issue,’ ‘corporate governance (is) a critical task for management.’ The directors seem to make no distinction between management and governance. Nor is that surprising, because they are the same people. 18 of the directors are executives at the top of the management hierarchy, and one of the two alleged outside directors is not independent.
The classical model of Japanese corporations and their keiretsu groups reflects the social cohesion within Japanese society, emphasising unity throughout the organization, non-adversarial relationships, lifetime employment, enterprise unions, personnel policies encouraging commitment, initiation into the corporate family, decision-making by consensus, cross-functional training, and with promotion based on loyalty and social compatibility as well as performance.
In the classical Japanese model, boards of directors tend to be large and are, in effect, the top layers of the management pyramid. People speak of being ‘promoted to the board’. The tendency for managers to progress through an organization on tenure rather than performance means that the mediocre can reach board level. A few of the directors might have served with associated companies, others might have been appointed to the company’s ranks on retirement, or even from amongst the industry’s government regulators (known as a amakaduri or “descent from heaven”).
But independent non-executive directors, in the Western sense, would be unusual, although the proportion is increasing. Many Japanese do not see the need for such intervention “from the outside.” Indeed, they have difficulty in understanding how outside directors operate. “How can outsiders possibly know enough about the company to make a contribution,” they question, “when the other directors have spent their lives working for the company? How can an outsider be sensitive to the corporate culture? They might even damage the harmony of the group.” A study by the Japanese Independent Directors Network, in November 2010, showed that of all the companies on the Nikkei 500 index, outside directors made up 13.5% of the board, women 0.9% and non- Japanese 0.17%.
TEPCO fits this model perfectly.
However, the classical model of Japanese corporate governance is coming under pressure. With the Japanese economy facing stagnation in the 1990s, traditional approaches to corporate governance were questioned. A corporate governance debate developed and the stakeholder, rather than shareholder, orientated corporate governance model came under scrutiny. Globalisation of markets and finance put further pressure on some companies. The paternalistic relationship between company and lifetime ‘salary-man’ slowly began to crumble.
Some companies came under pressure from institutional investors abroad. Company laws were redrafted to permit a more US style of corporate governance. But few firms have yet embraced them. Signs of movement included calls in 2008 by eight international investment funds for greater shareholder democracy, and a report from the Japanese Council for Economic and Fiscal Policy to the prime minister proposing that anti-take over defences be discouraged and the take-over of Japanese firms be made easier.
Perhaps the TEPCO experience will encourage further moves towards enhanced corporate governance.
Bob Tricker 20 April 2011
The New York Stock Exchange Commission on Corporate Governance has reported.
In autumn 2009, the New York Stock Exchange (NYSE) formed an independent commission to examine core governance principles in the light of changes that had occurred in governance over the past decade, and to make recommendations which could be widely supported by listed companies, directors and investors. Chaired by Larry W. Sonsini, Chairman of Wilson Sonsini Goodrich & Rosat, a US law firm specializing in business and securities law, the commission members represented investors, listed companies, broker-dealers, and governance experts. On 23 September, 2010 the NYSE Euronext (NYX) published the Commission’s final report which identified 10 core principles of corporate governance covering the scope of the board’s authority, management’s responsibility for governance and the relationship between shareholders’ trading activities, voting decisions and governance.
The Commission argued that a board’s fundamental objective is to build long-term sustainable growth in shareholder value, so corporate policies that encourage excessive risk-taking for the sake of short-term increases in stock price are inconsistent with sound corporate governance. Corporate management has a critical role in corporate governance, the Commission concluded, as management has the primary responsibility for creating an environment in which a culture of performance with integrity can flourish.
Consistent with business opinion in many other parts of the world, the Commission felt that while legislation and agency rule-making are important to establish the basic tenets of corporate governance, over-reliance on legislation may not be in the best interests of shareholders, companies or society. The Commission, therefore, called for market-based governance solutions whenever possible.
