tag:theconversation.com,2011:/nz/topics/corporate-governance-1051/articlesCorporate governance – The Conversation2024-02-27T20:11:43Ztag:theconversation.com,2011:article/2235362024-02-27T20:11:43Z2024-02-27T20:11:43ZWhy do some organizations’ boards fail? The answer might lie in how directors perceive their expertise and responsibilities<figure><img src="https://images.theconversation.com/files/577683/original/file-20240223-28-8wo3px.jpg?ixlib=rb-1.1.0&rect=63%2C42%2C6991%2C4664&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The board of directors is a group of expert individuals responsible for overseeing the management of an organization.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>While many of us can name a handful of CEOs, identifying directors serving on the boards of those same organizations is probably more challenging. The work of directors, whether they hold volunteer or compensated positions, is rarely publicized, and when it is, it is rarely good news. </p>
<p>Indeed, <a href="https://www.forbes.com/sites/groupthink/2016/04/27/the-theranos-crisis-where-was-the-board/?sh=70b0404bc58e">corporate scandals often prompt public scrutiny</a>, <a href="https://money.cnn.com/2017/04/24/investing/wells-fargo-scandal-board-annual-meeting/index.html">focusing on the board’s role</a> and questioning how directors could have overlooked issues or been complicit in questionable organizational conduct.</p>
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Read more:
<a href="https://theconversation.com/boards-of-directors-not-governments-must-prevent-scandals-like-hockey-canadas-189201">Boards of directors, not governments, must prevent scandals like Hockey Canada's</a>
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<p>Consider instances such as <a href="https://www.nytimes.com/2016/03/22/business/dealbook/valeants-struggles-could-lead-it-to-crumble.html">Valeant Pharmaceuticals’ questionable accounting practices, which went undetected and unreported by the board</a>. Or <a href="https://hbr.org/2022/12/ftx-and-the-problem-of-unchecked-founder-power">the loose oversight of FTX’s board</a>, which led to the collapse of its cryptocurrency exchange. Or consider the shortcomings of <a href="https://www.nytimes.com/2018/01/25/sports/larry-nassar-gymnastics-abuse.html">USA Gymnastics’</a> and <a href="https://theconversation.com/how-good-governance-can-stop-toxic-bro-behaviour-at-companies-145826">Hockey Canada’s</a> boards in the face of major scandals. </p>
<p>How can we explain these governance failures and the apparent inability of some boards to effectively safeguard the interests of the public or shareholders? Part of the answer lies in the way directors use their expertise and understand their role on the board.</p>
<h2>What are boards of directors?</h2>
<p><a href="https://doi.org/10.5465/19416520.2016.1120957">The board of directors is a group of expert individuals</a> responsible for overseeing the management of an organization, setting its strategic direction and ensuring accountability in terms of financial and non-financial performance. </p>
<p>Often selected for their professional experience and expertise, board directors are <a href="https://laws.justice.gc.ca/eng/acts/c-7.75/FullText.html">chosen by an organization’s members in the case of non-profits</a> or <a href="https://ised-isde.canada.ca/site/corporations-canada/en/business-corporations/directors-and-officers#toc-02">by shareholders in corporations</a>. They are <a href="https://doi.org/10.5465/amr.2014.0066">expected to protect the interests of those who elected them</a>. </p>
<p>To exercise their oversight effectively, board directors are assigned to various committees tasked with overseeing processes and issues such <a href="https://doi.org/10.1506/car.26.1.3">as finance and audit</a>, corporate governance risk or <a href="https://doi.org/10.1111/j.1911-3846.2011.01118.x">human resources and management compensation</a>. </p>
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<img alt="A middle aged businesswoman talks to a group of people at a conference table" src="https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/577682/original/file-20240223-22-6uvtol.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Board directors are chosen by an organization’s members in the case of non-profits or by shareholders in corporations.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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<p>Directors are typically placed on committees based on the expertise showcased in their resumes. For instance, a chartered professional accountant will probably sit on the finance and audit committee, while a human resources professional is more likely to sit on the human resources and management compensation committee.</p>
<p>Staffing board committees according to directors’ areas of expertise makes sense and <a href="https://doi.org/10.1002/smj.3320">is a critical step to ensure board effectiveness</a>. </p>
<p>However, and as highlighted by a <a href="https://doi.org/10.1111/1911-3846.12890">field study I conducted</a>, expertise in one area does not guarantee its use on the board. Here is what I found through in-depth interviews with board directors of Canadian public companies.</p>
<h2>Being an expert or feeling like one</h2>
<p>Some directors don’t consider themselves as experts, despite what their resume states. Since directors don’t choose the committees they contribute to, some might find themselves involved with topics and processes they feel are beyond their comfort zone and range of knowledge. </p>
<p>This often leads them to let other directors, who they see as more knowledgeable, take the lead, which limits their own contribution. Because of this, the conventional indicators of expertise like professional designations, credentials and business awards may not actually reflect a director’s perceived competence.</p>
<p>Additionally, my study reinforces the idea that a board’s culture and approach of the chair both influence how directors mobilize their expertise during meetings. Directors tend to follow the <a href="https://doi.org/10.1080/09638180.2017.1367315">lead of the chair</a> and observe how other board members act and interact to shape their own actions and practices on the board. </p>
<p><a href="https://doi.org/10.1002/smj.3320">Directors also often prioritize maintaining positive relationships and collegiality</a> over asserting their expertise through challenging arguments and questions.</p>
<h2>To each their own oversight style</h2>
<p>The interviews I conducted for this study also show that board directors each develop their own oversight style and interpretation of what their responsibilities are on the board. </p>
<p>While rules and regulations outline <a href="https://ised-isde.canada.ca/site/corporations-canada/en/business-corporations/directors-and-officers">directors’ official duties</a>, there are no set requirements for how they should prepare for meetings or how much time they should invest in preparation. </p>
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<img alt="A group of people having a meeting in a conference room" src="https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/577686/original/file-20240223-18-5oxg63.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A recent study has found that a board’s culture and the approach of the chair both influence how directors mobilize their expertise during meetings.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
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<p>Additionally, the verbs used to define the role of board directors in official guidelines such as “<a href="https://www.osc.ca/en/securities-law/instruments-rules-policies/5/52-110/unofficial-consolidation-national-instrument-52-110-audit-committees">oversee</a>,” “supervise,” and “<a href="https://ised-isde.canada.ca/site/corporations-canada/en/business-corporations/directors-and-officers">making decisions</a>” are elusive at best and unclear at worst. </p>
<p>This ambiguity contributes to a lack of clarity regarding what board directors should do in practice to fulfill their governance mission. </p>
<p>As a result, directors are left to interpret and determine which practices and tasks are sufficient on their own. This results in varying contributions to the board, with some directors reporting spending only a few hours preparing for meetings, while others dedicate days to reading material and formulating insightful questions ahead of time.</p>
<h2>Addressing governance challenges</h2>
<p>With directors not considering themselves experts and developing their own approach to board responsibilities, it’s unsurprising some boards end up only engaging in symbolic oversight.</p>
<p>In essence, there is an empirical difference between having the status of an expert and feeling like one. The way directors embody their responsibilities is up to interpretation, which may explain why some boards fail to prevent or detect management errors, whether deliberate or inadvertent.</p>
<p>Addressing governance failures requires a multifaceted approach. Boards must not only focus on assembling a diverse and qualified set of directors, but also foster a culture that encourages active engagement, knowledge-sharing and commits to <a href="https://theconversation.com/corporate-directors-dont-see-stopping-wayward-ceos-as-their-job-contrary-to-popular-belief-165788">effective monitoring</a> instead of a facade of oversight.</p><img src="https://counter.theconversation.com/content/223536/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Oriane Couchoux received funding from the Social Sciences and Humanities Research Council of Canada, the Canadian Foundation for Governance Research, and the CPA Ontario Centre for Corporate Governance & Accountability. </span></em></p>How can we explain governance failures in boards of directors? Part of the answer lies in the way directors use their expertise and understand their role on the board.Oriane Couchoux, Assistant Professor of Accounting, Carleton UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2224832024-02-05T13:31:44Z2024-02-05T13:31:44ZWhy Elon Musk’s ‘self-driving’ of Tesla’s board and its decision to pay him $56B collided with the law – and what happens next<p><em><a href="https://www.bloomberg.com/news/articles/2024-02-02/elon-musk-meets-his-match-in-shakespeare-quoting-delaware-judge?sref=Hjm5biAW">Delaware Chancery Court Judge Kathaleen St. Jude McCormick</a> has <a href="https://corpgov.law.harvard.edu/2024/02/01/tesla-musk-case-post-trial-opinion/">blocked Elon Musk’s US$55.8 billion pay package</a>, which <a href="https://abcnews.go.com/Business/wireStory/court-rejected-elon-musks-558b-pay-package-worth-106846409">Tesla’s board of directors approved in 2018</a> through a process she found to be “deeply flawed.”</em> </p>
<p><em>No CEO of a publicly traded U.S. company has ever been <a href="https://www.wsj.com/business/elon-musks-55-billion-tesla-pay-package-struck-down-by-judge-3e619f53?mod=hp_lead_pos9">paid this much</a> for one year’s work, according to Equilar, which tracks corporate leadership data. Pay for the 10 highest-paid executives, including Google’s Sundar Pichai and Apple’s Tim Cook, reportedly <a href="https://www.cnbc.com/2023/07/05/heres-how-much-the-10-highest-paid-us-ceos-earn.html">maxed out at around $250 million</a> in 2022.</em> </p>
<p><em>The Conversation asked <a href="https://www.udel.edu/faculty-staff/experts/justin-p-klein/">Justin P. Klein</a>, the director of the Weinberg Center for Corporate Governance at the University of Delaware, to explain McCormick’s reasoning.</em></p>
<h2>Why did the judge block Musk’s pay package?</h2>
<p>McCormick’s opinion began with a good question: “Was the richest person in the world overpaid?”</p>
<p>She concluded, in this reference to Musk – whose <a href="https://www.bloomberg.com/billionaires/profiles/elon-r-musk/">fortune was estimated to be worth $205 billion</a> before the ruling and consists largely of his <a href="https://www.washingtonpost.com/technology/2024/02/01/elon-musk-wealth-net-worth-companies/">Tesla shares and stock options, along with his SpaceX stake</a> – that he was. </p>
<p>This legal defeat may have <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">knocked Musk out of his perch</a> atop the Forbes list of the world’s richest people, making him the second-wealthiest, the <a href="https://www.forbes.com/real-time-billionaires/#1e2714563d78">media outlet calculated</a>. </p>
<p>McCormick ruled against Musk in <a href="https://www.theguardian.com/business/nils-pratley-on-finance/2024/jan/31/three-cheers-for-the-delaware-judge-who-stood-up-to-elon-musk">Tornetta v. Musk</a>, a lawsuit filed on behalf of an investor who owned only nine Tesla shares – and by extension virtually all of the company’s stockholders. Ultimately, she determined that Musk’s compensation plan was considered and approved by a board of directors that was <a href="https://apnews.com/article/elon-musk-ceo-pay-compensation-tesla-f5ad4ce659a73a1209dc99a583d7b883">not sufficiently independent or objective</a>.</p>
<p>The compensation plan was subject to a vote by the rest of Tesla’s shareholders. But the information they received left out key details and contained inaccurate statements.</p>
<p>This pay package deserved close scrutiny because of its enormity, McCormick observed. She called it the “largest potential opportunity ever observed in public markets by multiple orders of magnitude.”</p>
<h2>What was wrong with Tesla’s board?</h2>
<p>McCormick concluded that many of Tesla’s board members, including <a href="https://www.sec.gov/Archives/edgar/data/1318605/000156459018009339/tsla-def14a_20180606.htm">his brother Kimbal Musk</a>, had close financial and social relationships with Elon Musk and that they were beholden to him due to these ties.</p>
<p>The board approved this compensation plan without <a href="https://corpgov.law.harvard.edu/2020/03/19/compensation-committee-guide-2020/">following commonly accepted norms</a>, according to the ruling. Further, McCormick found that the directors allowed Musk to control the process for approving the compensation plan, dictating the terms, amount and timing.</p>
<p>Board members apparently made no efforts to benchmark the plan as compared to <a href="https://ceoworld.biz/2023/05/26/the-highest-paid-tech-ceos-in-the-united-states/">compensation paid to executives of comparable companies</a>, a critical and typical step in any situation like this.</p>
<p>Musk was in control of Tesla, <a href="https://www.investopedia.com/articles/stocks/07/executive_compensation.asp">a publicly traded company</a>, that should have standard protocols in place regarding its compensation practices.</p>
<p>There was no negotiation between Musk and the compensation committee or the board regarding the amount and terms of the plan, the chancellor found. This is both inconsistent with widely accepted <a href="https://www.huntonak.com/en/insights/six-key-considerations-executive-contract-negotiations.html">compensation setting practices</a> and striking due to the scale of the pay package. </p>
<p>“Musk launched a self-driving process, recalibrating the speed and direction along the way as he saw fit,” McCormick wrote. “The process arrived at an unfair price. And through this litigation, the plaintiff requests a recall.”</p>
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<span class="caption">Tesla corporate headquarters, in Travis County, Texas.</span>
<span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/in-an-aerial-view-the-tesla-corporate-headquarters-is-seen-news-photo/1454072958">Brandon Bell/Getty Images</a></span>
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<h2>What factors are boards supposed to consider in setting CEO pay?</h2>
<p>In deciding what CEOs should earn, boards or compensation committees should consider the <a href="https://www.investopedia.com/managing-wealth/guide-ceo-compensation">company’s performance under the leadership of the CEO</a> and the executive’s own personal performance. They should also review what comparable companies take into consideration when making decisions about their own CEO’s compensation.</p>
<p>Other metrics or considerations may be taken into account, too. These may include whether the company has made <a href="https://worldatwork.org/resources/publications/workspan-daily/how-dei-will-shape-executive-compensation-in-changing-legal-climate">progress in terms of diversity, equity and inclusion</a>, <a href="https://link.springer.com/article/10.1007/s11846-022-00538-4">employee retention</a>, <a href="https://hbr.org/2023/02/linking-executive-pay-to-sustainability-goals">sustainability and environmental performance</a>, worker safety practices, risk management and <a href="https://www.hrpolicy.org/insight-and-research/executive-compensation/executive-pay-legislation-and-regulation/">compliance with laws and regulations</a>.</p>
<p>Around the time of this compensation decision, Musk was the subject of a <a href="https://www.foxbusiness.com/technology/elon-musk-says-420-price-tesla-buyout-tweet-not-joke-testimony">Securities and Exchange Commission probe</a> over alleged fraud stemming from what the SEC said were <a href="https://www.sec.gov/files/litigation/complaints/2018/comp-pr2018-219.pdf">misleading statements</a> regarding his plans to take Tesla private at $420 per share – a part of a tweet widely regarded as a cannabis joke.</p>
<p>The <a href="https://www.sec.gov/news/press-release/2018-226">settlement Musk reached with the SEC</a> forced him to pay a $20 million fine and step down as the company’s chairman for at least three years. It also required the appointment of two new independent Tesla board members and a requirement that he preclear certain public statements.</p>
<p>The company was not taken private.</p>
<p>In 2023, a <a href="https://electrek.co/2023/02/03/elon-musk-found-not-guilty-in-the-tesla-420-take-private-case/">jury found Musk not liable</a> for <a href="https://www.cnn.com/2023/02/03/cars/musk-tesla-tweet-lawsuit-jury/index.html">related losses by Tesla investors</a> who sued over the incident. Tesla shares closed at $187.91 on Feb. 2, 2024, far below that $420 price that unleashed litigation. The company’s share prices closed at <a href="https://www.morningstar.com/news/dow-jones/202401297494/tesla-on-pace-for-worst-month-since-december-2022-data-talk">$409.97 in November 2021</a> – the highest point to date.</p>
<p>The board could have considered this incident a negative factor when making its decisions about Musk’s compensation.</p>
<h2>What process are boards supposed to follow in setting CEO pay?</h2>
<p>In setting CEO compensation, all members of boards or <a href="https://www.pwc.com/us/en/services/governance-insights-center/library/compensation-committee.html">compensation committees</a> should be truly independent and objective, with no interest in the outcome.</p>
<p>They should consider engaging compensation experts and benchmark or seek information on executive compensation at comparable companies.</p>
<p>These decisions require careful consideration of all components of the CEO’s compensation and how the pay package should be structured. That includes how much of the pay should be provided as cash, <a href="https://www.investopedia.com/terms/r/restrictedstock.asp">restricted stock</a>, which may not be sold for a period of time, and <a href="https://www.investopedia.com/terms/s/stockoption.asp">stock options</a>, which provide the right to purchase stock at a predetermined price before a particular time in the future. </p>
<p>When stock prices rise a great deal, stock options soar in value. That’s <a href="https://www.nytimes.com/2024/01/30/business/elon-musk-tesla-pay-package.html">what happened with Musk’s colossal pay package</a>.</p>
<h2>What happens now?</h2>
<p>Musk may decide to appeal to the Supreme Court of Delaware. On the other hand, Musk could ask Tesla’s board, its compensation committee – or both of them – to revisit and revise his compensation plan, taking into account the objections spelled out in the ruling.</p>
<p>That would include both the amount – $55.8 billion – and the process by which it was set.</p>
<p>Musk, however, <a href="https://whyy.org/articles/delaware-elon-musk-wants-tesla-to-vote-on-switching-corporate-registration-to-texas/">appears to be seeking a third option</a>. “Tesla will move immediately to hold a shareholder vote to transfer (the) state of incorporation to Texas,” <a href="https://twitter.com/elonmusk/status/1752922071229722990">he posted on X</a>, his social media platform previously known as Twitter.</p>
<p>Even if Musk were to prevail and change Tesla’s jurisdiction of incorporation, it would not be likely to affect this decision.</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1752922071229722990"}"></div></p>
<h2>Is Delaware particularly tough on corporate leaders?</h2>
<p><a href="https://www.cnbc.com/2023/03/13/why-more-than-60percent-of-fortune-500-companies-incorporated-in-delaware.html">Delaware is the corporate home</a> of more than 60% of Fortune 500 companies even though it’s the country’s second-smallest state.</p>
<p>One reason for its popularity with businesses of all kinds is that Delaware’s courts are quite experienced, with a great deal of expertise in considering business matters and cases of this kind. Musk’s court case was heard in its <a href="https://www.law.cornell.edu/wex/chancery">Court of Chancery</a>, a system that primarily decides <a href="https://courts.delaware.gov/chancery/jurisdiction.aspx">corporate legal matters</a>.</p>
<p>Although Musk <a href="https://twitter.com/elonmusk/status/1752455348106166598?s=20">suggested that standards in Delaware are overly strict</a> in another message he posted on X after the ruling, this kind of case is very rare.</p>
<p>One of few similar lawsuits was filed <a href="https://www.nytimes.com/2005/08/10/business/media/ruling-upholds-disneys-payment-in-firing-of-ovitz.html">against former Disney CEO Michael D. Eisner</a> over his $140 million severance package. In 2005, Chancellor William B. Chandler III of the Delaware Chancery Court let it go, while acknowledging the apparent impropriety of paying an executive so much.</p>
<p>“Despite all the legitimate criticisms that may be leveled at Eisner, especially at having enthroned himself as the omnipotent and infallible monarch of his personal Magic Kingdom,” <a href="https://casetext.com/case/in-re-walt-disney-co-derivative-litigation">Chandler wrote</a>, “I nonetheless conclude, after carefully considering and weighing all the evidence, that Eisner’s actions were taken in good faith.”</p><img src="https://counter.theconversation.com/content/222483/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Justin P. Klein directs the advisory board of the Weinberg Center for Corporate Governance. Chancellor Kathaleen McCormick is an ex officio member of that center's advisory board.</span></em></p>Musk can’t dodge this ruling by moving Tesla’s incorporation to Texas.Justin P. Klein, Director of the Weinberg Center for Corporate Governance, University of DelawareLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2181092023-11-20T05:51:39Z2023-11-20T05:51:39ZThe Optus chief was right to quit but real change is unlikely at the telco until bigger issues are fixed<p>Optus chief executive Kelly Bayer Rosmarin bowed to the inevitable on Monday and <a href="https://www.singtel.com/about-us/media-centre/news-releases/leadership-changes-at-optus--ceo-kelly-bayer-rosmarin-resigns">resigned</a> as chief executive of Australia’s second largest telecommunications company.</p>
<p>Why inevitable? <a href="https://www.news.com.au/technology/online/hacking/optus-slammed-for-lack-of-communication-with-customers-government/news-story/a8a2d8ce1c40b3c5b847ea67a2e153be">Poor communication</a> and a lacklustre response during a major system outage is bad enough. Then things got worse when Bayer Rosmarin and the director of Optus networks <a href="https://www.afr.com/chanticleer/optus-planning-failure-will-hang-over-kelly-bayer-rosmarin-20231117-p5eksv">admitted at a Senate hearing on Friday</a> they had no disaster management plan for the kind of national outage experienced two weeks earlier.</p>
<p>Someone was always going to have to take the blame. Now, two critical questions emerge. First, will the resignation of the chief executive be sufficient to stem the tide of <a href="https://www.theaustralian.com.au/business/technology/communication-failure-as-optus-opts-out-after-blackout/news-story/b194a05f11aad186c9fb665ff85d1339">bad publicity from Optus’ outage</a> debacle? Second, is this yet another instance of a female chief at a prominent Australian company being pushed over the “glass cliff”? </p>
<h2>Quitting is only a Band-Aid fix</h2>
<p>The resignation of a chief executive following a national fiasco has become something of a ritual for big Australian corporations. This happened <a href="https://www.qantasnewsroom.com.au/media-releases/announcement-on-qantas-ceo-succession/">at Qantas</a>, too. </p>
<p>Such actions calm public anger, making it appear someone is taking responsibility. Yet, is this truly effective? Not necessarily. This is because problems are deeply ingrained within these corporations, which removing the current leader will not necessarily resolve. Again, the Qantas example <a href="https://www.theguardian.com/business/2023/sep/06/qantas-in-crisis-alan-joyce-has-departed-but-the-airline-still-has-plenty-of-baggage">illustrates this point</a>.</p>
<p>Optus’ challenges are notably linked to its operational model as a subsidiary of Singtel Ltd, a Singapore-based company. A review of its website shows Optus has a very lean corporate structure in Australia. </p>
<p>Remarkably, Optus doesn’t have a traditional board of directors within Australia to oversee its management. The website lists <a href="https://www.optus.com.au/about/corporate/executive-profiles">Paul O’Sullivan as the chairman</a>, but it’s unclear what exactly he chairs. Surprisingly, O’Sullivan maintains a low public profile, despite Optus being Australia’s second-largest telecommunications carrier. At best, it appears he chairs a board of senior executives including the chief executive.</p>
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Read more:
<a href="https://theconversation.com/the-optus-outage-shows-us-the-perils-of-having-vital-networks-in-private-hands-217660">The Optus outage shows us the perils of having vital networks in private hands</a>
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<p>Even within the ranks of the nominated executives, no one is specifically responsible for the company’s risk management. While Optus claims to have such systems in place, the recent national outage points to a significant lapse in disaster planning. This is a major failure of risk management. </p>
<p>The likelihood of such an outage might have appeared remote to Bayer Rosmarin, yet given the potentially severe consequences, comprehensive planning and scenario testing would seem essential for the telco giant. Like the inevitability of cyber hacking, a national outage could be considered a matter of when, not if.</p>
<h2>Optus needs robust governance</h2>
<p>In a typical scenario, a board of directors would scrutinise the executive team’s oversight and accountability functions as the catastrophe unfolded. With no Australian board, those tasks are apparently the responsibility of Optus’ parent, Singtel.</p>
<p>It is easy to imagine systemic risk concerns at Optus might be too far removed from the Singapore-based board. But that is not much consolation for Australian consumers and agencies who depend on Optus for telecommunication services, including the emergency triple-zero number.</p>
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Read more:
<a href="https://theconversation.com/optus-has-revealed-the-cause-of-the-major-outage-could-it-happen-again-217564">Optus has revealed the cause of the major outage. Could it happen again?</a>
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<p>Optus’ lack of strong governance in Australia is and remains a major concern for the company, regardless of who’s in charge. Optus urgently needs a properly constituted local board of directors with clear accountability for its local operations.</p>
<p>This includes a chairperson ready to front the media and share responsibility with the chief executive. It also requires more transparent governance, particularly regarding risk management and remuneration. Optus can handle some of these issues, but the cost overlay will no doubt be a factor in the mode of the remedy.</p>
<p>That is where the federal government, through its regulatory agency, the <a href="https://www.acma.gov.au/">Australian Communications and Media Authority</a>, must come in and tighten up the governance requirements of companies with a <a href="https://www.acma.gov.au/sites/default/files/2019-11/Carrier%20licensing%20guide.pdf">carrier licence</a>.</p>
<h2>The short-lived tenure of women at the top</h2>
<p>The resignation of Bayer Rosmarin from Optus arguably becomes a classic case of the “glass cliff” phenomenon, where women are installed in leadership roles only to be blamed for failing to fix a crisis. Her stint as chief executive was brief, <a href="https://en.wikipedia.org/wiki/Optus">starting in April 2020</a> after joining Optus in March 2019. Her time at the helm will likely be remembered for two national scandals: a cyber hack and a national outage.</p>
<p><a href="https://www.theguardian.com/business/2023/nov/05/over-the-glass-cliff-female-chief-executives-have-shorter-tenure-than-men-due-to-crisis-management-roles">Studies</a> looking at women in leadership suggest women who take on such roles in turbulent times are likely to endure a shorter tenure than their male counterparts. One scandal might be overlooked, but two? It seems the outcome was inevitable. </p>
<p>Michael Venter, the interim chief executive, may well succeed where Bayer-Rosmarin failed. However, unless Optus takes the time to properly resolve systemic risk issues and bolster its governance arrangements, it should expect more trouble ahead.</p>
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Read more:
<a href="https://theconversation.com/optus-said-it-didnt-have-the-soundbite-to-explain-the-crisis-we-should-expect-better-217302">Optus said it didn't have the 'soundbite' to explain the crisis. We should expect better</a>
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<img src="https://counter.theconversation.com/content/218109/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Bird does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Embattled Optus chief Kelly Bayer Rosmarin who oversaw two network outages in the last year has resigned after admitting her company had no disaster management plan.Helen Bird, DIscipline Leader, Corporate Governance & Senior Lecturer, Swinburne Law School, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2176602023-11-15T03:56:00Z2023-11-15T03:56:00ZThe Optus outage shows us the perils of having vital networks in private hands<p>Optus chief executive Kelly Bayer Rosmarin is set to front a <a href="https://www.smh.com.au/technology/optus-reveals-cause-of-mass-outage-20231113-p5ejnk.html#">Senate inquiry</a> this week, probing last week’s colossal outage which left millions stranded without internet or mobile phone connectivity for a staggering 14 hours.</p>
<p>The company has faced severe <a href="https://www.afr.com/companies/telecommunications/optus-public-response-to-the-system-crash-didn-t-work-20231109-p5eiop">criticism</a> for its handling of the outage, including for its lack of urgency in updating the public.</p>
<p>Loss of trust and confidence aside, if the national outage has taught us anything, it is there are real dangers in leaving the management of critical national infrastructure to a 100% privately owned company, in this case, a subsidiary of Singapore Telecommunications Limited, or <a href="https://en.wikipedia.org/wiki/Singtel">Singtel</a> as it is better known.</p>
<p>As a private company, Optus has no legal obligations to report publicly on its financial statements or governance arrangements, unlike its competitor, Telstra Ltd. They don’t even have to report to government, despite holding a licence to be a carrier under federal legislation.</p>
