What’s the Future of Corporate Governance?
Future Corporate Governance: Different, But More Effective?
Shann Turnbull suggests that the world of corporate governance will benefit from the establishment of "a new type of corporate information and control architecture."
Speculation on the future of corporate governance in response to last month's column suggests both a conclusion and a question: It will be different, but will it be more effective?
First, the differences. Corporate governance in the future will, according to Devdip Ganguli, reflect an increasing emphasis on customer satisfaction as a way of measuring the adaptability of the organization over time. As he put it, "By focusing too strongly on financial records (and audit committee work), we lose sight of the fact that departments like operations and human resources are very important components (in forecasting future success). (Phrases in parentheses are mine.)
Shann Turnbull suggests that the world of corporate governance will benefit from the establishment of "a new type of corporate information and control architecture." In fact, he goes beyond this to propose that a network of more specialized board groups and "advisory stakeholder councils" comprising employees, lead customers, suppliers, and others offers a useful solution to the governance vacuum that exists in many large corporations today.
Not so fast, says Gopi Vaddi. While agreeing that "customer and employee satisfaction and loyalty are indeed good predictors for (the) future success of a company," he suggests that these measures have to be viewed with a long-term lens, one that accommodates the fact in the short-run, managements may take actions to reduce costs and the size of the labor force to achieve long-term success—actions that could adversely affect non-financial indicators used as inputs for corporate governance.
Vaddi provides a list of questions that need to be answered if a "public" balanced scorecard of non-financial information is to be created. "Who will perform the audit? What are the guidelines? Who pays for it? Should there be an independent firm that is appointed by the SEC?"
What do you think?
Observers such as Jay Lorsch, in his book Pawns and Potentates, has argued that boards of directors often have insufficient information with which to perform their duties. Some don't invest the time necessary to provide effective oversight of management activities. And many are reluctant to tread too closely to the line between oversight and management. This may help explain why boards are accused of acting far too slowly in discharging their ultimate duty, insuring proper leadership for an organization.
Robert Kaplan and David Norton, in their books, The Balanced Scorecard and The Strategy-Focused Organization, have argued for performance measures and reward practices that reflect predictors of future success as well as a continued almost-total reliance on largely historic financial measures. In a book that I wrote with Earl Sasser and Len Schlesinger, The Service Profit Chain, we discussed the mounting evidence that customer and employee satisfaction and loyalty are far better predictors of future financial success than are measures of past financial success. They would be strong candidates for inclusion in any organization's balanced scorecard.
Among board committees, the audit committee has historically received the most attention. Not only are boards expected—and in case of publicly financed organizations required—to have one, independent, so-called "outsider," director membership on the audit committee has been strongly prescribed. Increasingly, audit committees are called to task for their responsibilities and required to co-sign important communications to shareholders.
While all of this is going on, of course, governance continues to go astray. An organization's books may be in order, but its performance may be going down the tubes. What's to be done?
Should the growing number of governance committees require management to establish certain measures—in this case, measures disclosing trends in customer and employee satisfaction and loyalty—that help predict future performance? Should they be responsible for the regular auditing of such measures? Should the measures be made available to investors on a regular basis? In fact, should the SEC or another organization require the disclosure of such information, just as it now requires the disclosure of somewhat meaningless (at least for future investors) historic financial information? What do you think?