What Is The Governance Revolution?

The following is an excerpt from The Governance Revolution: What Every Board Member Needs to Know, Now ! by Deborah Hicks Midanek.

“It is of the essence of revolutions of the more silent sort that they are unrecognized until they are far advanced. This was the case with the so-called industrial revolution and is the case with the corporate revolution through which we are at present passing. The translation of perhaps two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers, and the methods of property tenure. The divorce of ownership from control consequent on that process almost necessarily involves a new form of economic organization of society. Manifestly the problem calls for a series of appraisals.”

–Berle & Means, The Modern Corporation & Private Property, 1932

In 1932, Adolf A. Berle and Gardiner C. Means named a revolution that has transferred much control of wealth to the organization.  Today the control of the organization is under fire and the responsibility of the board of directors is poorly understood by many, including directors themselves.

The director’s job is not to maximize shareholder value but to protect and enhance the health and value of the corporation. Focus on maximizing shareholder value in the short run, which has become a dominant focus, can be seen as a dereliction of fiduciary duty.

Shareholders of public companies do not own them, but instead own interests in residual income with specific and narrow rights attached, including the right collectively to elect the directors. Just because they assert rights does not mean they have those rights, unless the board falls for their bluster and gives them rights.

Shareholder activists may employ very smart people and may have ideas worth listening to and acting upon. That does not give them the right to abuse and harangue sitting directors or do anything more than vote them out. Companies also employ and can hire more very smart people to analyze alternative scenarios just as the activists do and implement those they find to be in the best interests of the corporation.

Each director singly and the board of directors collectively owes its loyalty to the corporation, not to shareholder’s short term wishes. Much of the volume of funding hedge funds and private equity firms enjoy derives from hard working pension fund managers struggling to garner enough money to pay escalating, unfunded pension obligations. Addressing the pension crisis would change the investment landscape and somewhat reduce the chronic pressure for short term profits.

The Governance Mystique

Boards are mysterious, and imperious; cloistered and powerful; revered and reviled. Their members are a breed apart, to be treated warily as we just do not know exactly what to make of them—sometimes even when we serve alongside them.

Long accustomed to operating in obscurity, directors have found their peace and quiet disturbed lately by all kinds of clamor at the board room door. Many of our major enterprise failures are blamed on failure of governance. Activist shareholders believe they know better. Proxy advisors grade board performance. Women and minorities lament their lack of inclusion, and the lovely phrase “board refreshment” has taken hold as a polite way of saying that new blood is needed. Regulators debate whether and how to add more new rules to ensure that boards perform.

Improving Governance Now Urgently Important

At the same time, a number of corporations are now larger than small countries and have operations that span the globe. Technological change, already disruptive, continues to accelerate. Financial markets and their derivative instruments and computer directed trading are volatile, unpredictable, and opaque. Accounting rules do not always correspond to measures of health. Customers and vendors alike are fickle as all are under pressure to show growth, which often means cutting cost or quality. Employee loyalty has been eroded by perceived lack of employer loyalty, and by the constant search for green grass. And of course, we have terrorists and cyber thieves attacking our information systems and sometimes our people.

It is hardly surprising that board members may want to hide behind that door to the boardroom, as their job has become extremely demanding. There are many legitimate needs for their attention, and many distractions. How to tell the difference?

To my mind, to separate the wheat from the chaff in governance, we start with the definition of the role, which needs to start with an exploration of what governance is, and how it came to be practiced in the forms we know today. Without that foundation, board members will flounder. In fact, many do flounder, as they lack a basic understanding of their purpose and thus are left believing that their job is simply to follow the checklist du jour.

Governance Defined 

A quick Google search of “corporate governance” can create the impression that it is a recent invention, coming to life late in the 20th century. Though public focus on governance increased in the 1980s as a wave of hostile takeovers occurred, and in the 1990s and the New Millennium with various huge failures in the US and abroad, governance itself is as old as the hills. Wherever humans have had to divide resources and allocate risks among themselves, governance has been at work. Over the centuries, various governance systems have been codified as ownership and control inevitably become separated.

Definitions of governance abound, each one more detailed and sophisticated than the last, but to me the most robust one is this: Governance is the system by which decisions about enterprise resource allocation and risk tolerance are made. Such systems, implicit or explicit, are everywhere, in families, countries, homeowner’s associations, tribes, wolf packs, and so on. Some are good and productive, and others are disorganized and destructive. But wherever there are resources to be acquired or divided and more than one consumer of same, there is governance. It comes down to who decides who gets what, for the achievement of which purpose.

If directors take ownership of these concepts, they can drive the companies in their charge toward long term sustainable value creation over short term sophistry. They can if they choose just say no to activists with whom they disagree and can boldly lead their companies to better futures if they will do the job before them. If they do not assert their control, the relentless pressure to secure short term gains may seriously erode their companies’ positions and our country’s ability to compete on the world stage.

Read more: The Board’s Role in Strategy: Lessons Learned from GE

Deborah Hicks Midanek is a veteran independent director, a pioneer in the corporate restructuring industry, and a serial entrepreneur. Widely respected for her turnaround skills, she has diagnosed and remedied problems for over 60 corporations and facilitated the growth of nearly 30 other ventures, including her own. Described by the late Fletcher Byrom, CEO of a Fortune 25 company, as a "pure thinker" - she quickly gains a deep understanding of complex problems and uses her broad experience and practical humanity to craft lasting solutions. Deborah has been directly involved in much of the extraordinary innovation that has taken place on Wall Street over the last few decades, and in handling the consequences of its excess. She has served as chairman, lead director or director as well as committee chair (audit, compensation, governance, special independent) for 23 public and private companies. Deborah earned her MBA from the Wharton School and an AB in History from Bryn Mawr College. A frequent writer and speaker on governance, strategy, leadership, and resilience, she is a New Yorker now living in Mississippi, in the middle of a downtown turnaround, renovating and repurposing 22 19 century buildings in Grenada, MS.