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<a href="https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Image of one of the Singapore based telecommunications company Singtel's storefronts" src="https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=338&fit=crop&dpr=1 600w, https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=338&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=338&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/559499/original/file-20231115-23-jz48j1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Optus is Australia’s second largest communications carrier but is privately owned by Singtel.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/singapore-27-jul-2019-customers-visit-1464421670">Tang Yan Song/Shutterstock</a></span>
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<p>Optus is the second largest supplier after Telstra of national carrier infrastructure in Australia. Its services are critical to the operation of our economy and community wellbeing. An illustration of this was the failure of the emergency 000 service during the outage. People with Optus couldn’t contact emergency services for up to 14 hours.</p>
<h2>The obligations of listed companies</h2>
<p>If Optus was a publicly listed company, like Telstra, it would have to comply with the <a href="https://www.asx.com.au/about/regulation/rules-guidance-notes-and-waivers/asx-listing-rules-guidance-notes-and-waivers">listing rules</a> of the Australian Stock Exchange (ASX). This means it would have to disclose any information that could reasonably be expected to <a href="https://www.asx.com.au/documents/rules/Chapter03.pdf">affect the price or value of the entity’s shares</a>.</p>
<p>An unexplained system-wide outage of carrier services would arguably warrant this. If these rules applied to Optus, it would have had to issue regular market updates on developments during the outage. The odd, unannounced <a href="https://www.9news.com.au/national/optus-year-from-hell-from-the-data-breach-hack-to-australias-biggest-network-outage/487356fb-c52f-4eab-9b44-cb8f2669d067">phone call by the Optus CEO</a> to a radio program would be unsatisfactory. </p>
<p>A quick review of the Optus website’s “<a href="https://www.optus.com.au/about">About Us</a>” section suggests a number of apparent shortcomings. Contrary to the recommendations of the <a href="https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf">ASX corporate governance rules</a> not a single member of the Optus executive board of directors qualifies as an independent director, that is, a director with no apparent ties to the company.</p>
<p>The idea of the independent director is to help a company board break out of its group think. In a crisis, for example, this would mean asking hard questions of executive management. While ASX governance rules technically only apply to public companies, they are a role model for all corporates, including large proprietary companies like Optus.</p>
<p>No details of the company’s risk-management arrangements are given either, including the chief risk officer. This is extraordinary for a company whose recent history (cyber hack, system outage) shows its exposure to extremely high levels of risk.</p>
<p>There are also no details of who monitors the executive management of Optus. It is important to see this for what it is - Optus <a href="https://www.optus.com.au/about/media-centre/annual-reports">devolves its corporate governance responsibilities</a> to Singtel and runs a very lean operation in Australia.</p>
<p>This is seemingly good for Optus from a cost management viewpoint, but bad for Australia because we are leaving the governance of critical national infrastructure to a company with no direct accountability to the public and minimal accountability to the federal government. </p>
<h2>Poorly prepared for a crisis</h2>
<p>The absence of a comprehensive crisis management plan was obvious during last week’s outage. Despite experiencing a <a href="https://www.afr.com/technology/inside-the-optus-hack-that-woke-up-australia-20221123-p5c0lm">wide-scale cyber hack in 2022</a> Optus seemed ill-prepared to handle the system outage. You have to ask: why wasn’t a plan prepared well in advance of any such crisis? </p>
<p>Crisis management should entail a communication hierarchy and a systematic response. It is a key part of a company’s risk management system. This means knowing who needs to be notified and when to notify them. Presumably, high on that list would be the government. Instead, Bayer Rosmarin phoned radio programs revealing snippets of information in an ad-hoc way. </p>
<p>As part of crisis management, system fixes should be prioritised and companies obliged to tell the public the order in which these will be tackled. For example, the first fix should be health and hospital services. This did not happen. Instead, the absence of a clear plan only fuelled public anger. </p>
<h2>Optus likes to control the narrative</h2>
<p>Optus likes to tightly control its communication narrative. It refused to publicly release the Deloitte report on its 2022 cyber hack, <a href="https://www.theguardian.com/business/2023/nov/10/optus-cyber-attack-report-released-secret-court-case-deloitte">until late last week</a> when it was ordered to make it available to litigants in a class action.</p>
<p>Similarly, the chief executive was reluctant to explain the current system outage, effectively asserting that there was no point until they had “<a href="https://www.afr.com/technology/optus-ceo-says-no-soundbite-to-explain-phone-outage-20231108-p5eid1">bottomed out the root cause</a>” and could make it more digestible to the public.</p>
<p>Optus held all the power, yet when it did finally explain the failure days later, it was described as caused by <a href="https://ia.acs.org.au/article/2023/optus-reveals-cause-of-nationwide-outage.html#:%7E:text=Five%20days%20after%20the%20outage,a%20%E2%80%9Croutine%20software%20upgrade%E2%80%9D.">a system upgrade and a failure of routers</a>. Hardly more digestible than the system failure we already knew it to be. </p>
<p>In an increasingly digitised world, technology failures and system outages have become a fact of life. ASX Ltd, the licensed operator of Australia’s equity market, experienced a bad one in 2022, known as the <a href="https://www.afr.com/companies/financial-services/asx-ignored-warnings-made-unworkable-demands-on-chess-inquiry-hears-20230608-p5dezh">collapse</a> of the Clearing House Electronic Subregister System replacement project. </p>
<h2>Knowing less than we would like</h2>
<p>We know more about that failure than we will ever know about the Optus crisis because the ASX is a public company and was required to make continuous disclosure to the market.</p>
<p>In addition, ASX is also accountable for the management and governance of its critical infrastructure on an annual basis under licence arrangements overseen by the Reserve Bank and the Australian Securities and Investment Commission .</p>
<p>Like Optus, these failures have been the subject of hearings before parliament. However, there are no equivalent accountability requirements for Optus. Surely, the national telecommunications infrastructure managed by Optus is every bit as important as ASX’s clearing house infrastructure?</p>
<p>It is time to ask what accountability mechanisms should be in place for companies like Optus, whether they are enough and who watches over them. Where are the yearly assessments of that infrastructure by government agencies? The <a href="https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Environment_and_Communications/OptusNetworkOutage">Senate inquiry</a>, which was announced the day after the outage, will hopefully tackle these issues with the serious attention they deserve.</p><img src="https://counter.theconversation.com/content/217660/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Helen Bird is a member of ASIC's corporate governance panel. She has received funding from the Criminology Research Council and the Australian Research Council in the past.</span></em></p>The Optus chief will face some tough questions about the company’s poor handling of last week’s catastrophic network outage when she appears before a Senate inquiry.Helen Bird, DIscipline Leader, Corporate Governance & Senior Lecturer, Swinburne Law School, Swinburne University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2029182023-04-24T16:14:03Z2023-04-24T16:14:03ZHow to repair a damaged reputation<figure><img src="https://images.theconversation.com/files/522126/original/file-20230420-1035-nz53nk.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C5607%2C3699&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/upset-businessman-laptop-174612419">Lolostock/Shutterstock</a></span></figcaption></figure><p>A reputation can be damaged by a single mistake, or after months or even years of bad behaviour. Organisations may turn a blind eye to such behaviour by employees or business leaders, and sometimes it is tacitly enabled by a toxic culture that prioritises an end game – profits or “winning” – over people or planet.</p>
<p>In either case, research can tell us about the drivers of reputational loss, as well as how to rebuild a reputation, and ways to avoid damaging it in the first place. But while reputations can be protected, my research shows this shouldn’t happen at all costs – there is a dark side to reputation management that can, and should, be avoided.</p>
<p>Working with my PhD student, Navdeep Arora, I <a href="https://journals.sagepub.com/doi/10.1177/10564926211007204">interviewed inmates in a US federal prison</a> who had been indicted for white collar crimes, as well as prison officers. This presented a unique lens for understanding what causes people who are not inherently bad to make poor decisions. </p>
<p>While this is an extreme case, it offers valuable lessons for all of us. As I discuss in <a href="https://global.oup.com/academic/product/reputations-at-stake-9780192886521?cc=gb&lang=en&#:%7E:text=Reputations%20at%20Stake%20provides%20evidence,it%20can%20attract%20and%20retain.">my recent book Reputations at Stake</a> there are three main reasons why these inmates acted unethically. </p>
<p>Gordon Gecko from Oliver Stone’s Wall Street may believe that everything boils down to <a href="https://www.youtube.com/watch?v=VVxYOQS6ggk">money and greed</a>, but my research indicates that’s not often the case. While there was a small element of ego, hubris and greed among these inmates, other factors were at play. For example, fear of failure, compensating for perceived deficiencies and feeling overwhelmed by the expectations of others. </p>
<p>An organisation can also play a role in someone’s bad behaviour that leads to reputational damage. This is especially true when weak governance and undesirable cultural norms within organisations go unchallenged. For example, harsh quarterly financial targets or perverse incentives to generate value can create toxic environments. </p>
<p>Beyond the organisation, excessive regulatory expectations can have negative effects as well. For the participants in our study, rules that were perceived to be unwieldy sometimes perversely triggered the opposite behaviours to those intended. For example, one inmate said that he and his colleagues sought a practical work around in response to the mounting regulatory expectations which they saw as unmanageable.</p>
<p>Blaming bad behaviour and reputational damage solely on individuals is typically more convenient for organisations. It can also be an attractive way for media to report on an event – <a href="https://www.bbc.co.uk/news/business-65313822">sensational stories</a> of <a href="https://news.sky.com/story/dominic-raab-bullying-report-into-deputy-prime-minister-handed-to-number-10-12855631">people self-destructing</a> sell well.</p>
<p>But the reality is that individual, organisational and societal factors all contribute to professional misconduct and reputation loss.</p>
<h2>Rebuilding reputations</h2>
<p>There are many ways that the reputations of people and organisations can suffer in the eyes of those around them – whether that’s co-workers, family and friends or shareholders, employees and customers. </p>
<p>For a person, this could include being reprimanded at work, being made redundant, or acting inappropriately. For organisations, it could be treating staff poorly, incentivising perverse behaviours or breaching codes of conduct. P&O’s sacking of 800 of its crew members via video message is <a href="https://news.sky.com/story/p-o-ferries-sackings-replacing-workers-with-1-80-an-hour-agency-staff-illegal-says-tuc-head-frances-ogrady-12572552">a great example</a> of the actions of leaders being at odds with the expectations of other corporate groups including employees, customers, shareholders and the public.</p>
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<a href="https://theconversation.com/pando-ferries-how-some-companies-can-afford-to-break-the-law-180054">P&O Ferries: how some companies can afford to break the law</a>
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<p>An important part of recovery is when damaged individuals or organisations reconnect with these other, related parties. </p>
<p>Research into reputation distinguishes between character reputation and capability reputation. Both focus on past ethical conduct and performance. But given that both can also be shattered, particularly during severe reputation loss events, it’s more valuable to think about “contribution”. </p>
<p>This is when other groups or people believe the individual or organisation can provide future value. Frank Lampard’s <a href="https://www.football365.com/news/chelsea-praised-major-lampard-decision-agbonlahor-no-chance-stays">recent return</a> as interim manager of Chelsea Football club, despite his sacking two years earlier, shows the possibility of <a href="https://hbr.org/2007/01/firing-back-how-great-leaders-rebound-after-career-disasters">this kind of bounce back</a>.</p>
<p>Without making such a reconnection, it is difficult to anchor a recovery. And so the starting point of reputation recovery is identity recovery in the eyes of interested parties, whether that’s customers, employees, management or the general public.</p>
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<span class="caption">Reputation management.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businesswoman-pressing-smiley-on-keyboard-laptop-1116947918">13_Phunkod/Shutterstock</a></span>
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<h2>Avoiding reputation loss</h2>
<p>And what about protecting reputation from damage in the first place? It’s important to avoid thinking that reputation always requires proactive management – it should not be safeguarded at all costs. </p>
<p>One way of thinking about reputation management is on a spectrum: on one end is passivity where you do not care about reputation. Social media, mass media and other coverage is inconvenient noise that can be ignored. </p>
<p>The risk with passivity is you become disconnected with how you think about yourself or your organisation and how others think. Over time that gulf can become a problem if you forget about the feelings of others. Another risk is that other people can take control of your narrative, which can reach a point of no return when whatever you say or do will not persuade people to think differently about who you are. </p>
<p>At the other end of the spectrum is the dark side of reputation management. This is an obsessiveness that can see individuals and organisations become consumed by what others think and contribute to bad judgment. </p>
<p>Think of the incredible hype and media attention surrounding the disastrous <a href="https://www.bbc.co.uk/news/newsbeat-46904445">Fyre festival</a> or the supposedly revolutionary Theranos blood testing device <a href="https://www.businessinsider.com/theranos-founder-ceo-elizabeth-holmes-life-story-bio-2018-4?r=US&IR=T">that never worked</a>. Both these businesses failed catastrophically and their founders were convicted of fraud.</p>
<p>The key to reputation management therefore, is to be sufficiently proactive without becoming obsessively self-centred in how you present yourself and your organisation to others. While reputation deserves our attention, it should not be the sole focus of our attention or safeguarded at all costs. Reputation is not only about our organisation, ourselves or our narrow set of stakeholders, but our wider responsibility to groups, societies and our planet.</p><img src="https://counter.theconversation.com/content/202918/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Will Harvey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A reputation is worth safeguarding but not at all costs.Will Harvey, Professor of Leadership and Education Director at the University of Bristol Business School, University of BristolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1993112023-02-15T08:38:29Z2023-02-15T08:38:29ZInvisible Trillions review: global capitalism operates beyond the rule of law and threatens democracy<figure><img src="https://images.theconversation.com/files/508894/original/file-20230208-15-42994g.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Achieving greater transparency and accountability in democratic governance and in capitalist economics must occur simultaneously. </span> <span class="attribution"><span class="source">shutterstock</span></span></figcaption></figure><p>Secrecy has become as important for corporations as transparent and taxable profits used to be, according to Raymond W. Baker in his new <a href="https://www.goodreads.com/book/show/60978837-invisible-trillions">book</a> Invisible Trillions. Global capitalism, he argues, operates beyond the rule of law. This contributes to extreme inequality that threatens liberal democracy.</p>
<p>Deals in the financial secrecy system account for half of global economic operations. This is far beyond illicit transfers of funds through corporate under-pricing and overpricing of exports and imports, or the drug and other criminal networks 50 years ago. Tax havens, “shell companies”, anonymous trust accounts, fake foundations and new digitised money laundering technologies have proliferated. Add to that falsified trade. All of this is facilitated by international lawyers, accountants and financial strategists based mostly in rich countries. </p>
<p>The book’s timely contribution is how financial secrecy threatens both free enterprise and political freedoms. Both are critical to dealing with current inequalities afflicting humanity and to meeting challenges in public health, climate, and elsewhere.</p>
<p>Baker indicts the United States as the biggest user of the financial secrecy system, and the biggest recipient of dirty money from around the world. A key indication of the cost of this is that gaps between top and average wages in the US have shot up from 20 to 1 in 1960 to 350 to one today. Had this not occurred, Baker told me he estimates, the middle class would now be better off by US$50 trillion. </p>
<h2>Pioneering work</h2>
<p>A <a href="https://www.amazon.com/Capitalisms-Achilles-Heel-Free-Market-System/dp/1119086612">pioneer</a> in exposing illicit financial flows, Baker is a member of the <a href="https://au.int/sites/default/files/documents/40545-doc-IFFs_REPORT.pdf">High-Level Panel</a> on the subject commissioned by the African Union (AU) and UN Economic Commission for Africa. It was chaired by former South African president Thabo Mbeki from 2011 to 2015. It is suspended pending further funding. Invisible Trillions should spur renewed work by the panel.</p>
<p>The panel’s <a href="https://au.int/sites/default/files/documents/40545-doc-IFFs_REPORT.pdf">2015 report</a> estimated that in the previous half-century, Africa lost over a US$ trillion in illicit money flows. This is about what Africa received in official development assistance over the same period. Baker made a similar finding in his <a href="https://www.amazon.com/Capitalisms-Achilles-Heel-Free-Market-System/dp/1119086612">2005 book</a>, Capitalism’s Achilles Heel. </p>
<p>He began his career as an entrepreneur in Nigeria after independence, applying his 1960 Harvard MBA to launch several successful local businesses in the 1960s and 1970s. After relocating to Washington, DC in the 1980s, he became a guest fellow at the <a href="https://www.brookings.edu/">Brookings Institution</a>. He eventually founded <a href="https://gfintegrity.org/">Global Financial Integrity</a> in 2006. The research institute continues to produce seminal research and policy analysis on all aspects of the secretive world of illicit financial flows.</p>
<h2>Clean up must begin from above</h2>
<p>Baker is cogently critical not only of the complicity of the US and its corporations, but also law firms, auditors and consulting companies that abet tax avoidance, concentration of wealth, and corruption of government officials. He accuses the US and China, which together account <a href="https://statisticstimes.com/economy/united-states-vs-china-economy.php">for over 40% of the world’s nominal GNP</a>, of knowingly exploiting secrecy in global economic relations. </p>
<p>Little wonder that 193 members of the United Nations have pledged to halt illicit financial flows, but with little discernible effect. Meanwhile, the COVID pandemic, the war in Ukraine and climate change worsen inequality within and among nations.</p>
<p>Concise and accessible, Invisible Trillions has three parts:</p>
<ul>
<li><p>Democratic Capitalism at Risk</p></li>
<li><p>Corroding the Commons</p></li>
<li><p>Renewing Democratic Capitalism.</p></li>
</ul>
<h2>Rogue capitalism</h2>
<p>I found Baker’s criticisms of capitalism in the US to be reasonable, his indictments of corruption and authoritarianism illuminating, and his emphasis on fairness, justice, equity and human rights hopeful. America’s leading democracy scholar, <a href="https://politicalscience.stanford.edu/people/larry-diamond">Larry Diamond of Stanford University</a>, wrote the book’s foreword. As he asserts:</p>
<blockquote>
<p>Only radical improvements across the globe in financial transparency and accountability and in regulatory capacity and integrity can break this cycle of political decay and despair. </p>
</blockquote>
<p>Baker, however, carefully avoids analysis of the <a href="https://www.washingtonpost.com/outlook/2018/11/06/united-states-isnt-democracy-and-was-never-intended-be/">structural deficiencies</a> of US democracy. He defers to others to build on his analysis of how secretive concentrations of wealth became possible with the complicity of banks, corporations and “complicit governments” in key chapters of Part II.</p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=669&fit=crop&dpr=1 600w, https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=669&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=669&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=840&fit=crop&dpr=1 754w, https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=840&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/508892/original/file-20230208-26-mlr1kw.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=840&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption"></span>
</figcaption>
</figure>
<p>Although the book is mainly about the “rogue capitalism” of the US, it includes the impact of secrecy on economic behaviour further afield, using seven country case studies. Featured are the two dictatorships – Russia and China – plus a flawed pluralistic democracy, South Africa, an example of <a href="https://theconversation.com/south-africas-state-capture-commission-nears-its-end-after-four-years-was-it-worth-it-182898">state capture</a>. Other examples of where secrecy serves autocrats are Guatemala, Venezuela, Myanmar and Iran.</p>
<p>The South African case shows well the role played by foreign corporations, international lawyers and public relations firms in corruption. Baker concludes Part II with a very short chapter, “Hiding in Silos”. It is critical of western attempts to spread the rule of law while ignoring</p>
<blockquote>
<p>the degree to which the capitalist system (is) operating increasingly beyond the rule of law.</p>
</blockquote>
<p>This sets up Part III, in which he proposes ways and means for “Renewing Democratic Capitalism”.</p>
<h2>Renewing democratic capitalism</h2>
<p>In Baker’s view, democracy is self-correcting, but capitalism is not. His main message is: reform capitalism or forfeit democracy.</p>
<p>His suggestions focus on the US and its potential for either causing disaster or preventing it. This will depend, he argues, on the US government requiring greater transparency, accountability and governance reforms by corporations.</p>
<p>He advocates forcing banks and other financial institutions to once again separate lending and investing. And audit firms should not offer costly financial advice – another conflict of interest.</p>
<p>Baker recommends government action on increasing minimum wages to $15 an hour, ensuring universal healthcare, waiving student debt, and a reckoning with “race”. He also urges a reducing inequality among nations. In sum, an agenda much like that of the Biden administration.</p>
<p>Unless national Democratic majorities continue to grow and press effectively for <a href="https://www.amacad.org/ourcommonpurpose/report">bi-partisan democratic reforms</a>, it is difficult to imagine the country playing the kind of constructive democratic role at home or abroad that Baker calls for.</p><img src="https://counter.theconversation.com/content/199311/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John J Stremlau does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Raymond W. Baker says the estimated hundreds of billions of dollars in hidden wealth a decade ago has skyrocketed to trillions today.John J Stremlau, Honorary Professor of International Relations, University of the WitwatersrandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1943332022-11-10T07:05:46Z2022-11-10T07:05:46ZMark Zuckerberg can sack 11,000 workers but shareholders can’t dump him: it’s called ‘management entrenchment’<p>“I want to take accountability for these decisions and for how we got here,” tech billionaire Mark Zuckerberg <a href="https://www.cnbc.com/2022/11/09/meta-to-lay-off-more-than-11000-thousand-employees.html">told</a> the 11,000 staff he sacked this week. </p>
<p>But does he really?</p>
<p>The retrenchment of about <a href="https://www.cnbc.com/2022/11/09/meta-to-lay-off-more-than-11000-thousand-employees.html">13% of the workforce</a> at Meta, owner of Facebook and Instagram, comes as Zuckerberg’s ambitions for a “metaverse” tank. </p>
<p>The company’s net income in the third quarter of 2022 (July to September) was <a href="https://investor.fb.com/home/default.aspx">US$4.4 billion</a> – less than half the US$9.2 billion it made in the same period in 2021. </p>
<p>That’s due to a 5% decline in total revenue and a 20% increase in costs, as the Facebook creator invested in his idea of “an embodied internet – where, instead of just viewing content, you are in it” and readied for a post-COVID boom that never came.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/is-the-metaverse-really-the-future-of-work-192633">Is the metaverse really the future of work?</a>
</strong>
</em>
</p>
<hr>
<p>Since he changed the company’s name to Meta a year ago, its <a href="https://finance.yahoo.com/quote/META/">stock price</a> has fallen more than 70%, from US$345 to US$101. </p>
<figure class="align-center ">
<img alt="Facebook became Meta in 2021, expressing founder Mark Zuckerberg's enthusiasm for the 'metaverse'." src="https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/494594/original/file-20221110-18400-cifa1o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Facebook became Meta in 2021, expressing founder Mark Zuckerberg’s enthusiasm for the ‘metaverse’.</span>
<span class="attribution"><span class="source">Godofredo A. Vásquez/AP</span></span>
</figcaption>
</figure>
<p>Selling is really all the majority of shareholders can do. They are powerless to exert any real influence on Zuckerberg, the company’s chairman and chief executive. </p>
<p>If this had happened to a typical listed company, the chief executive would be under serious pressure from shareholders. But Zuckerberg, who <a href="https://capital.com/facebook-shareholder-who-owns-the-most-meta-stock34">owns about 13.6%</a> of Meta shares, is entrenched due to what is known as a dual-class share structure. </p>
<p>When the company listed on the NASDAQ tech stock index in 2012, most investors got to buy “class A” shares, with each share being worth one vote at company general meetings. </p>
<p>A few investors were issued class B shares, which are not publicly traded and are worth ten votes each. </p>
<p>As of <a href="https://capital.com/facebook-shareholder-who-owns-the-most-meta-stock">January 2022</a> there were about 2.3 billion class A shares in Meta, and 412.86 million class B shares. Although class B shares represent just 15% of total stock, they represent 64% of the votes. It means Zuckerberg alone controls more than 57% of votes – meaning the only way he can be removed as chief executive is if he votes himself out.</p>
<h2>A trend in tech stocks</h2>
<p>Meta is not the only US company with dual-class shares. Last year almost half of tech companies, and almost a quarter of all companies, that made their initial public offerings (stock exchange listing) issued dual-class shares. </p>
<hr>
<iframe src="https://flo.uri.sh/visualisation/11765510/embed" title="Interactive or visual content" class="flourish-embed-iframe" frameborder="0" scrolling="no" style="width:100%;height:600px;" sandbox="allow-same-origin allow-forms allow-scripts allow-downloads allow-popups allow-popups-to-escape-sandbox allow-top-navigation-by-user-activation" width="100%" height="400"></iframe>
<div style="width:100%!;margin-top:4px!important;text-align:right!important;"><a class="flourish-credit" href="https://public.flourish.studio/visualisation/11765510/?utm_source=embed&utm_campaign=visualisation/11765510" target="_top"><img alt="Made with Flourish" src="https://public.flourish.studio/resources/made_with_flourish.svg"> </a></div>
<hr>
<p>This is despite <a href="https://www.sec.gov/news/speech/fleming-dual-class-shares-recipe-disaster">considerable evidence</a> of the problems dual-class shares bring – as demonstrated by Meta’s trajectory.</p>
<p>Protection from the usual accountability to shareholders leads to self-interested, complacent and lazy management. Companies <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2009.01477.x">with dual-class structures</a> invest less efficiently and make worse takeover decisions, but pay their executives more. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/why-metas-share-price-collapse-is-good-news-for-the-future-of-social-media-193482">Why Meta's share price collapse is good news for the future of social media</a>
</strong>
</em>
</p>
<hr>
<p>Investors cannot vote Zuckerberg out. Their only real option is to sell their shares. Yet despite shares falling 70% in value, Meta’s approach has yet to change.</p>
<p>It’s a cautionary tale that should signal to investors the risks of investing in such companies – and highlight to policymakers and regulators the danger of allowing dual-class structures.</p><img src="https://counter.theconversation.com/content/194333/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With less than 14% of shares, Meta’s chairman and chief executive controls the majority of votes because of the tech company’s dual-class share structure.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1892012022-09-07T18:36:25Z2022-09-07T18:36:25ZBoards of directors, not governments, must prevent scandals like Hockey Canada’s<figure><img src="https://images.theconversation.com/files/482146/original/file-20220831-22-oupmmb.jpg?ixlib=rb-1.1.0&rect=62%2C83%2C6874%2C2850&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There's a void of responsible leadership at Hockey Canada and other scandal-plagued organizations. Governments can't fix those systemic problems.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><iframe style="width: 100%; height: 100px; border: none; position: relative; z-index: 1;" allowtransparency="" allow="clipboard-read; clipboard-write" src="https://narrations.ad-auris.com/widget/the-conversation-canada/boards-of-directors--not-governments--must-prevent-scandals-like-hockey-canada-s" width="100%" height="400"></iframe>