The 10 core principles outlined by the Commission on Governance were:
1. The Board’s fundamental objective should be to build long-term sustainable growth in shareholder value for the corporation
2. Successful corporate governance depends upon successful management of the company, as management has the primary responsibility for creating a culture of performance with integrity and ethical behaviour
3. Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation
4. Shareholders have a responsibility and long-term economic interest to vote their shares in a reasoned and responsible manner, and should engage in a dialogue with companies thoughtful manner
5. While legislation and agency rule-making are important to establish the basic tenets of corporate governance, corporate governance issues are generally best solved through collaboration and market-based reforms
6. A critical component of good governance is transparency, as well governed companies should ensure that they have appropriate disclosure policies and practices and investors should also be held to appropriate levels of transparency, including disclosure of derivative or other security ownership on a timely basis
7. The Commission supports the NYSE’s listing requirements generally providing for a majority of independent directors, but also believes that companies can have additional non-independent directors so that there is an appropriate range and mix of expertise, diversity and knowledge on the board
8. The Commission recognizes the influence that proxy advisory firms have on the markets, and believes that it is important that such firms be held to appropriate standards of transparency and accountability
9. The SEC should work with exchanges to ease the burden of proxy voting while encouraging greater participation by individual investors in the proxy voting process
10. The SEC and/or the NYSE should periodically assess the impact of major governance reforms to determine if these reforms are achieving their goals, and in light of the many reforms adopted over the last decade the SEC should consider the expanded use of “pilot” programs, including the use of “sunset provisions” to help identify any implementation problems before a program is fully rolled out
Principle #7 has raised some eyebrows in the United States. “While independence is an important attribute for board members”, the Commission said, “boards should seek an appropriate balance between independent and non-independent directors to ensure an appropriate mix of expertise, diversity and knowledge. The NYSE’s Listing Standards do not limit a board to just one non-independent director.”
The US-based Corporate Governance Alliance Digest, December 1, 2010, asked “Is this a good idea? Including more non-independent members on an issuer’s board may be a very hard sell to investors, given the fact that in all markets investors rank board independence as the most important governance topic. Is adding non-independent members an irritant worth creating?”
On the unitary board of a listed company, directors are responsible for both the performance of the enterprise and its conformance. In other words, the board is expected to be involved in strategy formulation and policy making, whilst also supervising management performance and ensuring appropriate accountability and compliance with regulations. It has been suggested that this means the unitary board is effectively trying to mark its own examination papers. Of course, the two-tier board structure avoids this problem by having the executive board responsible for performance and the supervisory board for conformance, with no common membership allowed between the two boards.
Typically, corporate governance codes and stock exchange listing rules call for independent outside (non-executive) directors to play a vital role in the unitary board. Independence is precisely defined to ensure that these directors have no interest in the company that could adversely affect genuine independent and objective judgement. The number or percentage of independent board members on listed company board is usually specified. Audit, remuneration and nomination committees of the board must be mainly or wholly comprised of these independent, outside directors.
The definition of independence in most corporate governance codes is exhaustive. To be considered independent a director must have no relationship with any firm in the up-stream or down-stream added-value chains, must not have previously been an employee of the company, nor be a nominee for a shareholder or any other supplier of finance to the company. Indeed, the definition of independence is so strict that an independent director who has served on the board for a long period is often assumed to have become close to the company and is no longer considered independent.
Herein lays a dilemma. The more independent directors are, the less they are likely to know about the company, its business and its industry. Conversely, the more directors know about the company’s business, organization, strategies, markets, competitors, and technologies, the less independent they become. Yet such people are exactly what top management needs to contribute to its strategy, policy making and enterprise risk assessment.
This argument looks set to run a long way.
Bob Tricker 6 December 2010
Twenty steps to better corporate governance
A new international corporate/company secretary organization was launched in March 2010 at the Headquarters of the Word Bank in Paris.
The Corporate Secretaries International Association (CSIA) is an international federation of professional bodies formed to promote good governance and corporate secretary-ship. Member organisations include national representative organisations from Australia, Hong Kong/China, India, Kenya, Malaysia, New Zealand, Singapore, South Africa, the United Kingdom, the United States and other jurisdictions representing some 70,000 governance professionals in more than 70 countries.
A research paper was presented at the launch of CSIA: Twenty Steps to Better Corporate Governance. Corporate governance experts from around the world, including the two authors of this blog site – Professor Chris Mallin and Professor Bob Tricker – were asked for their opinions on possible corporate governance implications arising from the recent global financial crisis and the ongoing economic hiatus.
The other contributors to the paper were (in alphabetical order):
- Sir Adrian Cadbury, widely known for his chairmanship of the UK Committee on the Financial Aspects of Corporate Governance and the seminal corporate governance code of best practice that bears his name,
- Dr John Carver, a corporate governance consultant, originator of the Policy Governance® model and author of Corporate Boards that Create Value, 2002, USA
- Professor Gabriel Donleavy, Professor of Accounting, University of Western Sydney, Australia,
- Professor William Judge, E.V. Williams Chair of Strategic Leadership, Old Dominion University and editor of Corporate Governance – an international review, USA,
- Dr Gregg Li, Head of Governance and Risk Management, Aon Global Risk Consulting, Hong Kong,
- Professor Jay W. Lorsch, Louis Kirstein Professor of Human Relations at the Harvard Business School, USA,
- James McRitchie, CEO, Corporate Governance Network, USA.
- Dr Shann Turnbull, Principal, International Institute for Self-governance, Australia.
To read more about the CSIA go to http://www.csiaorg.com.
The full paperTwenty Steps to Better Corporate Governance can be accessed at http://www.csiaorg.com/pdf/research_paper.pdf
Bob Tricker, 1 June 2010