Corporate Governance – Some Reflections and Some Data

One of my pet peeves is the typical introduction to a paper on corporate governance, in which the author, whether by political inclination, the availability heuristic, or naivete, assumes there is a crisis in corporate governance, and proceeds to spend the next 25,000 words or so proposing a legal solution. For better or worse, I tend not to think of companies either as the unnamed “they” or as black boxes. People run companies in groups, and the groups are subject to the usual dynamics that militate doing things well sometimes, badly sometimes. Moreover, the groups are made up of individuals, and all individuals are not created equal in their charisma, their courage, their complacency, their decisiveness, their passiveness, etc. I’m not inclined to think that complex regimens of rules would improve the decision-making of corporate management and boards. A tinker here, and a tweak there, sure. But as I have said here, what really makes the world go ’round is too complex to capture in a one-size-fits-all rule. (That feeling is particularly acute when you consider how different kinds of organizations govern themselves. I’ve participated in the governance of a public corporation, a major religious institution, a leading private school, a community organization or two, and now a faculty. Nothing says a business can’t be a democracy, just like nothing says a law school class can’t be a democracy. The model just doesn’t work very well compared even to more or less enlightened schools of thought on leadership, management, or pedagogy.)

What prompted this reflection was my receipt of the 2007 Spencer Stuart Board Index, a database on the governance practice of the Standard & Poors 500 companies, which includes details on board size, compensation, retirement age, independence, gender, composition, process, organization and many other aspects of corporate governance. Here are some interesting highlights:

1. Active CEOs constituted 53% of all new independent directors in 2000, and 41% in 2002. In 2007, the figure was down to 33%. The report contains a discussion whether that is a favorable or unfavorable trend.

2. The number of new independent board members who are at the next level down from the CEO (i.e. leaders of major divisions and functions) is up from 7% in 2002 to 21% in 2007. I know that we had at least one director who was a CEO heir apparent at another company; his own company encouraged it as a learning experience, and he was one of our best and most insightful directors.

3. Even though only 16% of all S&P 500 directors are women (up from 12% in 2002), there are women on 91% of all S&P 500 boards.

What is particularly interesting about this report is the breadth of opinion it reflects. It contains interviews not only with Ira Millstein, a long-time Weil Gotshal partner and corporate governance guru, and David Swinford, the CEO of Pearl Meyer & Partners, probably the leading executive compensation consultant in the U.S., but also Nell Minow, one of the original founders of Institutional Shareholder Services, and the founder of The Corporate Library.

The best thing about the material is that it takes one beyond prescription by the pathological – the idea that the regulatory schemes around public company governance should be shaped by, rather than responsive to, Enron and the other usual suspects of companies behaving badly.

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