<p>The Hockey Canada scandal has <a href="https://theconversation.com/addressing-athlete-abuse-in-canadian-sport-requires-internal-change-and-external-investigators-188783">sparked anger and outrage</a>. Many argue the Canadian government should take action.</p>
<p>We saw similar cries for action with the <a href="https://www.cbc.ca/news/politics/ottawa-demanding-improve-network-rogers-outage-1.6516970">major Rogers service outage in July 2022</a>. And when <a href="https://www.northernontariobusiness.com/industry-news/training-education/laurentian-on-the-home-stretch-of-ccaa-lawyer-says-5423555">Laurentian University sought creditor protection</a> under the Companies’ Creditors Arrangement Act in 2021, <a href="https://www.auditor.on.ca/en/content/specialreports/specialreports/Laurentian-U_Preliminary_Perspective_en.pdf">the Ontario Auditor General</a> was called in. </p>
<p>When things go south, we all want a remedy, and it’s easy to ask the government to step in. Realistically, however, we can’t expect governments to solve all problems.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/whats-the-point-of-parliamentary-committees-probing-entities-like-rogers-and-hockey-canada-188260">What's the point of parliamentary committees probing entities like Rogers and Hockey Canada?</a>
</strong>
</em>
</p>
<hr>
<h2>The government as last resort</h2>
<p>Government action should be the last resort when things go sour with non-government organizations, not the first. These corporations have boards and they must be held to account in the first place. </p>
<p>Governments should set overarching policies, including regulatory guidelines and processes, that allow the non-governmental sector — private and not-for-profit — to develop products and services within those policies. Each must stay in its own lane.</p>
<p>The requirement for governance is the same for both private and not-for-profit organizations, while the motivation is different: for-profit corporations act in self-interest, whereas not-for-profit must act in the public interest. Problems arise when not-for-profit companies begin operating in self-interest.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-good-governance-can-stop-toxic-bro-behaviour-at-companies-145826">How good governance can stop toxic 'bro behaviour' at companies</a>
</strong>
</em>
</p>
<hr>
<p>When things go awry, the first question should be: <a href="https://chartthefuture.ca/assets/uploads/img/Where-Were-the-Directors-the-Dey-Report-optimized.pdf">“Where were the directors?”</a> In 1994, businessman Peter Dey coined that phrase when he was called in to head a review committee about governance practices for publicly listed companies on the Toronto Stock Exchange.</p>
<p>His report outlined basic principles of board independence from management, as well as the overarching need for oversight. While aimed at private companies, the principles apply to all types of organizations. The principle that “<a href="https://corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/eng/cs06643.html">directors are responsible for supervising the activities of the corporation and for making decisions regarding those activities</a>” is now codified in law. </p>
<p>While managers are responsible for the day-to-day operation of the corporation, boards of directors must provide oversight because they’re responsible for all material aspects of the corporation.</p>
<p>Others have weighed in on governance, since it’s an important part of public policy. In a recent book, authors Gerry Brown and Randall Peterson talk about the corporate dysfunctions everyone should understand in <a href="https://link.springer.com/chapter/10.1007/978-3-030-91658-9_1"><em>Disaster in the Boardroom</em></a>.</p>
<p>They argue that a board should never be subordinated to narrow interests, nor become a conforming one, because it can slowly become dysfunctional and lead to disaster. A well-functioning board must exercise its duty of care conscientiously and diligently, independent of management, and not just try to get along — whether with the CEO or other board members.</p>
<h2>Failed governance at Hockey Canada</h2>
<p>The Hockey Canada saga is a prime example of failed board governance, rather than a government problem. </p>
<p>It’s a not-for-profit organization that performs vital public interest functions, and in return can receive substantial public and private subsidies, membership fees, tax deductions and exemptions. Consequently, the public and members Hockey Canada represents are entitled to know how it spends their resources and how they conduct their operations.</p>
<p>As a not-for-profit organization, it must work in the public interest and has ethical obligations. </p>
<figure class="align-center ">
<img alt="Two men, one with his hand against his jaw, sit in a hearing room." src="https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=427&fit=crop&dpr=1 600w, https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=427&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=427&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=537&fit=crop&dpr=1 754w, https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=537&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/482142/original/file-20220831-12-y7jwpy.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=537&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Scott Smith, Hockey Canada president and chief operating officer, left, and Hockey Canada Chief Financial Officer Brian Cairo, appear at a House of Commons committee hearing in July 2022 looking into how Hockey Canada handled allegations of sexual assault and a subsequent lawsuit.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Sean Kilpatrick</span></span>
</figcaption>
</figure>
<p>Hockey Canada governance has proven over the years that it is lackadaisical. It acts like a secret society for the benefit of its members, and not for the common good. Its <a href="https://cdn.hockeycanada.ca/hockey-canada/Corporate/About/Downloads/2020-21-annual-report-e.pdf">annual report</a> fails its members, its funders, its sponsors and the general public for an organization of its size. The report is all about branding, not accountability.</p>
<p>The financial section of the document suffers from a glaring lack of transparency and doesn’t provide enough details on sources of revenue and expenditures for sponsors and members’ oversight into the organization’s decisions. </p>
<p>From the data publicly provided, it’s nearly impossible to get a clear understanding of the source of funds and the use of those funds. </p>
<h2>More transparency required</h2>
<p>For an organization of its size, audited statements should be made public. CEO compensation should also be public, along with that of the senior management and all board directors. Minutes of board meetings should be published. The nomination process for board members should also be more transparent. </p>
<p>These would represent the first steps to improving governance. </p>
<p>Good board governance starts with understanding the mandate and role of the board, followed by structure, robust processes and practices. It’s the duty of the board to provide oversight to all material operations of the corporation and it is the board’s primary duty to supervise management — not the government. </p>
<p>Firing people without changing the playbook will only see a repeat. </p>
<p>Hopefully former <a href="https://www.cbc.ca/news/politics/hockey-canada-appoints-former-supreme-court-judge-for-governance-review-1.6541254">Supreme Court justice Thomas Cromwell, who was recently commissioned to lead a governance review of Hockey Canada</a>, will do his work freely and independently in order to generate a much-anticipated reflection on the governance of Hockey Canada and similar not-for-profit organizations.</p><img src="https://counter.theconversation.com/content/189201/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Good board governance starts with understanding the mandate and role of the board and then follows through with structure, robust processes and practices.Eric Champagne, Professeur agrégé, École d'études politique, Directeur, Centre d'études en gouvernance / Associate professor, School of Political Studies, Director, Centre on Governance, L’Université d’Ottawa/University of OttawaAlex Beraskow, Affiliated Researcher, Centre on Governance, University of Ottawa, L’Université d’Ottawa/University of OttawaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1817732022-04-25T23:34:11Z2022-04-25T23:34:11ZElon Musk argues Twitter is better off without a board of directors – is he right?<figure><img src="https://images.theconversation.com/files/459609/original/file-20220425-2721-hz88wk.jpg?ixlib=rb-1.1.0&rect=108%2C54%2C5062%2C3225&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Twitter may soon be without the benefits – or the problems – of a public board of directors.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/illustration/large-boardroom-business-meeting-royalty-free-illustration/508876372?adppopup=true">A-Digit/DigitalVision Vectors via Getty Images</a></span></figcaption></figure><p><a href="https://www.wsj.com/livecoverage/twitter-musk-deal/card/elon-musk-s-twitter-acquisition-a-timeline-fI3LhbZ0Q1koe3aUSKHZ">After a wild ride</a>, it looks like Elon Musk’s bid to buy Twitter <a href="https://www.nytimes.com/2022/10/04/technology/elon-musk-twitter-deal.html">may be back on</a>. </p>
<p><a href="https://investor.twitterinc.com/corporate-governance/board-of-directors/default.aspx">Twitter’s board of directors</a> had sued the Tesla billionaire in July 2022 when Musk tried to terminate the US$44 billion deal. The board has yet to drop its lawsuit, with a trial <a href="https://www.bloomberg.com/news/articles/2022-10-05/musk-twitter-judge-says-oct-17-trial-is-still-on-for-now?srnd=premium&sref=Hjm5biAW">still scheduled to begin Oct. 17, 2022</a>, which was intended to force Musk to complete the buyout. </p>
<p>The board has in fact been at the center of this saga since the beginning, when Musk launched his hostile takeover bid while <a href="https://www.barrons.com/articles/how-twitter-board-stock-ownership-compares-musk-tesla-51650304124">criticizing board members</a> for owning almost no shares of the company they oversee. Twitter founder Jack Dorsey <a href="https://www.cnbc.com/2022/04/18/twitters-ex-ceo-criticizes-board-musk-says-they-own-almost-no-shares.html">called the board the “dysfunction of the company</a>.”</p>
<p><a href="https://scholar.google.com/citations?user=j97Zw9IAAAAJ&hl=en&oi=ao">As experts</a> on <a href="https://scholar.google.com/citations?user=dvEc5eUAAAAJ&hl=en&oi=ao">corporate governance</a>, we believe this feud raised two important corporate governance questions: What purpose does a board of directors serve? And does it matter if a member owns company stock or not? </p>
<h2>‘A bad board will kill’</h2>
<p>“Good boards don’t create good companies, but a bad board will kill a company every time.”</p>
<p>Venture capitalist Fred Destin <a href="https://www.linkedin.com/pulse/valuation-vs-bad-vc-tradeoff-fred-destin/">wrote that in 2018</a>, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently in light of Musk’s hostile bid. It even seemed to get a nod from Dorsey himself <a href="https://twitter.com/jack/status/1515536972995088385?ref_src=twsrc%5Etfw">when he replied to a tweet</a> containing the quote with “big facts.” </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A white man with a long beard and gray suit stares straight ahead while appearing to open his mouth to speak" src="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=393&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=393&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=393&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=494&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=494&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459601/original/file-20220425-116757-cd73cw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=494&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Twitter founder Jack Dorsey called the board the ‘dysfunction of the company.’</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Twitter-Dorsey/f8c70619918548d3a8a2ebe581cbb948/photo?Query=jack%20dorsey&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=290&currentItemNo=6">Michael Reynolds/Pool Photo via AP</a></span>
</figcaption>
</figure>
<p>This tweet and the general conversation that has emerged have important implications for understanding boards and their role in shepherding a company. </p>
<p>Broadly speaking, a <a href="https://www.boardeffect.com/blog/10-basic-responsibilities-board-members/">board’s most important roles</a> include hiring, paying and monitoring the chief executive officer.</p>
<p>Academic research suggests that board members at large companies – who <a href="https://work.chron.com/director-corporate-board-paid-19587.html">typically receive generous compensation packages</a> – may be limited in their ability to perform these tasks effectively. In our work, we found that <a href="https://doi.org/10.5465/19416520.2016.1120957">boards often find it impossible</a> to conduct adequate monitoring and rein in wayward CEOs because there’s just so much information for modern boards to process with their <a href="https://www.rhsmith.umd.edu/research/upside-having-busy-board-members">limited time</a>. And the social dynamics involved in the board also make it difficult for directors to speak up and oppose other directors.</p>
<p>In a separate study involving face-to-face interviews with directors, <a href="https://doi.org/10.1002/smj.3320">we were consistently told</a> that directors take their board service seriously and operate with their companies’ best interests in mind. But they do so with an eye toward collaborating with the CEO and the rest of the executive team rather than serving as impartial observers, as their “independent” status suggests they should. </p>
<p>While our work didn’t focus on this, if the board and the CEO fundamentally disagree about the direction of company – which was often the case <a href="https://nymag.com/intelligencer/2021/11/jack-dorsey-failed-twitter-parag-agrawal-will-be-way-better.html">between Dorsey and the Twitter board</a> – it would certainly be problematic and could lead to less than optimal decisions being made. </p>
<p>In other words, a board that isn’t functioning effectively can definitely destroy a company’s value. And <a href="https://www.newyorker.com/culture/infinite-scroll/why-would-elon-musk-want-to-buy-twitter">some reporting suggests</a> that’s what happened to Twitter, whose <a href="https://finance.yahoo.com/quote/TWTR/">shares were trading at less than half</a> their 2021 peak before Musk disclosed he had <a href="https://www.npr.org/2022/04/05/1090992306/elon-musk-takes-a-9-stake-in-twitter-to-become-its-largest-shareholder">amassed a 9% ownership stake</a>. </p>
<h2>A raider’s lament</h2>
<p>That brings us to the next question: Does not owning a significant stake in a company you oversee make it more likely that you’ll run it into the ground, as Musk seemed to suggest? </p>
<p>A few days after <a href="https://theconversation.com/elon-musks-bid-spotlights-twitters-unique-role-in-public-discourse-and-what-changes-might-be-in-store-181374">making his takeover offer</a> on April 14, the billionaire, <a href="https://twitter.com/elonmusk/status/1515403974802870279">responding to a tweet</a> showing how few shares Twitter board members own, posted that its directors’ “economic interests are simply not aligned with shareholders.”</p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1515403974802870279"}"></div></p>
<p>Musk’s arguments harked back to takeover bids from the 1980s in which activist investors – or “corporate raiders” – would argue that executives’ interests <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/activist-shareholders">did not align with those of shareholders</a>. As Gordon Gekko from the film “Wall Street” <a href="https://www.americanrhetoric.com/MovieSpeeches/moviespeechwallstreet.html">famously railed against executives</a> of a business he wanted to take over, “Today, management has no stake in the company!”</p>
<p>Musk’s words echo Gekko’s “greed is good” speech, except in regard to independent directors, who <a href="https://www.spencerstuart.com/-/media/2021/october/ssbi2021/us-spencer-stuart-board-index-2021.pdf">comprise the vast majority</a> of corporate boards. By definition, an independent or outside director is one who doesn’t hold an executive role in running the company, such as chief executive officer or chief financial officer. </p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/PF_iorX_MAw?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">‘Greed is good’</span></figcaption>
</figure>
<p>In reality, Twitter’s board share ownership is very similar to that of other companies. </p>
<p>Independent Twitter directors <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000114036122014049/ny20001921x3_def14a.htm">held a median ownership stake of 0.003%</a> as of May 2022. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s <a href="https://www.sec.gov/Archives/edgar/data/0001318605/000156459021044307/tsla-pre14a_20210813.htm">company Tesla is similarly minuscule, at 0.23%</a>. </p>
<p>Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity. </p>
<h2>Mixed research</h2>
<p>Academic researchers on effective corporate governance in the 1970s <a href="https://doi.org/10.1086/467037">argued that outside directors</a> should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, <a href="https://doi.org/10.1177/0149206312460680">management scholars have suggested</a> that higher stakes could <a href="https://doi.org/10.5465/amr.2014.0066">provide a way to motivate</a> directors to monitor management and make decisions more in line with shareholder interests. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A screenshot of a webpage depicting a round mug shot of a white man in sunglasses on a wide picture of planets and the words Elon Musk on his twitter page" src="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/459604/original/file-20220425-22-6csb6l.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Elon Musk, who currently has about 108 million Twitter followers, has revived his offer to buy the social media giant.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/TwitterMusk/f72e6080fc7c42ce98b2ba27802182d6/photo?Query=elon%20musk&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1175&currentItemNo=6">AP Photo/Eric Risberg</a></span>
</figcaption>
</figure>
<p>Some researchers have found that boards with larger ownership stakes <a href="https://doi.org/10.1017/S0022109013000045">can improve</a> a <a href="https://doi.org/10.1086/497048">company’s operational performance</a> and <a href="https://www.doi.org/10.5465/256355">better align outside directors</a> with the <a href="https://doi.org/10.1016/0304-405X(89)90084-6">interests of shareholders</a>. </p>
<p>But other work that examined multiple studies shows the impact of director stock ownership <a href="https://www.pearson.com/us/higher-education/program/Larcker-Corporate-Governance-Matters-A-Closer-Look-at-Organizational-Choices-and-Their-Consequences-2nd-Edition/PGM265559.html">is mixed at best</a>, with some studies suggesting higher stakes potentially lead to negative outcomes, such as <a href="https://doi.org/10.1016/j.jcorpfin.2005.08.005">excessive executive and director compensation</a>.</p>
<p>Since the passage of the Sarbanes–Oxley Act of 2002 <a href="https://www.sarbanes-oxley-101.com/sarbanes-oxley-faq.htm">after massive accounting scandals</a> at Enron, WorldCom and elsewhere, corporate governance issues such as board oversight <a href="https://www.nyulawreview.org/wp-content/uploads/2018/08/NYULawReview-82-4-Brown.pdf">have become increasingly important</a>. This led to a number of changes intended to align the interests of managers and those of shareholders, including a focus on board independence and adjusting executive compensation. </p>
<p>Although our research shows boards are limited in their ability to monitor management, <a href="https://theconversation.com/elon-musk-argues-twitter-would-be-better-off-in-private-rather-than-public-hands-corporate-governance-scholars-would-disagree-181382">they’re still better than nothing</a>.</p>
<p>In his original letter to shareholders announcing his bid, Musk <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922045641/tm2212748d1_sc13da.htm">vowed to “unlock” Twitter’s potential</a> as a <a href="https://www.investopedia.com/ask/answers/05/publictoprivate.asp">private company</a>, without a public board. We may finally learn if he’s right.</p>
<p><em>This is article has been updated to reflect the changing status of the Twitter deal.</em></p><img src="https://counter.theconversation.com/content/181773/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Musk, who revived his bid for Twitter after the social media company’s board sued to enforce the deal, has been very critical of its board.Michael Withers, Associate Professor of Business, Texas A&M UniversitySteven Boivie, Professor of Management, Texas A&M UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1813562022-04-20T08:47:36Z2022-04-20T08:47:36ZTo stay in the game directors need to rewire corporate missions and bring new faces to the table<figure><img src="https://images.theconversation.com/files/458140/original/file-20220414-26-qodhm3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty images</span></span></figcaption></figure><p>In the first ever case of its kind, <a href="https://www.clientearth.org/">ClientEarth</a> – a UK-based organisation that works with NGOS to fight legal battles on environmental issues – is taking <a href="http://clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/">Shell’s board of directors to court</a> for failing to properly prepare for an energy transition. This involves moving from carbon-emitting fossil fuels in line with climate science, and at a pace and scale that aligns with the <a href="https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement">Paris Agreement</a> goal to keep global temperature rises to below 1.5°C by 2050. </p>
<p>In mid-March the campaign group <a href="https://www.clientearth.org/latest/latest-updates/news/we-re-taking-legal-action-against-shell-s-board-for-mismanaging-climate-risk/">began legal proceedings</a> based on the claim that Shell board’s mismanagement of climate risk puts it in breach of its duties under the <a href="https://www.legislation.gov.uk/ukpga/2006/46/contents">UK Companies Act</a>. Under English law, company directors have a duty to assess, disclose and manage material risks to the company.</p>
<p>In an age-old narrative of litigation where the interests of the planet and public are often out-gunned by the corporate dollar, pound, renminbi or rupee, the entrance of an empowered NGO into the courtroom arena to strike at the legal duties of the board <a href="https://www.tcfdhub.org/wp-content/uploads/2021/06/Primer_on_Climate_Change_Directors_Duties_and_Disclosure_Obligations_CGI_CCLI.pdf">changes the rules of the game</a>. And it should make board directors everywhere sit up and take note.</p>
<p>In March, the Institute of Directors <a href="https://www.iod.com/news-campaigns/news/articles/IoD-It-is-no-longer-tenable-for-British-people-to-hold-board-positions-in-Russian-companies">stated</a> it was:</p>
<blockquote>
<p>no longer tenable for British directors to be involved in governance roles in the Russian economy. </p>
</blockquote>
<p>It called on them to do their “<a href="https://www.iod.com/news-campaigns/news/articles/IoD-It-is-no-longer-tenable-for-British-people-to-hold-board-positions-in-Russian-companies">moral duty</a>” and resign over the invasion of Ukraine. </p>
<p>In a poll of its members and wider community, 86% supported the view that all British directors should now resign their Russian board mandates. Many answered the call and relinquished their well-paid positions in Russian companies, but some chose to stay put, risking public opprobrium and legal action.</p>
<p>Larry Fink, US billionaire and chairman and CEO of the investment company BlackRock asked CEOs in his now-familiar annual letter this year if they wanted to be a <a href="https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter">dodo or a phoenix</a>. He stated categorically that stakeholder capitalism</p>
<blockquote>
<p>is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.</p>
</blockquote>
<p>Into this context the Intergovernmental Panel on Climate Change <a href="https://theconversation.com/ipcc-report-where-to-begin-slashing-emissions-180919">released</a> its latest assessments. They outlined with brutal clarity the effects of climate change and the narrowing window for action left to humanity. In his response to the latest mitigation report UN Secretary <a href="https://www.un.org/sg/en/node/262847">General Antonio Guterres</a> laid out the facts for everyone when he said:</p>
<blockquote>
<p>Some government and business leaders are saying one thing – but doing another. Simply put, they are lying.</p>
</blockquote>
<p>Boards are facing pressure from inside and outside the tent to find relevancy and step up to the new world order. </p>
<p>And it is clear that to respond to this new challenge, board directors need to pay full attention to the state of society and the planet for the simple reason these are two vital elements of their operating space. If our climate and nature can’t thrive, nor can business. As many an activist and sustainability thought-leader has put it “you can’t do business on a dead planet”.</p>
<p>Social instability or violent conflict can undermine economic growth and development – revolution or war, even more so. Scarcity of vital ecological “infrastructure” - such as water, or the agricultural conditions needed to feed the near-nine-billion global population, will threaten the business prospects or operations of many companies.</p>
<p>Building on earlier scholarship work on <a href="https://policydialogue.org/publications/working-papers/transparency-in-the-profit-making-world/">corporate transparency</a>, my current research focus on shifts in corporate law and governance indicates that directors will increasingly be held to account for failures to take such external risks – and their companies’ contribution to causing them – into account.</p>
<p>From many years of experience serving and advising boards, my sense is that directors are “diligently coasting”. They deliver what’s expected rather than seeking what is needed. </p>
<p>Now, a step-change is needed. </p>
<h2>The danger of being blind-sided</h2>
<p>A combination of systemic shocks and global pressures suggests a seismic ratcheting up of risks and also social, legal and political changes. When pent-up concern suddenly catalyses an epochral reaction, businesses may be blind-sided or flat-footed in response. A critical piece of self-reflection is recognising that it is often the business-as-usual practices of the for-profit sector that is eroding social well-being and environmental integrity, or that of their wider value and supply chains.</p>
<p>In theory at least, non-executive directors are best placed to bring this perspective to bear – provided they are sufficiently well informed and have the independence of mind to challenge a status quo approach. They will need to provide new direction and oversight.</p>
<p>Hence, resetting the mission of a company so that profitability is a means to an end – the organisation’s social purpose – and not an end in itself is essential.</p>
<p>In practice boards must have the right information at their disposal so that they can benefit from strategic foresight. To this end they need to build their ability to understand the complex context in which business must operate, the tough systemic changes that characterise the current era of global change (social, economic and political as well as environmental). In turn, this will enable directors to ask the right questions of their executives.</p>
<h2>Courage needed, and new skills</h2>
<p>The change will take courage as well as new skills – and in most cases new and different kinds of board members. Greater gender, ethnic and cultural diversity are vital, and recruitment must look beyond business alone, to welcome members from the non-profit and public interest sector. Many boards are already progressing with diversity and inclusion, often in response to the regulatory environment. In Norway, Spain, France and Iceland, for example, the law requires that women make up <a href="https://diligent.com/en-gb/blog/contrasting-corporate-governance-in-uk-europe-us/">40% of board members</a> at publicly listed companies.</p>
<p>However, age continues to be a blindspot. A <a href="https://www.pwc.com/us/en/governance-insights-center/annual-corporate-directors-survey/assets/pwc-annual-corporate-directors-survey-2018.pdf">2018 survey</a> by the consultancy firm PricewaterhouseCoopers showed that the average age of board directors in top US listed companies was 63 and with just 6% of directors 50 or younger. Only 21% of directors highlighting the importance of age diversity.</p>
<p>Younger generations are looking down the barrel of an increasingly volatile world where their futures are at stake. Without a doubt they must have representation at the table to challenge existing narratives and accelerate understanding and action.</p>
<p>These unusual board voices, often bringing with them the perspectives of those willing to risk everything – freedom, career, media opprobrium – to change the climate, nature and social sustainability discourse, offer the fastest route to positive disruption. Their meaningful inclusion is vital; the future legitimacy of the corporate board will depend on it.</p>
<p>It is time for boards to challenge the sacred cows of business-as-usual and refashion themselves in response to the new reality. They must step up to meet the challenge of the age and ask the difficult questions. This is the gauntlet we at the University of Cambridge’s Institute for Sustainability Leadership are throwing down to boards – to reset their mission and rewire their approach to leadership, so as to fundamentally rethink the role of business in society and the economy.</p><img src="https://counter.theconversation.com/content/181356/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Calland is a Fellow of the University of Cambridge’s Institute for Sustainability Leadership (CISL), and leads its work on and with Boards. He is the co-chair of the UN Secretary-General's Expert Group on International Climate Finance and co-director of the African Climate Finance Hub. He is also a founding partner of political economy consultancy, The Paternoster Group, and a member of the advisory council of the Council for the Advancement of the South African Constitution.</span></em></p>Companies need to reset their mission so that profitability is a means to an end - the organisation’s social purpose - not an end in itself is essential.Richard Calland, Associate Professor in Public Law, University of Cape TownLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1813822022-04-14T20:45:45Z2022-04-14T20:45:45ZElon Musk argues Twitter would be better off in private rather than public hands – corporate governance scholars would disagree<figure><img src="https://images.theconversation.com/files/458212/original/file-20220414-95-m9677t.jpg?ixlib=rb-1.1.0&rect=197%2C89%2C2797%2C1904&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Musk argues Twitter is better off in private hands – his. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/USElonMuskTwitter/380ba2684d7c49338ab4b5e0a26cf185/photo?Query=musk%20twitter&mediaType=photo&sortBy=creationdatetime:desc&dateRange=Anytime&totalCount=67&currentItemNo=2">Patrick Pleul/Pool via AP</a></span></figcaption></figure><p>Billionaire Elon Musk says he <a href="https://www.cnbc.com/2022/04/14/elon-musk-offers-to-buy-twitter-for-54point20-a-share-saying-it-needs-to-be-transformed-as-private-company.html">wants to take Twitter private</a> by buying 100% of its publicly held shares in a deal worth US$43 billion. </p>
<p>In a letter to the board, he said that <a href="https://www.sec.gov/Archives/edgar/data/0001418091/000110465922045641/tm2212748d1_sc13da.htm">Twitter can’t serve</a> as a platform for free speech as a public company. “Twitter needs to be transformed as a private company,” he wrote. </p>
