In today's business environment, the credibility of corporations - and of their leaders in particular – is at the heart of the concerns expressed by investors, regulators, consumers, and other interest groups. In this interview, Paul Coombes, a McKinsey & Company director and an expert in corporate governance, explains how changes in that field can help reestablish trust. While recent laws and regulations on governance will help, he argues that we need to understand how the whole, extended system – including boards, managers, and the financial community – can work better.
 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| What will be the effect of recent legislation around governance? |
|
| Paul Coombes:
Tougher governance laws mean more mandated disclosure. In retrospect we’ll see that as the single biggest change. Good companies will need to engage in dialogue with the entire range of stakeholders, not just investors. This is where good governance meets corporate social responsibility. Of course, no matter how good the new rules are, they will not prevent corporate failures or the occasional outbreak of scandals. Recent events reflect the bubble environment that we have all been living through. The view on governance that we must all take now is that it’s a progressive journey.
>br>
Back to Top
|
|
| |
|
| How much criticism does the U.S. deserve for governance problems? |
|
| Paul Coombes: In respect to corporate disclosure, the U.S. is far ahead of most of the rest of the world. So while others can rightly criticize instances of executive greed and unacceptable conflicts of interests,corporations in most other markets will feel pressure to reach comparable standards of transparency with the U.S.
|
|
| |
|
| Do you think the scandals of the past year have had any positive consequences? |
|
| Paul Coombes: Yes – one has been the greater recognition that corporate governance is not simply about behavior. It's a complex network of checks and balances, which affects the way a corporation behaves on the one hand, and influences and reflects how financial institutions act on the other hand. So while boards and auditors and corporate accountability – in terms of what executive management does – are all important, so, too, are the behavior and workings of the financial community, particularly the activities of equity analysts and of fund managers. The whole network needs to be strengthened in the U.S. and elsewhere. The legislative and regulatory changes thus far have addressed a series of "symptomatic" failures without specifically articulating a view of the system as a whole and how it should work.
|
|
| |
|
| Given the current climate, are we expecting nonexecutive directors to play too active a role? |
|
| Paul Coombes: With time pressures on all leaders increasing, their capacity to do a superb job is becoming ever more constrained. The central point is the need for much greater professionalism in the conduct of the non-executive director role. While better training can help, one further practical remedy may be to find more people who can play a professional” board director role, who dedicate themselves to this activity. These need not be retired people, but people in their prime working years who take on a number of board directorships and devote materially more time to them.
|
|
| |
|
| Given the increased scrutiny of board performance, how much time and energy does a board member need to devote to be successful? |
|
| Paul Coombes: Well, chairing the audit committees in financial institutions – which admittedly is one of the toughest non-executive jobs you can point to – can be a 40- to 50-day commitment per year. That's an extreme example. But for the average non-executive director involved in heightened committee work on top of participation in board meetings, the annual commitment is 20 to 25 days at minimum. But time isn't the only issue here. The level of financial literacy that's deemed appropriate for board membership has been ratcheted up considerably. For example, there is a serious shortage of people who can chair the audit committees. The current debate about enhancing board diversity is directed at how we can make sure that the present, rather limited interconnecting network of executives and retired executives that populate the boards in many countries is substantially enlarged and enriched. There are many talented candidates for board positions who may not have been CEOs of Fortune 100 companies or their equivalent – they may be CFOs or CIOs or hold similar executive positions.
|
|
| |
|
| Do chief executives really want stronger boards? |
|
| Paul Coombes: The enlightened chief executive should welcome anything that contributes to better decision making. And that means having an intelligent, informed, and experienced group of people with whom tough decisions can be robustly debated. The hesitation that many chief executives express on this is born of various factors. One is a tendency to interpret disagreement as disloyalty. And, of course, chief executives fear the hazards of a factionalized board more than anything else. They know that discord and lack of direction within an organization spreads to the marketplace and can result in severe penalties in terms of investor confidence.
|
|
| |
|
| What distinguishes a truly effective board? |
|
| Paul Coombes: It is one that is good at handling disagreements and at being self-critical. It is adaptable to circumstances. It doesn't always act in a predictable way. It contains diverse experiences. And everyone on the board is aware that while they will have robust disagreements from time to time on substantive matters, debate is effective only if it results in joint commitment to an agreed course of action. |
|
| |
|
| Will investor activism continue to grow? What can investors do? |
|
| Paul Coombes: Activism is on the rise and will continue. The problem has been that big fund management groups have faced huge conflicts of interest. For integrated investment houses, there are sometimes important corporate connections, e.g., pension fund mandates, or new issue business, that discourage them from publicly challenging companies in cases of prolonged underperformance. Activism is also costly and time-consuming. While there is some behind the scenes pressure, activism has been largely left to a handful of big, public-sector pension funds such as CalPERS, TIAA-CREF, and, in the U.K., the BT pension fund and its activist arm, Hermes. But looking ahead, it seems clear that regulators are trying to encourage more involvement in ways that are fair to all investors.
|
|
| |
|
| What role should boards play in setting strategy? |
|
| Paul Coombes: The board's role has been evolving away from the textbook model in which it sets strategy because it's at the top of the pyramid, leaving the executive management team to execute. That’s fine for small companies and family-owned businesses. A hundred years ago, that was fine for large companies too. But today it is inappropriate and misguided. Today, a board should set the parameters within which the chief executive develops the business. Those boundaries should address the scope of the business, the risk profile, and the enduring values of the corporation. Then the board must decide how much freedom to maneuver it wants to give the management team. That's a much more realistic way of thinking about strategy than the way that it is often characterized by regulators. |
|
| |
|