<p>I’m a <a href="https://damore-mckim.northeastern.edu/people/bert-a-spector/">scholar in corporate leadership and governance</a>. A big problem with private companies is they lack the safeguards of public corporations – like outside ownership and independent oversight. </p>
<h2>Public ownership</h2>
<p>Some years ago, I explored the distinction between public and private companies in detail when the American Bar Association <a href="https://www.americanbar.org/products/inv/book/137420869/">invited me to write</a> about what young corporate lawyers need to understand about how business works. Based on that research, I want to point to an important set of distinctions between public and private corporations.</p>
<p>Public corporations are those businesses that trade their stock on a public market, such as the New York Stock Exchange. They are regulated by the Securities and Exchange Commission and are affected by a number of important federal laws, most notably the <a href="https://www.complianceonline.com/corporate-and-criminal-fraud-accountability-act-overview-and-summary-of-requirements-12610-prdad">Corporate Fraud Accountability Act</a>, popularly known as Sarbanes-Oxley. </p>
<p>Private companies do not trade their stock publicly. Ownership is tightly held by a limited number of chosen investors. As such, they escape the scrutiny of these public overseers.</p>
<h2>Outside oversight</h2>
<p>The CEO of a public company is subject to an array of constraints and a varying but always substantial degree of oversight. </p>
<p>There are boards of directors, of course, that review all major strategic decisions. And there are separate committees composed entirely of independent directors who don’t have any ongoing involvement in running the business that assess CEO performance and determine compensation.</p>
<p>In addition, public shareholders are entitled to vote directly on the compensation awarded to top executives. Whole categories of CEO decisions, including mergers and acquisitions, international expansions and changes in the corporation’s charter, are subject to the opinion of shareholders and directors.</p>
<p>The composition of the board of directors is also regulated by law. Half the directors must be <a href="https://corporatefinanceinstitute.com/resources/careers/jobs/independent-director/">independent of the company</a>. And the board committees charged with conducting audits, hiring and firing the CEO and determining executive pay must be 100% independent. Company insiders and close family members may sit on public boards but are not counted as independent. </p>
<h2>Full disclosure</h2>
<p>The <a href="http://www.legalandcompliance.com/securities-resources/sec-requirements-for-public-companies">Securities and Exchange Commission requires</a> the CEOs of public corporations to make full and public disclosures of their financial performance. Regular reports require disclosure of operating expenses, significant partnerships, liabilities, strategies, risks and plans.</p>
<p>Additionally, public companies must hire an independent auditing firm approved by the <a href="https://pcaobus.org/">Public Company Accounting Oversight Board</a> to conduct and verify the thoroughness and accuracy of those financial statements. Any fraudulent reporting can result in criminal charges against the CEO and chief financial officer.</p>
<p>These rules are all intended to safeguard the integrity of corporations, to help make them transparent to public investors and to guard against corruption. They are <a href="https://www.londontfe.com/blog/Top-10-steps-to-improving-Corporate-Governance/">far from perfect</a>, but they are helpful. And private corporations are not required to comply with any of them.</p>
<h2>Good governance</h2>
<p>Well-governed companies, such as <a href="https://ethicalboardroom.com/corporate-governance-winners-2018-the-americas/">Microsoft and PepsiCo</a>, <a href="http://www.nber.org/papers/w15912">tend to outperform</a> poorly governed ones, often dramatically. That’s largely due to all the factors noted above that are required for public companies. </p>
<p>This doesn’t mean all private companies are governed poorly – or that all public businesses are governed well. But key ingredients of good governance, especially accountability, are baked into public corporations in a way that they aren’t for private companies. </p>
<p>[<em>Over 150,000 readers rely on The Conversation’s newsletters to understand the world.</em> <a href="https://memberservices.theconversation.com/newsletters/?source=inline-150ksignup">Sign up today</a>.]</p>
<p>Whether or not Twitter would become a better platform for free speech as a private company is debatable. But management research suggests it would make it perform worse as a business. </p>
<p><em>This story is an updated version of an <a href="https://theconversation.com/trump-organization-indictment-hints-at-downsides-of-having-no-independent-oversight-unlike-companies-traded-on-wall-street-163698">article published</a> on July 1, 2021.</em></p><img src="https://counter.theconversation.com/content/181382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bert Spector does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Public companies have many governance safeguards that private ones lack, such as independent oversight and transparency.Bert Spector, Associate Professor of International Business and Strategy at the D'Amore-McKim School of Business, Northeastern UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1719522021-11-29T19:11:21Z2021-11-29T19:11:21Z2 out of 3 members of university governing bodies have no professional expertise in the sector. There’s the making of a crisis<figure><img src="https://images.theconversation.com/files/433872/original/file-20211125-21-f8ifml.jpg?ixlib=rb-1.1.0&rect=637%2C0%2C2763%2C1835&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>To say Australian universities are in crisis is to state the obvious. A <a href="https://theconversation.com/universities-lost-6-of-their-revenue-in-2020-and-the-next-2-years-are-looking-worse-166749">common narrative</a> suggests the most immediate cause of the current crisis is “reduced international student revenue and income from investments, such as dividends” during the pandemic. Some correlation is undeniable. However, many <a href="https://tribunemag.co.uk/2020/10/how-neoliberal-reforms-led-to-the-student-covid-crisis">commentators have noted</a> that the problems besetting our universities transcend financial issues alone and predate the pandemic. </p>
<p>The root causes, we suggest, lie in radical changes in how Australian universities are governed. The shift toward a quasi-corporate model of governance included a significant change in the composition of universities’ governing bodies.</p>
<p>In the past, a majority of their members had a background in the tertiary education sector. Today barely a third do, our research for <a href="https://publicuniversities.org">Academics for Public Universities</a> has found. </p>
<p><a href="https://www.uts.edu.au/research-and-teaching/our-research/centre-business-and-social-innovation/news/rethinking-australian-higher-education">Some commentators</a> see a more corporate form of university governance as both inevitable and necessary. We believe it is neither. The increasing detachment of university governance from the university community itself has serious consequences. </p>
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Read more:
<a href="https://theconversation.com/universities-are-not-corporations-600-australian-academics-call-for-change-to-uni-governance-structures-143254">'Universities are not corporations': 600 Australian academics call for change to uni governance structures</a>
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<h2>COVID brought crises to a head</h2>
<p>A <a href="https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/3830/attachments/original/1631479548/An_Avoidable_Catastrophe_FINAL.pdf?1631479548">recent report</a> by The Australia Institute calculated more than 40,000 university jobs were lost in the year to May 2021. That equates to 20% of the total pre-pandemic university workforce, a rate <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release">two to three times greater</a> than overall pandemic job losses in Australia. The number also exceeds the <a href="https://www.abc.net.au/news/2019-07-11/fact-check-are-there-54000-jobs-in-thermal-coal-mining/11198150">jobs that would be lost</a> in total if all thermal coal mining in Australia were to end.</p>
<p>The casualisation of the academic workforce has also reached <a href="https://www.abc.net.au/news/2020-07-17/university-casual-workforce-redundancies-dirty-secret/12462030">staggering proportions</a>. The related issues of <a href="https://theconversation.com/wage-theft-and-casual-work-are-built-into-university-business-models-147555">wage theft</a> and <a href="https://www.icac.sa.gov.au/media-release/university-integrity-survey-2020">staff bullying</a> have regularly made the news.</p>
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<a href="https://theconversation.com/wage-theft-and-casual-work-are-built-into-university-business-models-147555">Wage theft and casual work are built into university business models</a>
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<p>Courses are being <a href="https://www.abc.net.au/news/2021-07-16/uwa-social-sciences-cuts-surprise-students-and-staff/100294516">increasingly cut</a>. At the same time the costs to students of certain degrees are increasing. </p>
<p>Even before COVID, students were increasingly being diverted to “self-directed” online modules. This trend reduces direct contact time with lecturers and tutors. It’s a source of the very clear student dissatisfaction and distress <a href="https://www.teqsa.gov.au/latest-news/articles/new-teqsa-report-details-student-experiences-switch-online-learning">reported</a> by the Tertiary Education Quality and Standards Agency. </p>
<p>There are also concerns about the decline of academic freedom. These led to the <a href="https://apo.org.au/node/229131">French review</a> recommendation of a <a href="https://www.dese.gov.au/higher-education-reviews-and-consultations/independent-review-adoption-model-code-freedom-speech-and-academic-freedom">model code</a> for universities. A relevant concern here relates to <a href="https://www.thesaturdaypaper.com.au/life/education/2021/11/27/academy-silences/163793160012955#mtr">dissenting academic members of universities’ governing bodies</a>. </p>
<p>Who has presided over this growing list of problems and predicaments?</p>
<h2>Who governs our public universities?</h2>
<p>At present, bodies commonly named councils (or senates in fewer cases, with one called a board of trustees) govern Australian public universities. Decision-making power ultimately rests with them.</p>
<p>As a result of a <a href="https://theconversation.com/governing-universities-tertiary-experience-no-longer-required-145439">series of changes over the past few decades</a>, these governing bodies are no longer comprised of a majority of academics and students. Instead, they have a majority of external members who are neither enrolled as students nor employed by the university. The governing bodies themselves elect many of these members.</p>
<p>Academics for Public Universities reviewed the composition and expertise (as advertised on university websites) of the governing bodies of all 37 Australian public universities. Of a total of 564 members, only 33% are elected from within the institutions they govern. </p>
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<p>Moreover, only 31.5% have any expertise working in the tertiary sector, while 7.5% are student representatives. The other 61% have professional expertise in fields other than tertiary education. And 33% come from the broader corporate/private/finance/industry sector. </p>
<p>As a result, individual members of universities’ governing bodies inject a great level of belief, dedication and financial and commercial skills, but, by definition, limited professional expertise in tertiary education.</p>
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Read more:
<a href="https://theconversation.com/governing-universities-tertiary-experience-no-longer-required-145439">Governing universities: tertiary experience no longer required</a>
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<h2>It’s not even proper corporate governance</h2>
<p>Ironically, this is a radical departure from corporate governance standards. Our review looked at large registered companies, such as Rio Tinto, Telstra and CSL, whose directors often sit on university councils. Their boards have 73%, 72% and 78% respectively of members with experience in the sectors they operate in.</p>
<p>Australian university governance also represents an anomaly internationally. A majority of academics and student representatives still govern most European universities, according to their charters. </p>
<p>For example, at <a href="https://governance.admin.ox.ac.uk/council/members-council">Oxford</a>, frequently ranked the best university in the world, 77% of governing members have experience in the university sector. And 73% have an explicit academic background. </p>
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<img alt="Academic procession at Oxford University" src="https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/433870/original/file-20211125-23-d0lpv6.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Oxford University has a traditional and much more representative governance model, which continues to serve it well.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
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<p>University managers often <a href="https://theconversation.com/universities-are-not-corporations-600-australian-academics-call-for-change-to-uni-governance-structures-143254#comment_2290733">act as if they are running commercial corporations</a>. It is time to acknowledge this is both inaccurate and inappropriate, as the South Australian Ombudsman <a href="https://www.timeshighereducation.com/news/release-salary-information-ombudsman-tells-adelaide">recently found</a>. </p>
<p>University governing bodies are <a href="https://theconversation.com/unis-are-run-like-corporations-but-their-leaders-are-less-accountable-heres-an-easy-way-to-fix-that-147194">not directly accountable</a> to an equivalent of “shareholders” through an annual general meeting. They are also not truly <a href="https://campusmorningmail.com.au/news/parliament-shrinks-qut-council-not-all-mps-approve/">accountable to the academic communities</a> they lead or to the broader communities they serve. </p>
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Read more:
<a href="https://theconversation.com/unis-are-run-like-corporations-but-their-leaders-are-less-accountable-heres-an-easy-way-to-fix-that-147194">Unis are run like corporations but their leaders are less accountable. Here's an easy way to fix that</a>
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<p>For over two decades now, Australian universities have increasingly been run like businesses by a majority of <a href="http://honisoit.com/2021/11/federation-uni-offers-all-staff-redundancies-replaces-deans-with-ceos/">business-minded experts</a>. The problems laid bare by the COVID-19 crisis seem to point to an abysmal failure of such an approach. </p>
<p>As a recent <a href="https://greens.org.au/campaigns/uni-future">discussion paper</a> released by Greens Senator Mehreen Faruqi argues: “Research and teaching should be governed by public interest and free intellectual inquiry, not the demands and pursuits of corporations” – or a commercial corporate mindset. Unless academic expertise and values return to the centre of a university’s governance structure, we fear not only will such an aspiration not be met, but also the sector-wide crisis unleashed by COVID-19 will be just one of many.</p><img src="https://counter.theconversation.com/content/171952/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alessandro Pelizzon is affiliated with Academics for Public Universities and is an elected academic member of Council at Southern Cross University.</span></em></p><p class="fine-print"><em><span>Adam Lucas is affiliated with Better University Governance (UOW) and Academics for Public Universities.</span></em></p><p class="fine-print"><em><span>Fran Baum receives grants from the ARC, NHMRCt and the Flinders Foundation. She is the co-Chair of the Global Steering Council of the People's Health Movement, a life member of the Public Health Association of Australia and a Fellow of the AAHMS, ASSA, AHPA. </span></em></p><p class="fine-print"><em><span>Justin O'Connor receives funding from the Australia Research Council. He is a member of Academics for Public Universities (APU)</span></em></p><p class="fine-print"><em><span>Oliver Vodeb is affiliated with Academics for Public Universities. </span></em></p><p class="fine-print"><em><span>Peter Tregear is affiliated with Academics for Public Universities. </span></em></p><p class="fine-print"><em><span>Renaud Joannes-Boyau is affiliated with the group Academics for Public Universities.</span></em></p><p class="fine-print"><em><span>Richard Hil is a member of The Greens; coordinator of Critical Conversations (NFP discussion forum); volunteer with Mullumbimby Neighbourhood Centre; co-leader of research circle, Resilient Byron; member of Academies for the Public University.</span></em></p><p class="fine-print"><em><span>Siobhan Irving is affiliated with Academics for Public Universities and the National Tertiary Education Union. </span></em></p><p class="fine-print"><em><span>Stephen Lake is a member of Academics for Public Universities and of the National Tertiary Education Union. </span></em></p><p class="fine-print"><em><span>David Noble and James Guthrie do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Universities supposedly have adopted a more corporate approach – but most corporate board members have expertise in the area their company operates in and are more accountable to shareholders.Alessandro Pelizzon, Senior Lecturer, School of Law and Justice, Southern Cross UniversityAdam Lucas, Senior Lecturer, Science and Technology Studies, University of WollongongDavid Noble, Associate Dean (Education), Southern Cross UniversityFran Baum, Matthew Flinders Distinguished Professor, Foundation Director, Southgate Institute for Health, Society & Equity, Flinders UniversityJames Guthrie, Distinguished Professor of Accounting, Macquarie UniversityJustin O'Connor, Professor of Cultural Economy, University of South AustraliaOliver Vodeb, Senior Lecturer in Design, RMIT UniversityPeter Tregear, Principal Fellow, The University of MelbourneRenaud Joannes-Boyau, Associate Professor, Southern Cross UniversityRichard Hil, Adjunct Associate Professor, School of Human Serivces and Social Work, Griffith UniversitySiobhan Irving, Sessional Academic, School of Social Sciences, Macquarie UniversityStephen Lake, PhD Candidate, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1704662021-11-07T19:09:12Z2021-11-07T19:09:12ZAustralian companies are facing more climate-focused ESG resolutions than ever before, and they are paying quiet dividends<p>In 2020, for the first time in Australia, more than half the shareholders of a public company voted in support of a climate change resolution put forward by shareholders in the face of opposition from the company’s board of directors.</p>
<p>The resolution, advanced at Woodside Petroleum’s annual general meeting, called for the company to establish <a href="https://www.smh.com.au/business/companies/breakthrough-moment-woodside-investors-revolt-on-climate-change-20200429-p54oe8.html">hard targets</a> to bring its own emissions and the emissions caused by the use of its products globally in line with the Paris Agreement to keep global warming below two degrees. </p>
<p>A similar resolution followed at this year’s AGL annual general meeting, gaining the support of <a href="https://reneweconomy.com.au/agl-gets-climate-action-lesson-from-angry-investors-and-inspired-teenager/">52%</a> of the shareholders. </p>
<p>Although the Woodside vote was described as a “<a href="https://www.smh.com.au/business/companies/breakthrough-moment-woodside-investors-revolt-on-climate-change-20200429-p54oe8.html">breakthrough moment</a>”, it is part of an increase in shareholder activism around environmental, social and governance (ESG) issues that’s been building for several years.</p>
<p>Our <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3859264">analysis</a> of shareholder ESG resolutions put forward in listed Australian companies between 2002 and 2019 finds they have increased in number, prominence and impact.</p>
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<h2>Shareholder ESG Resolutions per year</h2>
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<a href="https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=287&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=287&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=287&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430166/original/file-20211104-17-3bk14.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3859264">Freeburn and Ramsay 2021</a></span>
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<p>A record 36 shareholder ESG resolutions were put forward in 2020. So far in 2021 a further 20 have been put forward, with more foreshadowed.</p>
<p>The resolutions have been concentrated in a small number of companies and industries.</p>
<p>Four industries – energy, banking, insurance and materials – accounted for 83.5% of the resolutions, with the 139 resolutions recorded between 2002 and the first part of 2021 concentrated in only 28 companies. </p>
<p>They were generally the companies most exposed to the risk of climate change or which provide finance to these companies.</p>
<h2>More climate resolutions are succeeding</h2>
<p>Several have been subjected to more than one campaign a year. The company with the most is Origin Energy, facing 24 resolutions in the last six years.</p>
<p>Of the 83 shareholder ESG resolutions advanced between 2002 and 2019, 48 concerned climate change. A further 26 notionally related to governance, but the governance resolutions were often the ones needed to enable consideration of issues such as climate change. </p>
<p>The others related to workers’ rights, human rights, obtaining the consent of Aboriginal native title holders to fracking activities, and gambling.</p>
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Read more:
<a href="https://theconversation.com/rio-tintos-climate-resolution-marks-a-significant-shift-in-investor-culture-95927">Rio Tinto's climate resolution marks a significant shift in investor culture</a>
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<p>Almost all were proposed by just two groups: the <a href="https://www.accr.org.au/">Australasian Centre for Corporate Responsibility</a> and <a href="https://www.marketforces.org.au/get-involved/2021-shareholder-resolutions/">Market Forces</a>.</p>
<p>Until last year the level of support garnered by shareholder ESG resolutions was small, averaging 9.7%. In 2020, support jumped to 14.7%. </p>
<p>In 2021 to date it has climbed to 28%, bolstered by two resolutions of Rio Tinto shareholders that attracted 99% after winning the support of Rio Tinto’s board.</p>
<h2>Success needn’t mean being put to a vote</h2>
<p>Our study sought input from proponents of ESG resolutions, institutional shareholders, company directors, governance professionals and the Australian Securities and Investments Commission.</p>
<p>We found that winning votes isn’t the only objective of those who propose these resolutions. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/430415/original/file-20211104-14-lqx1u.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>Another is to get companies to respond positively even though the resolutions will be defeated, and sometimes in return for the resolutions being withdrawn before the annual general meeting.</p>
<p>As an example, the Australasian Centre for Corporate Responsibility submitted a resolution for this year’s Woodside annual general meeting calling on the company to prepare an annual climate report that would include Woodside’s strategy to reduce its greenhouse gas emissions and put the report to a shareholder advisory vote.</p>
<p>It <a href="https://files.woodside/docs/default-source/asx-announcements/2021-asx/022-withdrawal-of-resolution-requisitioned-by-shareholders.pdf?sfvrsn=9d700806_2">withdrew</a> the resolution after Woodside announced it would put climate reporting to an advisory vote of shareholders at its <a href="https://www.nasdaq.com/articles/australias-woodside-to-let-shareholders-vote-on-climate-change-report-in-2022-2021-03-19">2022</a> annual general meeting.</p>
<p>Some of those we interviewed said shareholder ESG resolutions distracted the companies from what they should be doing.</p>
<p>Others said they ran the risk of blurring the distinct roles of directors and shareholders. Many said the process for getting shareholder ESG resolutions on the agenda for annual general meetings is cumbersome. </p>
<p>However, almost all of those interviewed – and not just the proponents of the resolutions – saw them as a valuable way of letting companies know what their shareholders really think about how they should respond to the challenges of climate change and other issues.</p><img src="https://counter.theconversation.com/content/170466/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>There’s more than one way to get companies to do what you want. Sometime the threat of a vote at an annual general meeting is enough.Ian Ramsay, Emeritus Professor, Melbourne Law School, The University of MelbourneLloyd Freeburn, Research Fellow, Centre for Corporate Law, Melbourne Law School, University of Melbourne, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1701402021-10-20T14:09:29Z2021-10-20T14:09:29ZSuccession: Logan Roy’s hand-picked directors cover up wrongdoing, just like in real life<figure><img src="https://images.theconversation.com/files/427309/original/file-20211019-26-1pxp5jn.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Logan Roy, the media titan played by Brian Cox. </span> <span class="attribution"><a class="source" href="https://seac.bskyb.com/#search/eyJrZXl3b3JkIjoic3VjY2Vzc2lvbiIsImFzc2V0RG9tYWluIjoiYWxsIiwiY2ZfQ29sbGVjdGlvbkVsZW1lbnRzVGVtcGxhdGUiOiJhbGwiLCJjZl9DaGFubmVsIjoiYWxsIiwiY2ZfUHJvZ3JhbW1lIjoiYWxsIiwiY2ZfU2VyaWVzIjoiYWxsIiwiY2ZfRXBpc29kZSI6ImFsbCIsImNmX3VzYWdlIjoiYWxsIn0=">HBO/BSkyB</a></span></figcaption></figure><p>Will Logan Roy be brought down after his son Kendall publicly blamed him for covering up a litany of rapes and sexual assaults in Waystar Royco’s cruise-ships division? That’s the burning question that will be answered in season 3 of blockbuster business drama Succession, which is finally underway after being delayed by the pandemic. </p>
<p>For the uninitiated, Waystar Royco is a fictional media conglomerate along the lines of Disney or News Corporation. Logan Roy (played by Brian Cox) is its ageing emperor, unwilling to relinquish control and unsure that any of his three children are fit to wear the crown. </p>
<p>Much of the unfolding story in the first two seasons was about the cruise-ships scandal, which took place under the watch of the former head of the division, the late Lester McClintock. Scores of victims of McClintock and his cronies were paid corporate hush money to keep quiet, and the story is now coming out because some of them have been talking to the media. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Waystar board members strategising" src="https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/427313/original/file-20211019-25-1wwfnku.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Logan Roy has the Waystar board under his thumb.</span>
<span class="attribution"><a class="source" href="https://seac.bskyb.com/#search/eyJrZXl3b3JkIjoic3VjY2Vzc2lvbiIsImFzc2V0RG9tYWluIjoiYWxsIiwiY2ZfQ29sbGVjdGlvbkVsZW1lbnRzVGVtcGxhdGUiOiJhbGwiLCJjZl9DaGFubmVsIjoiYWxsIiwiY2ZfUHJvZ3JhbW1lIjoiYWxsIiwiY2ZfU2VyaWVzIjoiYWxsIiwiY2ZfRXBpc29kZSI6ImFsbCIsImNmX3VzYWdlIjoiYWxsIn0=">HBO/BSkyB</a></span>
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<p>Logan Roy and the other members of the Waystar board have clearly been aware of the situation for a long time – almost certainly including when it was taking place. Kendall Roy, a board member himself, betrayed his father because he was being lined up as a “blood sacrifice” to take the blame for the scandal. </p>
<p>So much of Succession holds a mirror to real life, and the way that Logan Roy’s hand-picked board members allowed these abuses to continue by turning a blind eye to them is a good example. We have <a href="https://www.sciencedirect.com/science/article/pii/S0929119921001887">just published research</a> that shows that public companies whose directors are chosen by their CEOs are statistically more likely to be involved in corporate misconduct, along with various other shortcomings. So why does this happen, and what should be done about it?</p>
<h2>What the research shows</h2>
<p>Warren Buffet put it well when he <a href="https://www.forbes.com/sites/bobzukis/2020/03/18/why-does-warren-buffett-want-pit-bulls-instead-of-cocker-spaniels-in-the-boardroom/">famously observed</a> that: “When seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”</p>
<p>Stock exchanges like the NYSE and NASDAQ have rules in place to reduce CEOs’ involvement in nominating new board members, but <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1540-6261.2009.01504.x">CEOs still</a> substantially influence <a href="https://econpapers.repec.org/article/eeecorfin/v_3a58_3ay_3a2019_3ai_3ac_3ap_3a112-141.htm">these appointments</a>. </p>
<p>It’s a feature of corporate life that we choose to live with, and it comes at a high price: according to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8551.12376">one study</a>, total penalties imposed on US-listed companies for corporate misconduct between 2002 and 2015 came in at US$1.1 trillion (£801 billion). In many cases, members of the board who were personally appointed by the CEO may have been choosing to look the other way when the wrongdoing was taking place. </p>
<p>A preponderance of evidence reveals that when directors are appointed by the CEO, they <a href="https://onlinelibrary.wiley.com/doi/10.1111/j.1467-6486.1992.tb00657.x">are disinclined</a> to <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/irfi.12296">question the</a> managerial status quo. This compromises the board’s monitoring of decision-making, leaving leaders free to pursue their own agendas. And as the proportion of CEO-appointed directors rises, it becomes increasingly unlikely that managers will be held to account for any incompetence.</p>
<p><a href="https://www.sciencedirect.com/science/article/pii/S0929119921001887">Our own study</a>, which looked at a large number of US companies over a <a href="https://academic.oup.com/rfs/article-abstract/27/6/1751/1596285">15-year period</a>, found that directors who were installed after the CEO was in place contribute less to board agendas, attend fewer board meetings, and receive above-average pay and perks. Most disturbing of all, we found that each such director on a company board increases the likelihood of corporate wrongdoing by over 4%. We found that these outcomes are most pronounced when firms have weak external monitoring and when social ties between CEOs and directors are strong. </p>
<h2>The effects</h2>
<p>The word “patronage” is relevant here, since the CEO will expect to see wagging tails when holding out a bone in the form of executive remuneration. <a href="https://econpapers.repec.org/article/ucpjlawec/v_3a36_3ay_3a1993_3ai_3a2_3ap_3a757-802.htm">Besides the</a> heavy fines, <a href="https://www.sciencedirect.com/science/article/abs/pii/S1042443117302871">such cases</a> of corporate wrongdoing undermine <a href="https://econpapers.repec.org/article/ouprevfin/v_3a13_3ay_3a2009_3ai_3a1_3ap_3a115-145.htm">investors’ confidence</a> in the company, damage <a href="https://econpapers.repec.org/article/eeejbfina/v_3a79_3ay_3a2017_3ai_3ac_3ap_3a57-73.htm">shareholder value</a>, lead to resources being misallocated, and make financial markets more unstable. </p>
<p>The <a href="https://money.cnn.com/2015/09/24/investing/volkswagen-vw-emissions-scandal-stock/">Volkswagen share price</a>, for example, tumbled 50% in the week after the announcement of its <a href="https://www.bbc.co.uk/news/business-34324772">emissions scandal</a> in 2015. The carmaker was found to have fitted 11 million diesel cars with software that made their emissions seem lower than they were. </p>
<p>While former CEO Martin Winterkorn <a href="https://europe.autonews.com/automakers/trial-ex-vw-ceo-winterkorn-likely-be-delayed">is facing trial</a> over allegations of fraud, which he denies, at least three of the company’s directors were hired during his tenure. They <a href="https://www.nytimes.com/2015/10/24/business/international/directors-say-volkswagen-delayed-informing-them-of-trickery.html">have said</a> they were unaware of any management misconduct, which may turn out to mean they weren’t monitoring the management properly. </p>
<p>Other real-life examples include Nissan and the case involving former chairman and CEO Carlos Ghosn and board member Greg Kelly, whom he chose. The US Securities and Exchange Commission <a href="https://www.sec.gov/litigation/litreleases/2019/lr24606.htm">accused Ghosn</a> of concealing over US$140 million of compensation and retirement benefits from Nissan’s investors, and accused Kelly of aiding and abetting him. </p>
<p>Both directors settled without admitting wrongdoing, while respectively paying civil penalties of US$1 million and US$100,000 and accepting lengthy bars to holding directorships. Nissan paid a civil penalty of US$15 million. Kelly is <a href="https://www.independent.co.uk/news/world/americas/carlos-ghosn-nissan-japan-renault-tokyo-b1928915.html">currently being tried</a> over similar charges in Japan, while Ghosn has avoided trial by fleeing to Lebanon in 2019. Both men <a href="https://www.newsweek.com/fugitive-carlos-ghosn-names-dark-forces-nissan-that-took-him-down-1634529">deny the charges</a>. </p>
<p>In revealing the strong connection between hand-picked directors and corporate misconduct, we’re hopefully exposing a severe threat to corporate governance that tends to be ignored. Scandals emerge periodically, but the corporate sector, aided by lawyers and accountants, always finds ways to put regulators off the scent. </p>
<p>It’s clear the authorities don’t have adequate tools for the job. It’s timely to be reminded of this by the fictional scandal in Succession, but it is not enough for us simply to feel frustrated about it. </p>
<p>What is required is for board independence to include a requirement for directors that have not been hired by the CEO. Those in post already could be more restricted by rules that limit their voting rights. Until governments take this problem seriously, the real-life Logan Roys will find it easier than they should to make their companies do wrong.</p><img src="https://counter.theconversation.com/content/170140/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>When directors are hand-picked by CEOs, it’s a recipe for disaster.Jia Liu, Professor of Finance, University of PortsmouthNader Atawnah, Lecturer in Finance, Edith Cowan UniversityRashid Zaman, Lecturer in Accounting, Edith Cowan UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1691392021-10-10T06:58:54Z2021-10-10T06:58:54ZFlaws in South Africa’s approach to tenure of directors of companies<figure><img src="https://images.theconversation.com/files/425253/original/file-20211007-23-bzddqm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Shareholder activists in South Africa have <a href="https://headtopics.com/za/new-blood-for-comair-board-after-shareholder-outcry-10826996">disapproved of lengthy tenures for directors</a> on boards of listed public companies. They have exerted <a href="https://www.citizen.co.za/business/business-news/2225566/under-fire-comair-massacres-board/">pressure</a> on long-serving directors to resign. </p>
<p>Boards with many long-serving directors are regarded as entrenched, hence the rising calls from activists that they should be <a href="https://www.citizen.co.za/business/business-news/2225566/under-fire-comair-massacres-board/">refreshed</a>. </p>
<p>Director tenure attracts attention <a href="https://www.spencerstuart.com/research-and-insight/boards-around-the-world?category=all-board-composition&topic=all-topics">worldwide</a>. The concern is that directors lose their independence by becoming too close to management if they serve for too long on company boards. </p>
<p>This pertains, in particular, to external directors, also known as independent non-executive directors. </p>
<p>Non-executive directors are not involved in the day-to-day management of the company’s business and are not full-time salaried employees. They are independent if there is no interest or relationship that is likely to unduly influence or cause bias in their decisions.</p>
<p>Independent directors protect shareholders’ interests, manage conflicts of interests and ensure compliance with legislation. They play an important role in detecting fraud and mitigating corporate corruption.</p>
<p>To promote objectivity and reduce the possibility of conflicts of interest in South Africa the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf">King IV Report for Corporate Governance</a> recommends that the majority of board members should be non-executive directors, and most of them should be independent. </p>
<p>South Africa’s <a href="https://www.onlinemoi.co.za/Act?section=66">Companies Act</a> gives original powers to directors to manage the business of the company, unless this is restricted in the company’s constitution. The directors delegate particular responsibilities to the executive directors. The non-executive directors in turn monitor the executive directors and exercise oversight over them. </p>
<p>The concern is that if directors stay in their positions for too long they lose this oversight capability because they become too familiar with the company and its ways. </p>
<p>The situation in South Africa points to the need for change. Some independent non-executive directors have served on boards of JSE-listed companies for as long as 46 years. One <a href="https://www.pwc.co.za/en/assets/pdf/ned-report-2020.pdf">study</a> found that 27% of non-executive directors on boards of JSE-listed companies have served for nine years or longer. Another <a href="http://www.sun.ac.za/english/Lists/news/DispForm.aspx?ID=7068">study</a> found that directors in the consumer services sector had the highest average tenure, followed by the industrials sector and then the consumer goods sector. </p>
<p>The South African Companies Act does not put a cap on how long a director may serve on a board. A director elected by the shareholders may serve on a board <a href="https://www.onlinemoi.co.za/Act?section=68">indefinitely</a> or for a term set out in the company’s constitution, if any. </p>
<p>Under the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf#page=56">King IV Report for Corporate Governance</a>, non-executive directors serving for longer than nine years are classified as independent if the board concludes each year that they are independent. When a non-executive director has served on the board for longer than nine years, a summary of the board’s views on his or her independence must be disclosed to the shareholders.</p>
<p>In my <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3924836">research</a> on the tenure of directors in international jurisdictions, I found that the approach to board tenure may be divided into three categories. South Africa could learn from them. It should review and modernise its approach to director tenure to bring it in line with <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3924836">international developments</a>. This will ease shareholder activists’ growing concerns about directors’ lengthy tenures.</p>
<h2>Are long-serving directors independent?</h2>
<p>It is controversial whether directors lose their independence if they serve for too long on company boards. This is because research on this matter reveals conflicting results.</p>
<p>Some <a href="https://www.chapman.com/media/publication/498_Chapman_Director_Tenure_Next_Boardroom_Battle_030415.pdf">studies</a> show that long-serving directors become friendlier with management and can no longer monitor the actions of management objectively. </p>
<p><a href="https://www.wlrk.com/webdocs/wlrknew/AttorneyPubs/WLRK.23346.14.pdf">Other studies</a>, however, show that long-serving directors are in a stronger position to monitor management. This is because they are less vulnerable to peer pressure and less likely to be controlled by management. </p>
<p>It is argued that limiting director tenure <a href="https://www.chapman.com/media/publication/498_Chapman_Director_Tenure_Next_Boardroom_Battle_030415.pdf">increases board diversity</a> and attracts new perspectives and skills to the board. On the flip side it is argued that <a href="https://www.chapman.com/media/publication/498_Chapman_Director_Tenure_Next_Boardroom_Battle_030415.pdf">long-serving directors have vital experience</a>, industry knowledge, and a better understanding of the company’s strategies. This may be lacking with newly appointed directors. </p>
<p>In my opinion the optimal director tenure varies by industry and company. The length of stay of a director isn’t necessarily a bad thing provided that the director is able to remain independent. </p>
<p>But the view that long-serving directors are so enmeshed with the company that they lack independence is gaining traction among corporate governance experts and shareholder activists. </p>
<h2>Director tenures in other countries</h2>
<p>At one end of the spectrum are jurisdictions that don’t impose any limits on how long a non-executive director may serve on the board. This approach is adopted in the US.</p>
<p>At the other end of the spectrum are jurisdictions that place a hard limit. For example, the European Commission recommends that companies in the European Union should limit the tenure of non-executive directors to <a href="https://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2005:052:0051:0063:EN:PDF">12 years</a>. This is done in France.</p>
<p>In between is a third category which says that there should be a limit on director tenure but it can be extended if the shareholders agree. </p>
<p>For example, in Singapore and Hong Kong independent non-executive directors can stay on the board after nine years if shareholders approve. In Malaysia, shareholder approval is needed after 12 years. In India it is needed after only five years. India introduced this requirement because of the high levels of corruption in its economy and to ensure that independent directors remain independent.</p>
<h2>Weaknesses in South Africa’s approach to director tenure</h2>
<p>In my <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3924836">view</a> South Africa’s approach to director tenure reveals three weaknesses. </p>
<p>First, it fails to give shareholders any formal say on keeping independent non-executive directors on the board after nine years. </p>
<p>Secondly, the board may disclose to the shareholders only a summary of its views on the independence of a long-serving non-executive director. This might not provide them with enough information. </p>
<p>Thirdly, the board doesn’t need to engage external independent facilitators in assessing a non-executive director’s independence after nine years, but can do this evaluation itself. </p>
<h2>Action</h2>
<p>South Africa should not introduce a hard limit on director tenure because the types of businesses conducted by companies are so diverse. We should not ignore variations across different industries. A hard limit will also deprive companies of the expertise of experienced directors.</p>
<p>Instead, shareholders should be involved in the decision of whether to keep independent non-executive directors on the board after nine years. </p>
<p>Involving shareholders in this decision will encourage active shareholder engagement. It will give shareholders an opportunity to assess the independence of directors. It will also enhance the reputation of companies and improve investor confidence. And it will avoid a situation where shareholders <a href="https://www.citizen.co.za/business/business-news/2225566/under-fire-comair-massacres-board/">publicly challenge boards</a> on the lengthy terms of their directors and <a href="https://www.news24.com/fin24/companies/industrial/concerns-raised-about-long-tenure-of-comair-directors-20191105#:%7E:text=A%20resolution%20was%20approved%20that,can%20stand%20for%20re%2Delection.&text=Outgoing%20chair%20Pieter%20van%20Hoven,lead%20independent%20non%2Dexecutive%20director./">press directors</a> to resign.</p>
<p>Dislosure and transparency are strongly emphasised in the <a href="https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf">King IV Report</a>. Thus the board should make a full and proper disclosure to shareholders of the reasons for concluding that long-serving directors are independent.</p>
<p>And, to enhance objectivity, external independent experts should be involved in assessing the independence of non-executive directors every year after they have served for nine years. This applies especially to listed public companies and state-owned companies.</p>
<p>Lastly, companies should work with shareholders and external experts to review their approach to director tenure.</p><img src="https://counter.theconversation.com/content/169139/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rehana Cassim does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The view that long-serving directors are so enmeshed with the company that they lack independence is gaining traction.Rehana Cassim, Associate Professor in Company Law, University of South AfricaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1666042021-09-07T14:57:14Z2021-09-07T14:57:14ZWhy corporate reforms falter: some insights from Kenya<figure><img src="https://images.theconversation.com/files/419271/original/file-20210903-25-rq5jfs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Getty Images</span></span></figcaption></figure><p>Socioeconomic development in African countries, along with other developing countries, is held back by many <a href="https://www.sciencedirect.com/science/article/pii/S0305750X0900223X?casa_token=G-15QJVzfMAAAAAA:ot8zddNdG8Z2h0ix954f7CieGsff0BkBkgxAvEeDNWFjhQUIijV_zvHj3YEV2_ryXOTdF7s3Jw">constraints</a>. These include an insufficiently skilled workforce, poor infrastructure, and inadequate capital to finance public goods and services. This is also <a href="https://www.researchgate.net/publication/228601978_How_does_mineral_wealth_affect_the_poor">true</a> for some African countries with abundant natural resources.</p>
<p>For decades, an array of structural reforms have been put forward to steer developing countries towards growth. Some have been economic, others political, or focused on the public sector. Most are concocted in western countries and <a href="https://books.google.co.uk/books?hl=en&lr=&id=7jAB6GJCZS4C&oi=fnd&pg=PP9&ots=H7Z7jRqsKZ&sig=e-xPJe09wyYtDFcnWXBXVFygxX4&redir_esc=y#v=onepage&q&f=false">midwifed by powerful western agencies</a>, such as the World Bank and International Monetary Fund.</p>
<p>Yet they have not led to the intended results. One reason is that recipient countries have traditionally been <a href="https://reader.elsevier.com/reader/sd/pii/S1045235416300260?token=CC7B5A602D9395164F9EA2D3BC1E7B21322F15F1E1F3C0BCEABAB34647F259EAF6B4DD50F0F7E33914F843C983638BDA&originRegion=eu-west-1&originCreation=20210819175032">excluded</a> from designing the reforms. This creates mistrust between those who want them and those who are forced to accept them. </p>
<p>Another reason that’s been suggested is that the western roots of reforms make them <a href="https://www.emerald.com/insight/content/doi/10.1108/MAJ-12-2017-1733/full/html">incompatible</a> with the social contexts of African countries. <a href="https://onlinelibrary.wiley.com/doi/10.1111/rego.12422">Tying reforms to financial aid</a> is a third reason. Bureaucrats in poor countries often view proposed reforms as nothing more than a means to international liquidity.</p>
<p>Our recent <a href="https://www.sciencedirect.com/science/article/pii/S1045235420301088?via%3Dihub">research</a> sought to understand why western-led corporate sector regulations don’t always have the intended effect in Kenya. Our study found that even the most well-crafted and well-meaning reforms are doomed to fail if they lack compatibility with host country contexts. </p>
<p>For instance, adopting state-of-the-art global reporting standards or certifications doesn’t prevent accounting malpractices. This is because accountants and auditors can be swayed by threats of <a href="https://www.sciencedirect.com/science/article/pii/S1045235408001007">violence</a> or by <a href="https://www.sciencedirect.com/science/article/pii/S0155998207000312">bribery</a>. </p>
<h2>Our study</h2>
<p>Our study was motivated by the poor record of structural reforms in African and other developing countries. It was also informed by reports of <a href="https://www.businessdailyafrica.com/bd/markets/capital-markets/cfos-of-listed-firms-summoned-over-rising-cases-of-accounting-fraud-2102798">accounting fraud</a> and <a href="https://www.businessdailyafrica.com/bd/news/cma-to-name-and-shame-listed-firms-that-fail-to-live-by-rules-2268220">weak corporate governance</a> practices in Kenya. We examined why reforms fail to live up to their promise. </p>
<p>We focused on one part of the broader economic reforms: the corporate governance model and international financial reporting standards inspired by Anglo-American business. We hoped to contribute to research on how these standards and governance systems work in developing countries. </p>
<p>We interviewed people involved in implementing corporate sector regulations. We also looked at archival evidence like corporate records, media reports, and official and policy publications. Using Kenya as a testing ground, we were keen to see whether western-originating reforms could thrive and deliver the intended outcomes.</p>
<p>This is a departure from previous studies which have largely concentrated on <a href="https://ir.lawnet.fordham.edu/ilj/vol31/iss1/1/">reform negotiation processes</a>. Others have focused on <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/1468-0491.00207">interactions</a> between representatives of western institutions and developing countries’ bureaucrats. </p>
<h2>Our findings</h2>
<p>Our analysis relied on the idea of <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-7679.2007.00387.x?casa_token=ocjzax9Q9jsAAAAA:vm5jmkWxaI5tIA_5zLNO2NJrVBe18xYu-O3um88PxtPz4ZCqyrHvH3ALzsfqMT0GMAhmgfuhGOU_Y5s">neopatrimonialism</a>: a way of life where personal relationships dominate interactions. To sustain relationships, people often exchange money, or other goods and services of value. This selective special treatment can foster corruption. It’s informal and blurs the lines between private and public resources.</p>
<p>This is how we looked at the interactions between traditional African social institutions and relatively recent corporate sector regulations in Kenya.</p>
<p>In western corporate governance, non-executive directors are not involved in the day-to-day management of a company. They are supposed to provide independent oversight of the board’s functions and constructive criticism on the behaviour of executive directors and senior managers.</p>
<p>We observed several interesting trends in the Kenyan context. Boards of directors and professionals such as accountants and auditors consistently deviated from clear provisions contained in the corporate sector regulations. For instance, non-executive directors in public companies routinely failed to monitor executive management effectively. </p>
<p>This is because their appointments were based on patronage relations with management. They were less likely to intervene where criticism of the management was warranted.</p>
<p>Evidence from interviews and archival records reinforced this point. We found that the number of accountancy professionals involved in corrupt practices and fraudulent financial reporting appeared to be <a href="https://www.businessdailyafrica.com/bd/corporate/companies/errant-accountants-on-the-rise-as-icpak-probes-fresh-cases-2273596">high</a> in Kenya.</p>
<p>This finding was not surprising. Such relations are common in many <a href="https://www.sciencedirect.com/science/article/pii/S1090951616302553?casa_token=zM2imi8haCEAAAAA:5fGYvyPYv4Vdo8MuwewxarN_NWwMeYDTGI2ckuolQ-j2i1aq4llskHaNC5Gj9g_hdjIMOrcEUSo">developing countries</a>.</p>
<p>We also found the regulatory infrastructure to be weak, primarily due to inadequate funding. Poor funding deterred highly competent staff and starved institutions of enabling technology. The political appointment of top management of regulatory bodies made it hard for them to effectively oversee firms owned or controlled by the political class. </p>
<p>Finally, having a lot of regulatory requirements creates confusion and is <a href="https://link.springer.com/article/10.1007/s10551-014-2405-3">counterproductive</a>.</p>
<h2>Way forward</h2>
<p>Corporate governance guidelines envisage the appointment of non-executive directors. But that does not guarantee board independence if the directors are members of influential families, politicians, current or former senior civil servants, or other social elites. Such individuals also dominate business activities and may have patronage relations with one another.</p>
<p>Eliminating these networks is <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1467-7679.2011.00527.x">nearly impossible</a>. Donors and policymakers should therefore begin by looking inward for more fitting solutions. They should do this before transplanting detailed external reforms which risk serving at best as facades of good governance. </p>
<p>For instance, efforts to curb misconduct of company directors should begin by empowering relevant regulatory bodies. This can be done through better resource allocation and staffing. This is also immensely important in curbing the behaviour of other influential market players. </p>
<p>To improve financial reporting and corporate accountability, authorities should improve the quality of training offered to accountants and auditors. It’s also vital to address possible threats to professionals or whistle-blowers.</p>
<p>Finally, reforms are a cog within a big wheel. They should go with appropriate improvements to the enabling infrastructure.</p><img src="https://counter.theconversation.com/content/166604/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Danson Kimani receives funding from The University of Essex, United Kingdom. Danson also previously received research funding from The Open University, United Kingdom.</span></em></p>Corporate governance reforms should be viewed as a cog within a big wheel and accompanied by appropriate changes to the enabling infrastructure.Danson Kimani, Lecturer in Accounting; CAGD coordinator at The Centre for Accountability and Global Development (CAGD), University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1594082021-05-20T17:46:08Z2021-05-20T17:46:08ZEntrepreneurs aren’t taking their companies public — and it’s a problem for our economy<figure><img src="https://images.theconversation.com/files/401713/original/file-20210519-15-7qf3bv.jpg?ixlib=rb-1.1.0&rect=0%2C208%2C5568%2C3492&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A sign board in Toronto's financial district shows the Toronto Stock Exchange's market value and gain. </span> <span class="attribution"><span class="source"> THE CANADIAN PRESS/Frank Gunn</span></span></figcaption></figure><p>Stock markets in Canada and the United States <a href="https://money.usnews.com/investing/stock-market-news/articles/why-the-market-is-booming-and-the-economy-is-struggling">are booming right now</a>. So why do so few companies want to join them? </p>
<p>With the exception of a couple of bad years, the last two decades have been a great time to be a public company. Valuations are at record highs and <a href="https://www.epi.org/publication/ceo-compensation-surged-14-in-2019-to-21-3-million-ceos-now-earn-320-times-as-much-as-a-typical-worker/">executive compensation has more than doubled as a percentage of corporate profits</a>. Nevertheless, <a href="https://www.investors.com/news/publicly-traded-companies-fewer-winners-huge-despite-stock-market-trend/#:%7E:text=Companies%20too%20small%20to%20compete,from%20S%26P%20Global%20Market%20Intelligence.">fewer and fewer companies and their managers want to take advantage of these opportunities</a>. </p>
<p>As we show <a href="https://www.policyschool.ca/wp-content/uploads/2021/04/FMR11_Capital-Markets_Tingle-Pandes.pdf">in a recent research study</a>, the number of companies choosing to go public in Canada has been declining sharply since the late 1990s. In fact, so few companies have been interested in listing publicly that the total number of Canada’s public operating companies has declined by more than 40 per cent on a per capita basis. American public markets are not much better. They’re about half the size they were back in the 1990s.</p>
<p>There is surprisingly little concern about this development among Canada’s regulators and politicians. This inattention is probably a mistake. Canada has four times the number of public companies per capita as the <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X03001259">United States and the United Kingdom</a>. It depends on its public markets to finance and grow new businesses in a way no other developed country does. </p>
<h2>Tech, pharma need public companies</h2>
<p>Even more important is the impact Canada’s public markets has on the ability to grow companies in high-value industries like technology or pharmaceuticals. <a href="http://itac.ca/wp-content/uploads/2013/07/StateofST2012_fullreportEN.pdf">Experts have pointed out</a> that Canada actually performs well at generating new ideas and starting new businesses. </p>
<p><a href="https://cca-reports.ca/wp-content/uploads/2018/10/2009-06-11-innovation-report-1.pdf">The country fails</a>, however, on scaling these new businesses up to a size where they can compete in world markets. Aside from one or two companies <a href="https://producthabits.com/shopify-grew-snowboard-shop-10b-commerce-ecosystem/">like Shopify</a>, we don’t create large technology, software, nanotechnology, biotechnology or pharmaceutical companies. </p>
<figure class="align-center ">
<img alt="Shopify headquarters" src="https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=326&fit=crop&dpr=1 600w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=326&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=326&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=409&fit=crop&dpr=1 754w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=409&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=409&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Shopify is the exception, not the rule, in terms of Canadian startup success stories.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span>
</figcaption>
</figure>
<p>Canada starts with technology that’s the best in the world in these sectors, but something happens before our companies become big enough to kick-start a new industry here. What happens? These valuable businesses get sold to larger companies within their industries, most of which aren’t Canadian.</p>
<p><a href="https://itac.ca/wp-content/uploads/2013/10/The-Issue-Building-Stronger-Tech-Companies-in-Canada1.pdf">One study</a> found that of 164 acquisitions of Canadian technology companies between 2004 and 2012, only a single company was purchased by a Canadian buyer. This turns into a vicious cycle — because we don’t have large, mature companies in many industries, the buyers of our promising startups are foreign, and because our startups are acquired early in their development, we don’t grow into large, mature companies.</p>
<h2>No spin-off benefits</h2>
<p>This dynamic means we lose the spin-off benefits of mature companies: we don’t train our workers in things like enterprise software sales or commercial nanotechnology research, and we don’t get new business ideas from older companies. Silicon Valley wouldn’t have become what it is today without beginning with large, mature firms like Xerox and Hewlett-Packard. Most entrepreneurs get their world-class ideas from working with more established companies.</p>
<p>What does Canada’s failure to scale technology businesses have to do with our public market problem? When a startup raises capital from outsiders, it must eventually provide them with an exit strategy so they can sell their shares. There are basically two kinds of exit: selling the company, usually to a larger company in its line of business, or taking the company public. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/canadian-startups-need-to-focus-on-corporate-governance-to-grow-and-thrive-149253">Canadian startups need to focus on corporate governance to grow and thrive</a>
</strong>
</em>
</p>
<hr>
<p>A public listing allows a company to continue to grow while permitting its early investors to sell their shares in the stock market.</p>
<p>Over the past two decades, an increasing number of companies have decided they would rather sell themselves than go public. What happened? </p>
<h2>Explanations don’t hold up</h2>
<p>In our research, we find that the usual explanations for the public market decline aren’t plausible. They either don’t explain why the decline is happening both in Canada and the United States, or they contradict the dominant fact of the last two decades: public companies have been getting more and more valuable.</p>
<p>Instead, we look at the ways public markets have changed to make corporate governance more painful, less effective and higher risk.</p>
<p>The biggest change over the past two decades or so has been a revolution in the ways public companies are run. Generally, this has involved the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3815139">transfer of power</a> from managers and boards of directors to less informed and incentivized third parties like <a href="https://www.fm-magazine.com/news/2019/nov/role-of-proxy-advisers-201922438.html">proxy advisers</a> and even <a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/money-manager/">money managers</a>.</p>
<p>By and large, these initiatives <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3094049">haven’t improved corporate performance</a>, but they have significantly increased the unpleasantness of going public. They take decisions about compensation, board composition, strategy and selling the company out of the hands of the people who know the business best and, as summarized in our research, give it to outsiders who are less effective. </p>
<p>This transfer of power also disadvantages workers, creditors and other constituencies important to the ultimate success of any business.</p>
<figure class="align-center ">
<img alt="A sign board in Toronto shows the closing number for the TSX with the CN Tower in the background." src="https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The TSX needs to abandon majority voting requirements, a measure that makes going public unattractive.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Frank Gunn</span></span>
</figcaption>
</figure>
<h2>The way forward</h2>
<p>In our recently published paper, we give a variety of concrete suggestions to reduce the penalties incurred by executives and boards if they take their companies public, and to make going public more attractive. </p>
<p>They include:</p>
<ul>
<li><p>Eliminating the majority voting requirements <a href="https://www.nortonrosefulbright.com/en-ca/knowledge/publications/9b173865/tsx-provides-guidance-on-director-election-requirements#:%7E:text=recent%20voting%20guidelines.-,Majority%20voting,tender%20his%20or%20her%20resignation.">that were adopted by the TSX in 2014</a>, which can make directors more vulnerable to shareholder action</p></li>
<li><p>Introducing effective staggered boards to give corporations the option to provide their managers greater independence from shareholder pressure</p></li>
<li><p>Eliminating an executive compensation disclosure regime that has produced precisely the opposite results from those intended</p></li>
<li><p>Abandoning any suggestion there are one-size-fits-all corporate governance best practices</p></li>
<li><p>Reining in the power of proxy advisers, who have become the de facto sources of corporate governance and executive compensation regulation in this country. </p></li>
</ul>
<p>These steps would clearly remove major barriers to Canadian companies choosing to scale up in this country.</p><img src="https://counter.theconversation.com/content/159408/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I have previously received funding from the Social Sciences and Humanities Research Council (SSHRC) and the Canadian Securities Institute Research Foundation. But I do not currently have funding from them. </span></em></p><p class="fine-print"><em><span>Bryce Tingle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why are so many entrepreneurs in Canada avoiding going public, and what are the consequences for our economy?Bryce Tingle, N. Murray Edwards Chair in Business Law, University of CalgaryJ. Ari Pandes, Associate Professor of Finance, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1603492021-05-05T21:08:00Z2021-05-05T21:08:00ZWhy Facebook created its own ‘supreme court’ for judging content – 6 questions answered<figure><img src="https://images.theconversation.com/files/399024/original/file-20210505-19-gg5zpf.jpg?ixlib=rb-1.1.0&rect=94%2C110%2C5184%2C3403&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Facebook's new Oversight Board affirmed the social media network's ban on Donald Trump.</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FacebookOversightPanel/eb4ce13be55d4a0b82cb1607f0a2d5f0/photo?Query=Facebook%20oversight%20board&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=14&currentItemNo=5">AP Photo/Jeff Chiu</a></span></figcaption></figure><p><em>Facebook’s quasi-independent Oversight Board on May 5, 2021, <a href="https://www.oversightboard.com/news/226612455899839-oversight-board-upholds-former-president-trump-s-suspension-finds-facebook-failed-to-impose-proper-penalty/">upheld the company’s suspension of former President Donald Trump</a> from the platform and Instagram. The decision came four months after Facebook CEO Mark Zuckerberg <a href="https://www.washingtonpost.com/technology/2021/05/03/facebook-trump-decision-faq">banned Trump “indefinitely” for his role</a> in inciting the Jan. 6 riot at the U.S. Capitol. The board chastised Facebook for failing to either set an end date for the suspension or permanently ban Trump and gave the social media company six months to resolve the matter.</em> </p>
<p><em>What is this Oversight Board that made one of the most politically perilous decisions Facebook has ever faced? Why did the company create it, and is it a good idea? We asked <a href="https://scholar.google.com/citations?user=loPMxzAAAAAJ&hl=en&oi=ao">Siri Terjesen</a>, an expert on corporate governance, to answer these and several other questions.</em> </p>
<h2>1. What is the Facebook Oversight Board?</h2>
<p>The Oversight Board was set up to give users an independent third party to whom they can appeal Facebook moderation decisions, as well as to help set the policies that govern these decisions. The <a href="https://www.washingtonpost.com/technology/2021/05/03/facebook-trump-decision-faq/">idea was first proposed</a> by Zuckerberg in 2018 after a discussion with Harvard Law Professor Noah Feldman, and the board began work in October 2020, funded by a US$130 million trust provided by Facebook to cover the initial six years of operating expenses.</p>
<p><a href="https://oversightboard.com">According to the board</a>, it “was created to help Facebook answer some of the most difficult questions around freedom of expression online: what to take down, what to leave up, and why.” The Oversight Board has final decision-making authority, even above the board of directors, and its decisions are binding on Facebook. </p>
<p>The Oversight Board has <a href="https://www.oversightboard.com/meet-the-board/">20 members</a> from around the world and a diverse variety of disciplines and backgrounds, such as journalism, human rights and law, as well as different political perspectives. It even includes a former prime minister. The goal is to eventually expand the board to 40 members in total. </p>
<figure class="align-center ">
<img alt="former President Donald Trump raises his right arm as his hand forms a fist during a speech, with a row of US flags behind him" src="https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/399043/original/file-20210505-17-f0ioku.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">In a statement, Trump called the Oversight Board decision a ‘total disgrace.’</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FacebookTrumpExplainer/789bc4439a9f4f9d8c736ff17901e404/photo?Query=facebook&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=9368&currentItemNo=1">AP Photo/Jacquelyn Martin</a></span>
</figcaption>
</figure>
<h2>2. What other decisions has it made?</h2>
<p>So far, <a href="https://oversightboard.com/decision/">the board has reviewed 10 Facebook decisions</a>, including the one involving Trump. The decisions involved a variety of types of content, such as posts that were removed because they were deemed <a href="https://oversightboard.com/decision/FB-S6NRTDAJ/">racist</a>, <a href="https://oversightboard.com/decision/IG-7THR3SI1/">indecent</a> or <a href="https://oversightboard.com/decision/FB-R9K87402/">intended to incite violence</a>. It overturned Facebook’s ruling in six of the cases and upheld it in three of them. In the 10th case, the user deleted the post that Facebook had removed, which ended the board’s review. </p>
<p>In cases where the board overruled Facebook, the posts that had been removed were reinstated. And the board sometimes urged the company to clarify or revise its guidelines.</p>
<p>Given that Facebook is expected to take <a href="https://reason.com/volokh/2021/02/17/the-facebook-oversight-board/">20 to 30 billion enforcement actions</a> in 2021 alone, it’s unlikely the Oversight Board will be able to handle more than a handful of the most high-profile cases, like that of Trump. It’s one of the reasons the Oversight Board is dubbed “<a href="https://www.newyorker.com/tech/annals-of-technology/inside-the-making-of-facebooks-supreme-court">Facebook’s Supreme Court</a>.”</p>
<h2>3. Is it a model other social media companies are likely to follow?</h2>
<p>As a platform company, Facebook is unique.</p>
<p>It’s a social media giant that must monitor a global operation that <a href="https://investor.fb.com/financials/?section=annualreports">generates over $86 billion in revenue</a>, <a href="https://www.statista.com/statistics/273563/number-of-facebook-employees">employs 58,600 people</a> and serves <a href="https://www.oberlo.com/blog/facebook-statistics">more than 2.8 billion active monthly users</a> – more than a third of the world’s population – as well as millions of advertisers. Very few companies operate in a space that involves user content moderation, and none at this scale. Other platform companies have considerably less content, and usually only in one language, whereas Facebook is available in <a href="https://investor.fb.com/financials/?section=annualreports">100 languages</a>. </p>
<p>Given Facebook’s shareholder-elected corporate board of directors includes just 10 people, each of whom has their own demanding day job, it is not surprising to me that Zuckerberg decided to set up an outside panel to develop decisions about speech and online safety. </p>
<p>It’s unlikely, however, that other companies will ever have a similar type of board. The Oversight Board has been extremely resource intensive. It <a href="https://oversightboard.com">took over two years to establish</a> through a series of 22 roundtable meetings with participants in 88 countries, six in-depth workshops, 250 one-on-one discussions and 1,200 submissions – not to mention its high cost of $130 million, which is meant to last six years.</p>
<h2>4. Was it a good idea, from a corporate governance standpoint?</h2>
<p>A growing body of research <a href="https://www.doi.org/10.5465/19416520.2016.1120957">questions whether directors on corporate boards can fulfill their oversight responsibilities</a> on their own, due to the sheer amount of information that must be obtained, processed and shared. </p>
<p>While I think we will see more corporate boards outsource some decisions and processes to external panels – as a small board cannot be expected to have the requisite knowledge and skills on all topics – few corporations are likely to follow Facebook’s lead and grant an outside body the power to make unilateral decisions. </p>
<p>Since only the board of directors is beholden to a company’s shareholders, board directors ultimately need to take the final responsibility for corporate decisions. </p>
<figure class="align-center ">
<img alt="Facebook CEO Mark Zuckerberg looks to his right during a hearing on Capitol Hill in 2019" src="https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=416&fit=crop&dpr=1 600w, https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=416&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=416&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=523&fit=crop&dpr=1 754w, https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=523&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/399044/original/file-20210505-23-1ajwvt5.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=523&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Zuckerberg may still face political blowback because of the Oversight Board’s decision.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FacebookOversightPanel/acf2cd51a2fc4dcfab8cff7ab466f749/photo?Query=Facebook%20oversight%20board&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=14&currentItemNo=13">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>5. Does the Oversight Board shield Facebook from political or legal fallout?</h2>
<p>While it’s likely that some at Facebook hoped shifting its thorniest decisions would insulate the company, executives and corporate board members from political or legal problems, as the Trump decision shows, it won’t actually do that. </p>
<p>Certainly the decision to utilize an outside oversight body might be interpreted as political, as all 10 Facebook board directors <a href="https://investor.fb.com/leadership-and-governance/?section=board">live and work</a> predominantly in the United States and might be hesitant to vote to make decisions like restricting the freedom of expression of a former president who <a href="https://www.usnews.com/news/politics/articles/2021-04-27/president-trump-losing-support-from-republicans-poll-finds">still commands support among many Americans</a> – and <a href="https://www.cfr.org/blog/2020-election-numbers">won 47% of the popular vote</a> in the last election. </p>
<p>But whether Facebook makes the decision itself or outsources to an independent board, Facebook will still face the consequences if the decision to uphold the Trump ban alienates Americans or people around the world who feel it is an attack on their freedom of expression. </p>
<p>People may leave Facebook for other platforms such as <a href="https://techcrunch.com/2021/01/09/parler-jumps-to-no-1-on-app-store-after-facebook-and-twitter-bans/">Parler</a>, <a href="https://reason.com/2018/10/29/ready-to-get-off-facebook-reason-reviews/">Gab</a> and <a href="https://www.theverge.com/2021/1/7/22218989/signal-new-signups-whatsapp-facebook-privacy-controversy-elon-musk">Signal</a>, as <a href="https://fortune.com/2021/01/11/mewe-gab-rumble-growth-parler-trump-bans-social-media-violence/">many have already done</a> since the initial Trump ban in January – and knowing an outside body made the decision won’t stop them. </p>
<p>And a poor “political” decision <a href="https://www.wsj.com/articles/as-decision-on-trump-looms-facebook-preps-its-advertisers-11620151529">could drive away some advertisers</a> and make it harder to hire and retain employees, regardless of who made it.</p>
<h2>6. How are other social media companies handling these issues differently?</h2>
<p>Twitter CEO Jack Dorsey made an internal decision to <a href="https://www.nbcnews.com/tech/tech-news/twitter-permanently-bans-president-donald-trump-n1253588">permanently suspended Trump</a> from his company’s platform on Jan. 8, 2021. While Dorsey acknowledged that the decision <a href="https://www.foxnews.com/media/twitter-ceo-jack-dorsey-defends-trump-ban-but-admits-his-companys-power-sets-a-dangerous-precedent">set a “dangerous precedent</a>,” Twitter, like other social media companies, doesn’t have an appeals process for that kind of decision. </p>
<p>Some newer companies, such as <a href="https://www.usatoday.com/story/tech/2021/01/20/mewe-social-network-gains-members-touts-privacy-over-facebook/4228797001/">MeWe</a> and <a href="https://www.foxbusiness.com/technology/youtube-rival-rumble-growth-ceo">Rumble</a>, offer more lax content moderation in order to allow greater freedom of expression for users.</p>
<p><a href="https://gab.com/">Gab</a> describes itself as “A social network that champions free speech, individual liberty and the free flow of information online. All are welcome.” <a href="https://legal.parler.com/documents/guidelines.pdf">Parler’s content guidelines</a> are even more basic and keeps content moderation to an “absolute minimum. We prefer to leave decisions about what is seen and who is heard to each individual.” </p>
<p><a href="https://www.businessinsider.com/gab-reports-growth-in-the-midst-of-twitter-bans-2021-1">Gab</a> and <a href="https://qz.com/1982895/parler-needs-apple-so-much-its-actually-moderating-more-content/,">Parler</a> are presently banned from the app stores of both Apple and Google due to a lack of content moderation.</p>
<p>[<em>You’re smart and curious about the world. So are The Conversation’s authors and editors.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=youresmart">You can read us daily by subscribing to our newsletter</a>.]</p><img src="https://counter.theconversation.com/content/160349/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Siri Terjesen has received research and review funding from U.S., Norwegian, and Swedish governments, as well as several private foundations.</span></em></p>The social media giant’s third-party review panel upheld Facebook’s ban on Donald Trump. A corporate governance expert explains why Facebook created the Oversight Board.Siri Terjesen, Phil Smith Professor of Entrepreneurship & Associate Dean, Research & External Relations, Florida Atlantic UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1585252021-04-08T08:42:10Z2021-04-08T08:42:10ZCompany directors can’t serve two masters: what went wrong at Australia Post<p>Shareholder primacy is often said to be the guiding principle of corporations. </p>
<p>The idea is that they exist to benefit their shareholders by providing dividends and capital gains, the more the better.</p>
<p>Fifty years ago, Nobel Prize winning economist Milton Friedman went as far as to argue that was the <a href="https://theconversation.com/vital-signs-50-years-ago-milton-friedman-told-us-greed-was-good-he-was-half-right-146294">only</a> responsibility of companies — to make as much for their shareholders as the law would allow. </p>
<p>These days, most boards refrain from speaking about shareholder primacy and instead talk about the interests of the company, which includes things such as social license, stakeholder engagement and community expectations. </p>
<p>But what happens if shareholders try to tell boards and company managements how to go about their jobs? </p>
<p>Are the directors and chief executives required to follow their instructions? </p>
<h2>Directors serve their companies first</h2>
<p>From a legal perspective, company directors are required to act in the best interests of the company rather than (what might be the shorter-term) interests of shareholders. </p>
<p>If shareholders are not happy with the decisions of the company, they have the option of replacing the directors.</p>
<p>The directors, under the leadership of the board chair have the ability to remove and give instructions to the chief executive and senior managers.</p>
<p>Directors are accountable to shareholders indirectly, because shareholders have the ability to vote them off the board.</p>
<h2>Shareholders lack direct power</h2>
<p>In large public companies, this threat is often difficult to carry out because big institutional investors usually support incumbent managements and lack the resources or the will to actively monitor all of the companies in their portfolio, at least while they seem to be doing well. </p>
<p>Even smaller shareholders (most of them) are passive investors. </p>
<p>But directors don’t have carte blanche. They are legally bound to act in the best interests of their company. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/not-suitable-where-to-now-for-james-packer-and-crowns-other-casinos-154938">'Not suitable': where to now for James Packer and Crown's other casinos?</a>
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<p>There is no parallel duty for them to act in the best interest of shareholders.</p>
<p>Decisions about how the company’s money should be spent and what it should pay its workers are solely decisions for company management, under the supervision and ultimately authority of the board of directors. </p>
<h2>Even government shareholders</h2>
<p>But what if the company is a government-owned enterprise? What if it has only one shareholder (the government) who has appointed the entire board?</p>
<p>Legally speaking, that makes no difference. The board still has the authority to refuse to do what the shareholder wants. </p>
<p>From a practical perspective, serving on the board of a government-owned company is different from serving on the board of a non-government company.</p>
<p>Governance in the boards of government-owned companies is inherently politicised because the government can appoint and remove directors whenever it wants, for whatever reasons it wants, rational or otherwise.</p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=969&fit=crop&dpr=1 600w, https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=969&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=969&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1218&fit=crop&dpr=1 754w, https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1218&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/393958/original/file-20210408-23-qkfsh0.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1218&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Former Australia Post chief Christine Holgate.</span>
<span class="attribution"><span class="source">BRENDAN ESPOSITO/AAP</span></span>
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</figure>
<h2>Even at Australia Post</h2>
<p>Which brings us to the Australia Post “<a href="https://www.abc.net.au/news/2021-04-06/former-australia-post-boss-christine-holgate-senate-submission/100051768">scandal</a>”. </p>
<p>A new chief executive, Christine Holgate, transformed the business, opening up new business lines, expanding offshore, producing massive increases in revenues and profits and energising the company’s network of disillusioned franchisees. </p>
<p>Instead of thanking her, late last year the head of the sole shareholder, Prime Minister Scott Morrison, labelled part of her conduct “<a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansardr/f1f6ecee-f76e-46be-b279-e3d2a88da6c2/&sid=0084">disgraceful and not on</a>”.</p>
<p>She had used company money to buy expensive presents (<a href="https://www.abc.net.au/news/2020-10-29/christine-holgate-prime-minister-humiliated-her-cartier-watches/12828346">watches</a>) for staff who secured contracts worth hundreds of millions of dollars. </p>
<p>“So appalled and shocked was I by that behaviour — any shareholder would in a company raise their outrage if they had seen that conduct by a chief executive”, the prime minister said, that the chief executive had been instructed to stand aside and, “if she doesn’t wish to do that, she can go”.</p>
<h2>Australia Post lacked guidelines</h2>
<p>In mainstream corporate Australia, the idea of bonuses of $20,000 for staff producing millions of dollars would only raise eyebrows if no bonus was paid. </p>
<p>Linking pay to performance is common, including in government-owned entities such as the <a href="https://www.afr.com/politics/coalition-senator-questions-future-fund-bonuses-20161018-gs4qyk">Future Fund</a>.</p>
<p>But apparently not if it is done via luxury watches during a pandemic.</p>
<p>Part of the problem is confused corporate governance. The board of Australia Post didn’t have a clear framework for rewarding employees with bonuses.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-post-ceo-christine-holgate-quits-in-cartier-watches-affair-149275">Australia Post CEO Christine Holgate quits in Cartier watches affair</a>
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<p>This left the chief executive to determine how to implement a suggestion from the then chair of the board that the employees be rewarded. Increases in salary or new company cars might not have raised eyebrows, not in the way watches did. </p>
<p>But handing out watches didn’t break any rules. If the board had put in place detailed-enough policies for bonus payments the chief executive would have had clear rules to follow. </p>
<p>Those rules could have been designed with the aim of not embarrassing the government. </p>
<h2>Its chair sided with the prime minister</h2>
<p>Without clear rules, the chairman and chief executive should have worked as a team, and might have. In her <a href="https://www.aph.gov.au/DocumentStore.ashx?id=7daf13a9-3952-4cfc-8559-0df1f7e36b88&subId=705432">submission</a> to the Senate inquiry, Christine Holgate says that when the watches were bought in 2018 the then chair took part in a discussion about whether to award the bonuses in the form of watches.</p>
<p>The subsequent chair paid greater attention to a <a href="https://www.aph.gov.au/Parliamentary_Business/Hansard/Hansard_Display?bid=chamber/hansardr/f1f6ecee-f76e-46be-b279-e3d2a88da6c2/&sid=0084">complaint</a> from the sole shareholder even though his legal duty was to the company rather than its owner.</p>
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Read more:
<a href="https://theconversation.com/covid-hands-australia-post-opportunity-to-end-daily-delivery-140848">COVID hands Australia Post opportunity to end daily delivery</a>
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<p>The more-serious scandal involving <a href="https://theconversation.com/not-suitable-where-to-now-for-james-packer-and-crowns-other-casinos-154938">Crown Casino</a> demonstrates clearly the problems that can arise when board members appear to bend over backwards to assist the major shareholder rather than the company.</p>
<p>The Bible says <a href="https://biblehub.com/luke/16-13.htm">no servant can serve two masters</a>. Directors are required to serve their companies.</p><img src="https://counter.theconversation.com/content/158525/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jason Harris does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Director’s responsibilities are to the company, not the the owners, even if those owners are the government.Jason Harris, Professor of Corporate Law, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1508302021-03-30T18:47:35Z2021-03-30T18:47:35ZAyn Rand-inspired ‘myth of the founder’ puts tremendous power in hands of Big Tech CEOs like Zuckerberg – posing real risks to democracy<figure><img src="https://images.theconversation.com/files/392144/original/file-20210329-19-1hredf9.jpg?ixlib=rb-1.1.0&rect=250%2C189%2C5380%2C3638&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Ayn Rand compares entrepreneurs to Atlas, the Greek god who holds up the world. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RockefellerCenter/804aeaab821647b7992a59be5246aabd/photo?Query=Rockefeller%20center%20statue&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=68&currentItemNo=39">AP Photo/Richard Drew</a></span></figcaption></figure><p>Coinbase’s <a href="https://www.pymnts.com/news/ipo/2021/coinbase-ipo-pushed-april/">plan to go public in April</a> highlights a troubling trend among tech companies: Its founding team will maintain voting control, making it mostly immune to the wishes of outside investors. </p>
<p>The <a href="https://www.bloomberg.com/opinion/articles/2021-03-02/coinbase-ipo-coin-the-crypto-exchange-is-a-100-billion-cult?sref=Hjm5biAW">best-known U.S. cryptocurrency</a> exchange is doing this by <a href="https://www.sec.gov/Archives/edgar/data/0001679788/000162828021004939/coinbaseglobalincs-1a1.htm#i86a9d9b35e45447ea6eb369e5dcf1e6a">creating two classes of shares</a>. One class will be available to the public. The other is reserved for the founders, insiders and early investors, and will wield 20 times the voting power of regular shares. That will ensure that after all is said and done, the <a href="https://finance.yahoo.com/finance/news/coinbase-ipo-7-key-takeaways-154321846.html">insiders will control 53.5% of the votes</a>. </p>
<p>Coinbase <a href="https://www.cii.org/dualclass_stock">will join dozens of other publicly traded tech companies</a> – many with household names such as Google, Facebook, Doordash, Airbnb and Slack – that have <a href="https://www.bloomberg.com/quicktake/dual-class-shares?sref=Hjm5biAW">issued two types of shares</a> in an effort to retain control for founders and insiders. The reason this is becoming increasingly popular has a lot to do with <a href="https://www.nytimes.com/2017/07/13/business/ayn-rand-business-politics-uber-kalanick.html">Ayn Rand</a>, <a href="https://www.theguardian.com/books/2017/apr/10/new-age-ayn-rand-conquered-trump-white-house-silicon-valley">one of Silicon Valley’s favorite authors</a>, and the “myth of the founder” her writings have helped inspire. </p>
<p><a href="https://www.sec.gov/news/speech/fleming-dual-class-shares-recipe-disaster">Engaged investors</a> and governance experts <a href="https://digitalcommons.law.seattleu.edu/sulr/vol39/iss2/13/">like me</a> generally loathe dual-class shares because they undermine executive accountability by making it harder to rein in a wayward CEO. I first stumbled upon this method executives use to limit the influence of pesky outsiders while working on my <a href="https://doi.org/10.2307/2393275">doctoral dissertation on hostile takeovers</a> in the late 1980s.</p>
<p>But the risks of this trend are greater than simply entrenching bad management. Today, given the role tech companies play in <a href="https://knightfoundation.org/digitalcitizenship/technology/">virtually every corner of American life</a>, it poses a threat to democracy as well. </p>
<h2>All in the family</h2>
<p>Dual-class voting structures have been around for decades. </p>
<p>When Ford Motor Co. went public in 1956, its founding family used the arrangement to <a href="https://www.nasdaq.com/articles/63-years-later-what-can-investors-learn-fords-1956-ipo-2019-01-16">maintain 40% of the voting rights</a>. <a href="https://www.washingtonpost.com/business/why-dual-class-shares-catch-on-over-investor-worries/2021/03/04/38ac326a-7d14-11eb-8c5e-32e47b42b51b_story.html">Newspaper companies</a> like <a href="https://www.casehero.com/new-york-times-co/">The New York Times</a> and <a href="https://media.terry.uga.edu/documents/finance/howell_dual_class_share.pdf">The Washington Post</a> often use the arrangement to protect their journalistic independence from Wall Street’s insatiable demands for profitability.</p>
<p>In a typical dual-class structure, the company will sell one class of shares to the public, usually called class A shares, while founders, executives and others retain class B shares with enough voting power to maintain majority voting control. This allows the class B shareholders to determine the outcome of matters that come up for a shareholder vote, such as who is on the company’s board. </p>
<p>Advocates see a dual-class structure as a way to fend off short-term thinking. In principle, this insulation from investor pressure can allow the company to <a href="http://dx.doi.org/10.2139/ssrn.3183517">take a long-term perspective</a> and make tough strategic changes even at the expense of short-term share price declines. Family-controlled businesses often view it as a way to preserve their legacy, which is why Ford remains a family company after more than a century.</p>
<p>It also makes a company <a href="https://doi.org/10.2307/2393275">effectively immune from hostile takeovers</a> and the whims of activist investors.</p>
<p><iframe id="jBE9l" class="tc-infographic-datawrapper" src="https://datawrapper.dwcdn.net/jBE9l/3/" height="400px" width="100%" style="border: none" frameborder="0"></iframe></p>
<h2>Checks and balances</h2>
<p>But this insulation comes at a cost for investors, who lose a crucial check on management. </p>
<p>Indeed, dual-class shares essentially short-circuit <a href="https://doi.org/10.1146/annurev.soc.31.041304.122249">almost all the other means that limit executive power</a>. The board of directors, elected by shareholder vote, is the ultimate authority within the corporation that oversees management. Voting for directors and proposals on the annual ballot are the main methods shareholders have to ensure management accountability, other than simply selling their shares.</p>
<p><a href="https://doi.org/10.1111/j.1540-6261.2009.01477.x">Recent research shows</a> that the value and stock returns of dual-class companies are lower than other businesses, and they’re more likely to overpay their CEO and waste money on expensive acquisitions.</p>
<p>Companies with dual-class shares <a href="https://site.warrington.ufl.edu/ritter/ipo-data/">rarely made up more than 10% of public listings</a> in a given year until the 2000s, when tech startups began using them more frequently, according to data collected by University of Florida business professor Jay Ritter. The dam began to break after Facebook went public in 2012 with a <a href="https://www.nytimes.com/2009/11/25/technology/internet/25facebook.html">dual-class stock structure</a> that kept founder Mark Zuckerberg firmly in control – <a href="https://www.vox.com/technology/2018/11/19/18099011/mark-zuckerberg-facebook-stock-nyt-wsj">he alone controls almost 60% of the company</a>. </p>
<p>In 2020, over 40% of tech companies that went public did so with two or more classes of shares with unequal voting rights. </p>
<p>This has alarmed <a href="https://corpgov.law.harvard.edu/2019/06/28/dual-class-shares-governance-risks-and-company-performance/">governance experts</a>, <a href="https://www.cii.org/dualclassenablers">some investors</a> and <a href="https://corpgov.law.harvard.edu/2017/04/24/the-untenable-case-for-perpetual-dual-class-stoc">legal scholars</a>. </p>
<figure class="align-center ">
<img alt="Facebook CEO Mark Zuckerberg speaks into a microphone at a House committee hearing in 2019" src="https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/392147/original/file-20210329-25-19izq9b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Zuckerberg controls almost 60% of Facebook through class B shares.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/FacebookAustraliaPowerPlay/007f1af98e314913aaf70e88a4b54a93/photo?Query=zuckerberg&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2388&currentItemNo=4">AP Photo/Andrew Harnik</a></span>
</figcaption>
</figure>
<h2>Ayn Rand and the myth of the superhuman founder</h2>
<p>If the dual-class structure is bad for investors, then why are so many tech companies able to convince them to buy their shares when they go public?</p>
<p>I attribute it to Silicon Valley’s mythology of the founder –- what I would dub an “Ayn Rand theory of corporate governance” that credits founders with superhuman vision and competence that merit deference from lesser mortals. Rand’s novels, most notably “Atlas Shrugged,” portray an America in which <a href="https://www.businessinsider.com/atlas-shrugged-business-advice-2013-10">titans of business hold up the world</a> by creating innovation and value but are beset by moochers and looters who want to take or regulate what they have created.</p>
<p>Perhaps unsurprisingly, Rand has a strong following among <a href="https://www.theguardian.com/books/2017/apr/10/new-age-ayn-rand-conquered-trump-white-house-silicon-valley">tech founders</a>, whose <a href="https://onezero.medium.com/the-philosophy-that-explains-why-so-many-silicon-valley-ceos-are-always-playing-victim-8dafeccb71f7">creative genius may be “threatened”</a> by any form of outside regulation. <a href="https://www.maavens.com/m/elon-musk">Elon Musk</a>, Coinbase founder <a href="https://www.maavens.com/m/brian-armstrong">Brian Armstrong</a> and even the late <a href="https://www.maavens.com/m/steve-jobs">Steve Jobs</a> all have recommended “Atlas Shrugged.” </p>
<figure class="align-center ">
<img alt="Ayn Rand sits with her arms folded outside Grande Central Terminal in New York City" src="https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=470&fit=crop&dpr=1 600w, https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=470&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=470&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=590&fit=crop&dpr=1 754w, https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=590&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/392360/original/file-20210329-15-rcl59s.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=590&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The writings of Ayn Rand are revered by many tech titans.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/BooksAynRand/533cbfabe6cc40b5913741a2f72034b5/photo?Query=ayn%20AND%20rand&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6&currentItemNo=0">AP Photo</a></span>
</figcaption>
</figure>
<p>Her work is also celebrated by the venture capitalists who typically finance tech startups – <a href="https://www.cbinsights.com/research/founders-best-venture-capitalist-investors/">many of whom were founders themselves</a>. </p>
<p>The basic idea is simple: Only the founder has the vision, charisma and smarts to steer the company forward. </p>
<p>It begins with a powerful founding story. <a href="https://corporate.delltechnologies.com/en-us/about-us/who-we-are/timeline.htm">Michael Dell</a> and Zuckerberg created their multibillion-dollar companies <a href="https://www.insider.com/companies-started-by-teenagers-2019-10">in their dorm rooms</a>. Founding partner pairs Steve Jobs and Steve Wozniak and Bill Hewlett and David Packard built their first computer companies <a href="https://www.theguardian.com/technology/2014/dec/05/steve-wozniak-apple-starting-in-a-garage-is-a-myth">in the garage</a> – Apple and Hewlett-Packard, respectively. Often the stories are true, but sometimes, as in Apple’s case, less so. </p>
<p>And from there, founders face a gantlet of rigorous testing: recruiting collaborators, gathering customers and, perhaps most importantly, attracting multiple rounds of funding from venture capitalists. Each round serves to <a href="https://the-realignment.simplecast.com/episodes/ep-98-balaji-srinivasan-the-coming-decentralization-of-everything-V_zTV5Hk">further validate the founder’s leadership competence</a>. </p>
<p>The Founders Fund, a venture capital firm that has backed dozens of tech companies, including Airbnb, Palantir and Lyft, is one of the biggest proselytizers for this myth, as <a href="https://foundersfund.com/the-future/">it makes clear in its “manifesto.”</a> </p>
<p>“The entrepreneurs who make it have a near-messianic attitude and believe their company is essential to making the world a better place,” it asserts. True to its stated belief, the fund says it has “never removed a single founder,” which is why it has been a big supporter of dual-class share structures. </p>
<p>Another venture capitalist <a href="https://www.businessinsider.com/entrepreneurship-startup-founders-success-overconfidence-andreessen-horowitz-scott-kupor-2019-6">who seems to favor</a> giving founders extra power is Netscape founder <a href="https://a16z.com/portfolio/">Marc Andreessen</a>. His venture capital firm Andreessen Horowitz is Coinbase’s <a href="https://www.sec.gov/Archives/edgar/data/0001679788/000162828021005373/coinbaseglobalincs-1a2.htm">biggest investor</a>. And most of the <a href="https://a16z.com/portfolio/">companies in its portfolio</a> that have gone public also used a dual-class share structure, according to my own review of their securities filings.</p>
<h2>Bad for companies, bad for democracy</h2>
<p>Giving founders voting control disrupts the checks and balances needed to keep business accountable and can lead to big problems. </p>
<p><a href="https://www.newyorker.com/magazine/2020/11/30/how-venture-capitalists-are-deforming-capitalism">WeWork founder Adam Neumann</a>, for example, demanded “unambiguous authority to fire or overrule any director or employee.” As his behavior became increasingly erratic, the company hemorrhaged cash in the lead-up to its ultimately canceled initial public offering. </p>
<p>Investors forced out Uber’s Travis Kalanick in 2017, but <a href="https://www.nytimes.com/2017/06/21/technology/uber-ceo-travis-kalanick.html">not before he’s said to have created a workplace culture</a> that allegedly allowed sexual harassment and discrimination to fester. When Uber finally went public in 2019, <a href="https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm">it shed its dual-class structure</a>. </p>
<p>There is <a href="https://www.nber.org/books-and-chapters/measuring-entrepreneurial-businesses-current-knowledge-and-challenges/are-founder-ceos-good-managers">some evidence</a> that founder-CEOs are less gifted at management than other kinds of leaders, and their companies’ performance can suffer as a consequence.</p>
<p>But investors who buy shares in these companies know the risks going in. There’s much more at stake than their money. </p>
<p>What happens when powerful, unconstrained founders control the <a href="https://theconversation.com/big-techs-swift-reaction-to-capitol-rioters-reveals-new-face-of-corporate-political-power-and-a-threat-to-american-democracy-153061">most powerful companies in the world</a>? </p>
<p>The tech sector is <a href="https://journals.sagepub.com/doi/10.1177/2631787721995198">increasingly laying claim</a> to central command posts of the U.S. economy. Americans’ access to news and information, financial services, social networks and even groceries is mediated by a handful of companies controlled by a handful of people. </p>
<p>Recall that in the wake of the Jan. 6 Capitol insurrection, the CEOs of Facebook and Twitter <a href="https://theconversation.com/big-techs-swift-reaction-to-capitol-rioters-reveals-new-face-of-corporate-political-power-and-a-threat-to-american-democracy-153061">were able to eject former President Donald Trump</a> from his favorite means of communication – <a href="https://www.washingtonpost.com/technology/2021/01/14/trump-twitter-megaphone/">virtually silencing him overnight</a>. And <a href="https://www.nytimes.com/2021/01/09/technology/apple-google-parler.html">Apple, Google and Amazon cut off Parler</a>, the right-wing social media platform used by some of the insurrectionists to plan their actions. Not all of these companies have dual-class shares, but this illustrates just how much power tech companies have over America’s political discourse.</p>
<p>One does not have to disagree with their decision to see that a form of political power is becoming increasingly concentrated in the hands of companies with limited outside oversight.</p>
<p>[<em>Deep knowledge, daily.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=deepknowledge">Sign up for The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/150830/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jerry Davis does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Tech companies’ use of dual-class share structures to keep control in the hands of founders and other insiders gives a handful of people power over enormous swaths of American life.Jerry Davis, Fellow at the Center for Advanced Study in the Behavioral Sciences at Stanford and Professor of Management and Sociology, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1492532020-12-01T16:24:41Z2020-12-01T16:24:41ZCanadian startups need to focus on corporate governance to grow and thrive<figure><img src="https://images.theconversation.com/files/372090/original/file-20201130-17-1ytc9ka.jpg?ixlib=rb-1.1.0&rect=0%2C0%2C4010%2C2299&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Good governance is critical for growth. But Canadian startups haven't yet got a handle on the importance of governance when seeking investors.</span> <span class="attribution"><span class="source">(Ravi Roshan/Unsplash)</span></span></figcaption></figure><p>To help recover from our current economic crisis, Canada needs to develop the next generation of world-leading technology corporations. </p>
<p>The <a href="https://www.theglobeandmail.com/business/article-venture-capital-industry-lobbies-ottawa-for-new-funds-to-prevent/">venture capital (VC) industry is seeking more government support</a>, including direct funding, for early-stage technology corporations. Unfortunately, any potential increased financing will not help the vast majority of entrepreneurs.</p>
<p>That’s because most entrepreneurs don’t understand how to structure their corporations to attract VC financing. This is partly due to a lack of respect for the needs of investors, and an associated weak understanding about corporate governance matters.</p>
<h2>VC frustrations</h2>
<p>Venture capitalists are specialized intermediaries who raise money from institutions to invest in technology-oriented corporations. <a href="http://www.angelblog.net/Angel_Investors_VCs_and_Entrepreneurs_Gaps_in_Understanding.html">VCs become frustrated</a> when entrepreneurs do not put in the time required to learn about, and implement, effective governance practices before launching their startups. </p>
<p>They complain that entrepreneurs often expect them to spend multiple hours learning about their business before making an investment, even though the entrepreneurs have neglected to take the time to learn about investor needs. Investors in early-stage corporations are active, and want to be heavily involved when key decisions are being made.</p>
<p>VCs, and other startup investors, review hundreds of potential companies a year in order to make a handful of investments. Early-stage investors will spend an average of <a href="https://docsend.com/view/p8jxsqr">under five minutes</a> reviewing an entrepreneur’s pitch deck, and will use that time to see if there are any critical flaws in the startup’s plans.</p>
<figure class="align-center ">
<img alt="A man looks at a tablet as another man sits behind him in an outdoor setting." src="https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372087/original/file-20201130-21-vph74q.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Potential investors will pore over a startup’s plans before deciding to invest.</span>
<span class="attribution"><span class="source">(Unsplash)</span></span>
</figcaption>
</figure>
<p><a href="https://www.creativedestructionlab.com/locations/calgary/">In a specialized program at the Haskayne School of Business at the University of Calgary</a>, we’ve noticed that when investors identify a potentially interesting opportunity, the entrepreneur will be asked to provide two sets of detailed corporate information: a list of all shareholders and key governance documents. </p>
<p>If entrepreneurs have been too generous, or too miserly, in the distribution of shares, this will lessen their ability to grow a strong leadership team, will reflect poorly on the entrepreneur’s skills and is a big red flag for investors. </p>
<h2>Complex governance challenges</h2>
<p>Most entrepreneurs don’t appreciate that the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3352203">governance challenges of a startup</a> are in many ways more complex than those of an established corporation. The type of securities used to raise financing, for example, and the arrangements negotiated between entrepreneurs and investors can be quite complicated.</p>
<p>That means specialized governance mechanisms are needed that can be put into place at a relatively low cost during the early years of a startup. Once a corporation has developed past a certain point, any governance deficiencies may be impossible to correct or may require too much time and money, scaring away potential investors. </p>
<p>An investor’s time is valuable and is better spent helping a startup move forward as opposed to helping an entrepreneur clean up past mistakes. Taken together, the failure to attract investors and to build a strong management team have been identified as the <a href="https://www.cbinsights.com/research/startup-failure-reasons-top/">second and third most important reasons for startup failure</a> — and together they add up to a higher value than the first reason: no market need for the startup’s product or service. </p>
<p>There is information available that can help entrepreneurs learn how to work with investors. Canadian sources include the <a href="https://www.nacocanada.com/cpages/entrepreneur-resources">National Angel Capital Organization (NACO)</a> and the <a href="https://www.cvca.ca/research-insight/model-legal-documents/">Canadian Venture Capital Association (CVCA)</a>. </p>
<p>Unfortunately, however, much of the governance information on these types of sites is highly technical and it takes experience to understand which governance practices are reasonable. An entrepreneur is encouraged to seek out experienced practitioners to assist in making this determination. </p>
<p>Since this is such a specialized area, the number of such practitioners is limited. Even seasoned lawyers and directors who have spent their careers working with large publicly traded firms can struggle when dealing with the governance issues faced by startups.</p>
<h2>A solution for the governance gap</h2>
<p>Drawing upon academic research, and insights from leading governance practitioners, researchers at the Haskayne School developed and delivered <a href="https://haskayne.ucalgary.ca/future-students/executive-education/programs-board-directors/enhancing-private-equity-governance">Canada’s first governance course specifically designed to meet the needs of early-stage start-ups</a> this year. </p>
<p>Six months post-program, several entrepreneurs discussed how they had effectively restructured their share ownership to make their corporation more investable, while others indicated that they had been able to attract significant capital after the course. </p>
<figure class="align-right zoomable">
<a href="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4603%2C1968&q=45&auto=format&w=1000&fit=clip"><img alt="A collection of Canadian and American bills." src="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&rect=0%2C14%2C4603%2C1968&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=260&fit=crop&dpr=1 600w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=260&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=260&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=326&fit=crop&dpr=1 754w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=326&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/372085/original/file-20201130-19-1bdo24v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=326&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Venture capitalists want to invest their money in startups that are well-managed.</span>
<span class="attribution"><span class="source">(John McArthur/Unsplash)</span></span>
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</figure>
<p>One director participant indicated that he was able to provide valuable direction as an angel investor and mentor to a startup that increased the confidence of the startup’s CEO, and its advisory board, in their fund-raising efforts.</p>
<p>Entrepreneurs provided with guidance at critical stages of their corporation’s development have a much higher chance of success. Developing strong governance practices will increase an entrepreneur’s ability to attract this support. </p>
<p>Good business requires good governance, and startups require a particular kind of governance to help them grow and prosper. Ensuring effective governance at Canadian technology startups needs to be part of any solution aimed at accelerating the development of these corporations.</p><img src="https://counter.theconversation.com/content/149253/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Robinson does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Good business requires good governance, and startups require a particular kind of governance to help them grow and prosper. That’s why it’s so important for startups to get governance right early on.Michael Robinson, Professor and Chen Fong Fellow in Entrepreneurial Finance, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1491012020-11-02T19:07:08Z2020-11-02T19:07:08ZA rushed move to virtual AGMs would disempower shareholders<figure><img src="https://images.theconversation.com/files/366638/original/file-20201030-18-gu9szn.jpg?ixlib=rb-1.1.0&rect=0%2C108%2C3415%2C2108&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Westpac AGM, 2019.</span> <span class="attribution"><span class="source">Mick Tsikas/AAP</span></span></figcaption></figure><p>Treasurer Josh Frydenberg appears to have backed down. </p>
<p>An extraordinarily rushed timetable that would have allowed investors and others just 12 days to comment on draft legislation permitting companies to hold virtual rather than face-to-face annual general meetings has been <a href="https://treasury.gov.au/consultation/c2020-119106">extended by seven days</a>, to the end of this week.</p>
<p>And Frydenberg has suggested he no longer supports it. He <a href="https://www.afr.com/chanticleer/hybrid-solution-should-end-virtual-agm-push-20201030-p56a80">now says</a> “reforms to the regulation of AGMs should enhance the ability of shareholders to interact with the board, not diminish it”. </p>
<p>The idea took hold when it became apparent COVID-19 would stop companies being able to hold physical meetings of shareholders. </p>
<p>In May the federal government announced a <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-it-easier-business-operate-during-covid-19">six-month temporary</a> relaxation of the Corporations Act rules to allow companies to hold online shareholder meetings. </p>
<p>The six months was later extended until <a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/making-it-easier-business-operate-during-covid-19">March 22, 2021</a>.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=272&fit=crop&dpr=1 600w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=272&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=272&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=342&fit=crop&dpr=1 754w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=342&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/366915/original/file-20201102-13-1cinelj.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=342&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="attribution"><a class="source" href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02303227-2A1260683?access_token=83ff96335c2d45a094df02a206a39ff4">In 2020 Westpac's AGM will be virtual</a></span>
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<h2>Temporary relief was to become permanent</h2>
<p>Then, in a surprising development two weeks ago (on October 19), the federal government published <a href="https://treasury.gov.au/consultation/c2020-119106">draft legislation</a> to permanently allow companies to hold virtual-only shareholder meetings, including annual general meetings. </p>
<p>The reaction was caustic.</p>
<p>There are two main criticisms. One is focused on the process adopted by the government. The other is focused on the proposal itself. </p>
<p>The process was undoubtedly flawed. Twelve days — in the midst of the AGM season — is an exceptionally short amount of time to consider such important reform.</p>
<p>The more fundamental criticisms relate to what’s proposed.</p>
<p>We believe it will undermine the role of shareholder meetings in making company directors answer to shareholders.</p>
<h2>Shorter questions, fewer questions</h2>
<p>There is evidence this has already been happening. </p>
<p>At some AGMs, shareholders’ questions have <a href="https://www.afr.com/markets/equity-markets/geoff-wilson-to-lead-investor-army-against-virtual-agms-20201026-p568iu">been ignored</a>. </p>
<p>Others meetings have been <a href="https://www.theaustralian.com.au/business/leadership/investor-groups-pushing-back-on-virtual-agm-proposal/news-story/dcfe57c041a2e9b8941bf7c78bed9cf6">much shorter</a>.</p>
<p>The Australian Shareholders’ Association says a good AGM is an opportunity for <a href="https://www.australianshareholders.com.au/common/Uploaded%20files/MEDIA%20RELEASES/MR_27102020_ASA%20-%20shortcomings%20of%20online%20only%20AGMs.pdf">healthy discussion</a> and exchange of information and views. In contrast, a virtual meeting “is a sterile format where companies are able to ignore questions, and gloss over details”.</p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/australia-is-ripe-for-shareholder-activism-69422">Australia is ripe for shareholder activism</a>
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<p>In the US, the Council of Institutional Investors (representing institutional investors with more than US$45 trillion under management) <a href="https://www.cii.org/files/issues_and_advocacy/correspondence/2020/Virtual%20Meetings%20Letter%20_%20Corrected%20Copy_.pdf">has complained</a> to the US Securities and Exchange Commission about the virtual meetings held because of COVID-19 — calling them a “poor substitute for in-person shareholder meetings” that placed obstacles in the path of shareholders wanting to participate in a meaningful way.</p>
<h2>Hard evidence is emerging</h2>
<p>A <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3674998">study</a> published in August about virtual shareholder meetings during COVID-19 supports these concerns. </p>
<p>Research by Miriam Schwartz-Ziv examined the transcripts and audio recordings for 94 US corporations that held an in-person or predominately in-person meeting last year and a virtual meeting this year. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/what-limits-shareholder-activism-is-the-free-rider-problem-127232">What limits shareholder activism is the free-rider problem</a>
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<p>The move to virtual meetings shortened the average meeting by 18%, decreased the time dedicated to providing a business update by 40%, and decreased the average time spent on answering questions by 14%. </p>
<p>Schwartz-Ziv says these findings:</p>
<blockquote>
<p>may suggest that not having visibly present shareholders, and perhaps not observing shareholders’ responses throughout the meeting, ultimately leads to less information communicated by the company to the shareholders</p>
</blockquote>
<p>Among the tactics used were company officials incorrectly stating there were no more questions and limiting questions to resolutions being voted on. </p>
<h2>Shareholders are increasingly active</h2>
<p>Right now shareholders are more active than ever, using AGMs to put matters such as climate change on the agenda. </p>
<p>This year’s <a href="https://www.smh.com.au/business/companies/breakthrough-moment-woodside-investors-revolt-on-climate-change-20200429-p54oe8.html">Woodside Petroleum AGM</a> made history when, for the first time in a major Australian listed company, a shareholder resolution requesting the company take action on climate change received more than 50% support from shareholders, even though the resolution was opposed by the company’s directors. </p>
<p>This type of activism, which is occurring in more companies, can indeed present challenges for directors who oppose the wishes of shareholders. Some of them might welcome an opportunity to limit questions. </p>
<h2>There’s no rush</h2>
<p>But that’s no reason for the government to facilitate it. The government’s proposal was rushed and poorly justified. </p>
<p>It would be better to debate the merits of permanently allowing what are called “<a href="https://www.afr.com/chanticleer/hybrid-solution-should-end-virtual-agm-push-20201030-p56a80">hybrid</a>” AGMs. This would involve a physical meeting along with online facilities for those who can’t be physically present.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/how-westpac-is-alleged-to-have-broken-anti-money-laundering-laws-23-million-times-127518">How Westpac is alleged to have broken anti-money laundering laws 23 million times</a>
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<p>This year’s AGM season will give us enough experience with virtual shareholder meetings to allow a more informed decision on their merits during 2021. </p>
<p>There’s plenty of time.</p><img src="https://counter.theconversation.com/content/149101/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ian Ramsay receives funding from the Australian Research Council.</span></em></p><p class="fine-print"><em><span>Lloyd Freeburn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Already, under this year’s temporary provisions, the meetings have been shorter with fewer questions.Ian Ramsay, Professor, Melbourne Law School, The University of MelbourneLloyd Freeburn, Research Fellow, Centre for Corporate Law, Melbourne Law School, University of Melbourne, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1485222020-10-22T05:03:29Z2020-10-22T05:03:29ZGaming the board: Crown Resorts shows you just can’t bet on ‘independent’ directors<figure><img src="https://images.theconversation.com/files/364633/original/file-20201021-19-lamjf8.jpg?ixlib=rb-1.1.0&rect=0%2C52%2C5000%2C3285&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>What’s the difference between an independent and non-independent director?</p>
<p>This question lies at the heart of the scandal embroiling Crown Resorts, Australia’s largest gaming company, which owns casinos in Melbourne and Perth, and is seeking a licence to run a third in Sydney.</p>
<p>The inquiry into the company’s suitability to hold that licence by New South Wales’ Independent Liquor and Gaming Authority’s has revealed abject board failures, including failing to prevent its casinos being used for money laundering. </p>
<p>As the Australian Financial Review <a href="https://www.afr.com/companies/games-and-wagering/easy-decision-to-make-on-crown-s-nsw-licence-20201016-p565o8">has editorialised</a>, the inquiry has revealed “a litany of extraordinary events, remarkable management failures, a bullying culture and an appalling lack of corporate governance.”</p>
<p>At Crown Resort’s <a href="https://www.smh.com.au/business/companies/crown-chairman-coonan-apologises-to-shareholders-for-casino-s-failures-20201022-p567h2.html">annual general meeting today</a>, shareholders expressed their displeasure with 34% of votes cast rejecting Crown’s remuneration report. Any vote of more than 25% represents a “first strike”. A second strike could require a spill of the entire 11-member board.</p>
<p>There were also significant votes against the reappointment of individual board members. Two directors were saved only by the votes of major shareholder James Packer, who holds a 36% share of the company.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/experienced-shareholders-better-than-independent-directors-for-business-61160">Experienced shareholders better than independent directors for business</a>
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<p>But that’s a big part of the problem – how much the board has been in the pocket of Packer, who quit as the board’s <a href="https://www.abc.net.au/news/2018-03-21/james-packer-resigns-from-crown-resorts/9570344">executive chairman in 2018</a>.</p>
<p>In particular the inquiry has raised questions about four of Crown Resorts’ six “independent directors”, meant to ensure the company is run in the interests of all shareholders, not just major shareholders.</p>
<h2>Committed to Packer’s interests</h2>
<p>At the top of the list of cosy personal relationships is that between Packer and Andrew Demetriou, the former boss of the Australian Football League who Packer invited to join the board as an independent director in 2014.</p>
<p>Independent directors, as the name suggests, are <a href="https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-tools/pdf/05446-1-10-mem-director-t-bc-types-of-directors_a4_web.ashx">expected to have</a> no personal or economic ties with the company, its management or major shareholders. </p>
<p>But the inquiry heard how Demetriou pushed for less focus on complying with gambling regulations and more on increasing profits. In December 2018 <a href="https://www.smh.com.au/business/companies/exist-to-win-demetriou-worried-crown-was-too-focused-on-compliance-20201012-p564ax.html">he emailed Packer</a> about compliance and regulatory issues taking up “time, resources, costs and focus of management”.</p>
<p>He went on: “We exist to win; I asked management and the board to come back in the new year and turn our minds to strategies to grow revenue.”</p>
<p>In a <a href="https://www.theguardian.com/australia-news/2020/oct/13/crown-resorts-director-andrew-demetriou-denies-dishonesty-at-casino-inquiry">2019 email</a> he assured Packer of his commitment “to serving the best interests of Crown, and most importantly you”. </p>
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<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/independent-isnt-necessarily-better-why-appointing-independent-directors-can-achieve-little-103092">Independent isn't necessarily better. Why appointing independent directors can achieve little</a>
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</p>
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<h2>Not that independent</h2>
<p>Demetriou’s relationship with Packer appears indicative of the relationship between the entire board of Crown Resorts and its major shareholder. </p>
<p>Since 2016, for example, Crown has provided Packer and his private company CPH Holdings confidential information not available to other investors. This arrangement was <a href="https://www.theguardian.com/australia-news/2020/oct/21/former-crown-resorts-chairman-rob-rankin-should-be-referred-to-corporate-regulator-inquiry-told">terminated the day before</a> the annual general meeting.</p>
<p>Technically <a href="https://www.crownresorts.com.au/About-Us/Board-of-Directors">six of the 11 directors</a> on the Crown Resorts board are independent, in line with the Australian Stock Exchange’s <a href="https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-fourth-edn.pdf">corporate governance principles</a>. </p>
<p>This includes Helen Coonan, a former federal minister in the Howard goverment, appointed board chair in January; former Australian chief medical officer John Horvath; former senior federal public servant Jane Halton; former Aristocrat Leisure executive Antonia Korsanos; and advertising guru Harold Mitchell.</p>
<p>Yet the NSW inquiry <a href="https://www.theguardian.com/australia-news/2020/oct/17/the-crown-inquiry-will-the-house-that-packer-built-come-tumbling-down">also heard evidence</a> of Packer’s personal ties to Horvath, once the doctor of Packer’s father Kerry, and Mitchell, given a “no-strings-attached” $1.9 million loan by Kerry Packer in the 1990s. It also heard Korsanos should not have been categorised as an independent director, given poker machine maker Aristocrat’s business contracts with Crown. </p>
<h2>The rule, not the exception</h2>
<p>My research into boardroom dynamics suggests <a href="https://eprints.qut.edu.au/72595/">cosy boardroom relationships</a> are the rule, rather than the exception. </p>
<p>As part of my research I’ve interviewed more than 30 directors from for-profit, not-for-profit and government organisations. Those interviews confirm how important personal connections are in getting appointed to a board. Close friendships between senior executive and board members were not infrequent. </p>
<p>For example, one experienced director on the board of a public company described the intertwined relationship between the chair and chief executive. This included the chief executive renting his home from the chair and employing the chair’s former personal assistant. The problem, as the director told me, was “people didn’t know it”.</p>
<h2>Misleading shareholders</h2>
<p>This research – and the Crown Resorts saga – highlights a significant problem with corporate governance disclosures.</p>
<p>Independence on paper does not always translate to independence in decision-making.
Boards are meant to assess and review the independence of directors. But while formal relationships are considered, friendship ties and social connections are typically ignored, despite the obvious conflict. And <a href="https://theconversation.com/company-boards-are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790">social connections among the corporate elite</a> abound.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/company-boards-are-stacked-with-friends-of-friends-so-how-can-we-expect-change-95790">Company boards are stacked with friends of friends so how can we expect change?</a>
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<hr>
<p>This potentially misleads shareholders looking for independence as an indicator of good governance.</p>
<p>Minority shareholders without inside knowledge of a company’s decision-making rely on independent directors in particular to ask the hard questions and keep management accountable. In the absence of any clarity around a director’s true independence, shareholders are left guessing who is looking out for them and who has other loyalties.</p>
<p>Coonan has promised more “independence of thought” in the boardroom. </p>
<p>But as long as it remains at the board’s discretion to review and determine director independence, shareholders need to be aware that what they see may not be what they get.</p><img src="https://counter.theconversation.com/content/148522/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Natalie Elms does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Cosy personal relationships among the corporate elite abound. So what makes an independent director actually independent?Natalie Elms, Lecturer, Queensland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1465132020-09-29T14:33:24Z2020-09-29T14:33:24ZThe MEC debacle is a predictable and avoidable governance failure<figure><img src="https://images.theconversation.com/files/360326/original/file-20200928-14-1q3mr9t.JPG?ixlib=rb-1.1.0&rect=293%2C53%2C3700%2C2449&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The outside of a Mountain Equipment Co-op is seen in North Vancouver.</span> <span class="attribution"><span class="source">THE CANADIAN PRESS/Jonathan Hayward</span></span></figcaption></figure><p>When news broke about Mountain Equipment Co-op (MEC) being sold to an investor in the United States, the reaction among many of its 5.4 million member-owners was surprise, anger and disappointment. </p>
<p>More than 130,000 members have so far signed <a href="https://www.change.org/p/mountain-equipment-coop-stop-the-privatization-of-mountain-equipment-co-op">a petition</a> to reverse the sale, while <a href="https://www.gofundme.com/f/save-mec-legal-fund">a group of members</a> has raised more than $100,000 to give members a voice at MEC’s Companies Creditors Arrangement Act (CCAA) proceedings. </p>
<p>Unfortunately, these efforts are too little, too late. MEC began eroding its membership’s democratic voice years ago, which put in motion the process that’s led to its demise as a co-operative. It was all sadly predictable. </p>
<p>Researchers have shown that <a href="https://usaskstudies.coop/documents/books,-booklets,-proceedings/big-co-ops-final.pdf">big co-operatives often fail</a> when they drift away from <a href="https://www.ica.coop/en/cooperatives/cooperative-identity">co-operative principles</a> <a href="https://thewalrus.ca/how-mec-lost-touch-with-its-roots/">and values</a>, especially democratic representation. </p>
<h2>No understanding of co-ops</h2>
<p>MEC made all the classic mistakes. It built a leadership team that lacked any obvious understanding of co-operatives and fostered a culture that started to see member involvement as a problem rather than a strength.</p>
<p>There is also evidence of management hubris, over-investment and lax board oversight — three more troubling signs, according to the same research on the failure of big co-operatives.</p>
<p>MEC’s slide arguably started in 2012, when it dropped the word “co-op” from its marketing and adopted <a href="https://www.vancourier.com/mountain-equipment-co-op-ballot-criticized-as-undemocratic-1.388689">a rule</a> to disqualify board of director candidates that the board felt weren’t up to the job. Today, only one of the bios for MEC’s board makes an implicit reference to co-operative experience.</p>
<p>In justifying these changes, the board said it needed board members with experience running companies as big and complicated as MEC to face off against online competitors like Amazon or big outdoor retailers like Sail in eastern Canada or Cabela’s in western Canada. The assumption was that the average board member just wouldn’t be able to cut it, even if they had ample experience on boards and in business. </p>
<h2>Diversity of perspectives</h2>
<p>This shift is peculiar because boards of big co-operatives like MEC can hire the advice they need. There’s also <a href="https://hbr.org/2019/03/when-and-why-diversity-improves-your-boards-performance">compelling research</a> showing that a diversity of perspectives can improve board decision-making. Recruiting people from the same professional background is misguided.</p>
<p>And as others researchers <a href="https://usaskstudies.coop/documents/books,-booklets,-proceedings/co-op-atlantic-final.pdf">have emphasized</a>, co-operative governance is mostly about setting the organization’s direction, maintaining legitimacy with members and ensuring the organization has a strong workplace culture and good relationships with the community. Experience at a big private company provides no obvious advantage when it comes to these assets. </p>
<p>MEC’s demise as a co-operative business seems to correlate with these governance shifts away from democratic input. Consider the graph below:</p>
<figure class="align-center ">
<img alt="A graph plotting MEC's leverage ratio from 2000 to 2019." src="https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=331&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=331&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=331&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=416&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=416&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359920/original/file-20200925-24-bg3tq7.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=416&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">MEC Leverage Ratio over 20 years.</span>
<span class="attribution"><span class="source">Authors' calculations</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>It shows the evolution of MEC’s leverage ratio, a measure of risk that we calculate as the ratio of the money owed by MEC (total liabilities) relative to how much money members had accumulated in the business (member equity). Until MEC started making big governance changes in 2012, the ratio was low and stable. Then it started climbing, settling near 100 per in 2018-19. </p>
<h2>Expansion to blame for debt?</h2>
<p>There is reason to believe that the debt resulted from MEC’s expansion strategy. </p>
<p>In 2012, <a href="http://marketingmag.ca/brands/mec-expands-product-base-plans-marcom-changes-47923/">MEC announced</a> it was adding 1,400 new products to its stores. In subsequent years, MEC opened a “<a href="https://www.mec.ca/en/explore/new-hq-press-release">stunning</a>” new headquarters in Vancouver and expanded into smaller Canadian markets like <a href="https://www.mec.ca/en/explore/mec-north-york-opening">North York</a>, <a href="https://www.mec.ca/en/explore/kelowna-grand-opening-press-release">Kelowna</a>, <a href="https://www.mec.ca/en/explore/mec-kitchener-open-press-release">Kitchener</a> and <a href="https://www.mec.ca/en/explore/mec-laval-ouverture">Laval</a> while expanding its presence in places like <a href="https://www.mec.ca/en/explore/south-edmonton-opening">Edmonton</a> and <a href="https://www.mec.ca/en/explore/mec-calgary-south-and-west">Calgary</a>. Plans were also underway to open a store in <a href="https://www.mec.ca/en/explore/mec-in-saskatoon-press-release">Saskatoon</a>.</p>
<p>In analyzing the sale of MEC to U.S.-based Kingswood Capital Management, <a href="https://twitter.com/ScottPiatkowski/status/1307371456385421316?s=09">one observer</a> concluded that the new owners will almost certainly close several MEC stores to make the business viable and suggests, as a result, that the sale is a bad and unnecessary deal. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1307371456385421316"}"></div></p>
<p>Could the MEC board have also closed stores? It wouldn’t have been easy. Some members would have objected. </p>
<p>But a more determined and democratically selected board might have had <a href="https://anserj.ca/index.php/cjnser/article/view/323/248">the legitimacy</a> to make tough decisions and in the process, retain the loyalty and good will of a big group of upset members. </p>
<h2>The loss of legitimacy</h2>
<p>After news of the sale, MEC’s board chairwoman <a href="https://www.mec.ca/en/article/a-message-from-mecs-board-of-directors">explained the decision</a> to sell the business. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="A woman with blonde hair and glasses smiles" src="https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/360359/original/file-20200928-24-hv9ug3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Judi Richardson, MEC’s board chairwoman.</span>
<span class="attribution"><span class="source">Mountain Equipment Co-op</span></span>
</figcaption>
</figure>
<p>If anything, her message underlines the board’s disinterest in what remained of MEC’s democratic process. Judi Richardson wrote that “things will look a little different” after the sale, for example, as if democratic control is trivial. The letter also dismisses the possibility that members might have helped to recapitalize the co-op. </p>
<p>The recent petition and fund-raising efforts suggest MEC could have tapped into a reservoir of good will. But the board’s skepticism about this solution is probably justified, because any such effort would have signalled to creditors that MEC was in trouble. That’s not something any board wants to do. </p>
<p>More fundamentally, the good will we see today is probably not deep enough to raise millions of dollars in capital, especially in the midst of CCAA proceedings. It’s easy to sign a petition or give a few dollars to a GoFundMe campaign, but it’s another thing to put big money into an organization that won’t give you any real democratic voice. </p>
<p>And maybe that’s the ultimate price that co-operatives pay when they make it harder for ordinary members to have a say. They lose their membership’s voice, loyalty — and ultimately, their business. </p>
<p><em>This piece was co-authored by <a href="https://theconversation.com/profiles/anthony-piscitelli-1160060">Anthony Piscitelli</a>, a professor for the Conestoga College Public Service Program.</em></p><img src="https://counter.theconversation.com/content/146513/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Marc-Andre Pigeon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>MEC built a leadership team that lacked any obvious understanding of co-operatives and fostered a culture that started to see member involvement as a problem rather than a strength.Marc-Andre Pigeon, Assistant Professor, Johnson Shoyama Graduate School of Public Policy, University of SaskatchewanLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1458262020-09-23T17:24:55Z2020-09-23T17:24:55ZHow good governance can stop toxic ‘bro behaviour’ at companies<figure><img src="https://images.theconversation.com/files/359161/original/file-20200921-14-mrogpr.jpg?ixlib=rb-1.1.0&rect=0%2C154%2C4493%2C2782&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In this 2019 promotional photo from McDonald's, then CEO Steve Easterbrook, fourth from the left, celebrates the 50th anniversary of the Big Mac with family members of the McDonald's employee who invented the popular sandwich. Easterbrook has since been dismissed from McDonald's for inappropriate behaviour.
</span> <span class="attribution"><span class="source">(Peter Wynn Thompson/AP Images for McDonald's)</span></span></figcaption></figure><p>In 2019, the board of directors of McDonald’s Corp. took the unusual but bold and moral decision <a href="https://www.bbc.com/news/business-50283720">to dismiss its CEO Steve Easterbrook</a> after he revealed he’d had a consensual relationship with a co-worker.</p>
<p>McDonald’s had a policy forbidding managers from having “intimate interactions” with direct or indirect employees. Easterbrook readily admitted the relationship and cited his desire to adhere to the company’s code of conduct as motivating his admission.</p>
<p>In an email to all employees after the board announced his dismissal, <a href="https://www.nytimes.com/2019/11/03/business/mcdonalds-ceo-fired-steve-easterbrook.html">he wrote</a>: “This was a mistake. Given the values of the company, I agree with the board that it is time for me to move on.”</p>
<p>The dismissal of a CEO is never something that boards take lightly, especially when it is sudden — and when the CEO is wildly successful.</p>
<p>Under Easterbrook’s leadership, McDonald’s updated its menus and restaurants to reflect contemporary tastes, expanded delivery and mobile payments and otherwise evolved into a more modern organization. The market rewarded these efforts by doubling the share price during his tenure. Easterbrook was also rewarded with compensation in the tens of millions of dollars annually.</p>
<h2>Impacts shareholder wealth</h2>
<p>Easterbrook’s dismissal was seen by some as a triumph of morality and judgment — albeit at the expense of shareholder wealth. <a href="https://markets.businessinsider.com/news/stocks/mcdonalds-stock-price-billions-wiped-from-value-on-fired-ceo-easterbrook-2019-11-1028654817">McDonald’s shares went down by as much as three per cent</a> (US$4 billion value) shortly after the announcement.</p>
<figure class="align-center ">
<img alt="The McDonald's golden arches logo is pictured on a brick wall at one of the fast food chain's restaurants." src="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359163/original/file-20200921-14-1v1n4fw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">McDonald’s share prices took a hit in the fallout of the departure of CEO Steve Easterbrook.</span>
<span class="attribution"><span class="source">(AP Photo/Gerry Broome)</span></span>
</figcaption>
</figure>
<p>The board’s dismissal without cause was deemed appropriate by media and investors under the circumstances and Easterbrook <a href="https://www.foodbusinessnews.net/articles/16592-mcdonalds-sues-former-ceo-to-recover-severance#:%7E:text=fired%20Stephen%20Easterbrook%2C%20then%20chief,executive%20compensation%20experts%20at%20Equilar">walked away with a severance package</a> worth about US$42 million.</p>
<p>Fast forward to 2020. <a href="https://www.businessinsider.com/mcdonalds-slams-ex-ceo-steve-easterbrook-motion-to-dismiss-lawsuit-2020-8">The board’s ongoing investigation</a> has revealed, among other things, that Easterbrook sent explicit photos from his McDonald’s email account, purportedly lied about other sexual relationships with co-workers and approved an extraordinary stock grant worth hundreds of thousands of dollars to one McDonald’s employee “… shortly after their first sexual encounter and within days of their second.”</p>
<p>As a result, the board belatedly filed a lawsuit against Easterbrook seeking to claw back the severance it had awarded eight months earlier, maintaining the CEO should have been dismissed for cause. Easterbrook responded in a court filing that the company and board already had all of this information — and had his entire email account and history stored on its company servers when it negotiated his severance package.</p>
<h2>‘Bro’ behaviour is infectious</h2>
<p>So, once again, toxic “bro” behaviour, <a href="https://www.businessinsider.com/bro-culture-harassment-discrimination-uber-business-2017-6#:%7E:text=Now%20Uber%20CEO%20Travis%20Kalanick,has%20gone%20to%20the%20bros.">as we have seen at Uber</a> and other organizations, infects an iconic organization, leaving the courts to decide.</p>
<p>Certainly, Easterbrook is to blame for, by his own admission, breaking the company’s code of conduct and, more importantly, the values it set for behaviour. However, the board shares responsibility for its singular failure to observe, recognize and act on what emerged as an ongoing, long-term, cultural and possibly legal fiasco.</p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/mcdonalds-upheaval-is-a-stern-reminder-to-ceos-about-ethics-127009">McDonald's upheaval is a stern reminder to CEOs about ethics</a>
</strong>
</em>
</p>
<hr>
<p>In 2020, the business world is regrettably replete with examples of poor CEO behaviour, and the #MeToo movement is both widespread and widely known. So why do these situations persist? More to the point, why do boards seem to be constantly surprised by such egregious conduct?</p>
<p>Corporate governance focuses a lot on “tone at the top.” Boards and directors are told and aware that they are under constant and unremitting scrutiny. Their acts — tacit and explicit — filter throughout their organizations, shareholders and stakeholders. They are the instigators, nurturers and custodians of one of an organization’s most critical and enduring assets: its culture.</p>
<p>So how can a board best ensure it discharges its responsibilities to corporate culture in an ethical, responsible and credible manner? How can boards best ensure, observe and embody the culture they desire for their organization?</p>
<p>We suggest three key strategies:</p>
<p><strong>1. CEO selection</strong></p>
<p>The board sets culture through its selection of the CEO. Boards are fascinating organisms inasmuch as they are a group that has only one employee — the CEO. Finding, recruiting, retaining and eventually replacing the organization’s chief executive is the board’s solemn function.</p>
<p>The CEO defines and leads the organization’s strategy. Through their behaviour and expressed beliefs, they come to define and perpetuate the organization’s culture. As such, when considering the organization’s succession plan, the board needs to be explicit about the values they’re seeking in a CEO — and test for those values not only through interviews with candidates, but through interviews with people they have worked with, as well as with clients and suppliers.</p>
<p>It also goes without saying that vetting includes a thorough background check. Past behaviour is one of the best predictors of future behaviour. If an aspiring CEO has inappropriate behaviour in their past, a thorough, confidential investigation before they are hired will likely reveal some of it.</p>
<figure class="align-center ">
<img alt="A picture of people sitting around a desk." src="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/359165/original/file-20200921-20-j005xo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">One strategy that board members should employ is getting to know the companies they oversee.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p><strong>2. Compensation schemes</strong></p>
<p>Once the CEO has been selected, the board negotiates a comprehensive compensation package. This package is based on a number of short, medium and long-term incentives and composed of both cash and shares or options.</p>
<p><a href="https://www.jstor.org/stable/256656">Compensation research</a> is clear in concluding that executives are remarkable in their ability to discern which behaviour is being compensated, and in turn, engaging in that very behaviour.</p>
<p>In developing compensation schemes, boards should include behaviour targets (such as employee engagement and <a href="https://hbr.org/2003/12/the-one-number-you-need-to-grow">net promoter scores</a>) in addition to more traditional performance-based metrics. They may even include a morals clause.</p>
<p>In evaluating the CEO’s performance annually, the board should keep checking on the CEO’s behaviour through both interviews and observation. The board should also anticipate and plan for involuntary dismissal of the CEO and include clawback mechanisms or even phased payouts in severance provisions.</p>
<p><strong>3. Get out of the boardroom</strong></p>
<p>Many boards hold at least one meeting per year offsite. This has the effect of familiarizing directors with the organization’s operations, as well as signalling to the organization’s employees and other stakeholders the board’s engagement with the entire organization, no matter where. Unfortunately, these off-site meetings are all too often highly scripted and co-ordinated affairs, more reminiscent of a theatre performance than a genuine pulse check.</p>
<p>Directors, individually and collectively, must make it a priority to see the organization’s operations from all perspectives. They should interact with employees, suppliers, customers and all stakeholders on a regular, unscripted and perhaps even unplanned basis. Only by doing so will they get a thorough idea of the company’s culture.</p>
<p>One highly successful director we know bases their decision to join a board partly by trying the organization’s products or services as a customer and witnessing first-hand how frontline employees perform. Another CEO provides every director with an all-access security pass and keycard to all of the organization’s workplaces, encouraging these directors to drop in unannounced to see operations firsthand.</p>
<p>The situation at McDonald’s did not arise spontaneously or suddenly. There are suggestions that it also extends beyond the CEO. Easterbrook’s personality did not undergo a radical transformation when he became the CEO at McDonald’s.</p>
<p>There is an old adage that says “the fish rots from the head down.” McDonald’s board failed in its duty to create, nurture, monitor and sustain a positive, healthy organizational culture. Easterbrook’s behaviour — and the ensuing impact on the entire company — was the result.</p><img src="https://counter.theconversation.com/content/145826/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Bad behaviour and toxic culture at a company can be corrected if the organization’s board of directors states clearly the values they are looking for in a CEO.Michael Parent, Professor of Management Information Systems / Fellow - David and Sharon Johnston Centre for Corporate Governance, Rotman School of Management, University of Toronto, Simon Fraser UniversityRichard Powers, Associate Professor, Rotman School of Management, University of TorontoLicensed as Creative Commons – attribution, no derivatives.