Welcome on Board, Stateholder; Corporate Governance Reform Needs You!
By Robert Gogel and Professor Ludo Van der Heyden
Courtesy of INSEAD Knowledge
The world is still waking up to the vast amount of capital injected by its governments into the “private economy” over recent years. The US and UK led the way, but other countries were close behind – with varying degrees of transparency and motivation. Whether the companies concerned are now semi-private or semi-public depends on your point of view. One thing is certain: these organisations will remain in the public eye for some time. And their actions will largely contribute to restoring public trust in corporations and the financial markets. Or not, as the case may be.
To a diehard capitalist, nationalisation instantly conjures up nightmare visions of communism or military rule. It’s far more palatable to talk of governments “taking equity warrants or senior debt positions in financial institutions for as short a period as possible”. However, the reality is that average Americans are now collectively bailing out icons of US capitalism like Goldman Sachs and Bank of America. It’s an entirely new concept, which has been called – with a sad twist of irony – “trickle-up economics”.
In a more positive spirit, we too propose a new term: “stateholder” – to recognise the broader and more permanent public mandate of the government stakeholder. For we believe that fundamental reform is needed to restore and maintain public trust in financial markets and corporations. This reform will have to specify the role of the state as a key and distinct stakeholder in the financial system. Returning to the situation before the meltdown is simply not a desirable option, even if it were possible.
But what is the proper role of the stateholder in the new financial order? What is the best way to oversee this new organisational phenomenon, the stateholder-run enterprise? Should stateholders act differently from individual and institutional shareholders and, if so, what will be the impact on corporate performance?
While it is too early to give definitive answers to these questions, we can offer four simple recommendations to guide stateholders – in order that the world may again see corporations and financial markets as serving the public interest.
1) Governments must commit to active and fair governance of capital markets
The stateholder did not emerge as a result of any inherent failure of capitalism but because of massive failures in governance – by regulatory authorities, managers of financial corporations and their boards. This phenomenon is well documented, along with its origins in the US and subsequent spread throughout the world (think UBS, RBS and Fortis). We don’t apologise for mentioning it yet again. The extent of governments’ failure to supervise the financial sector (including its rating agencies and its regulators) cannot be stated enough.
Indeed, one fundamental truth should never have been forgotten: markets and their actors need to earn the public’s trust continuously. And to do so, they have to operate in the public interest and be seen and understood to do so. The market is not an end in itself, society is. Regulatory authorities should be able to call boards to account and demand an explanation of how they are contributing to public value and trust. An ultra-liberal ideological quest pursued over several decades obscured this truth. Now we have rediscovered it, regulation and governments are back – and here to stay – with renewed supervisory vigour, and hopefully greater enlightenment.
The first responsibility of stateholding governments is to help identify and deflate the speculative bubbles that markets are forever blowing. A simple argument for this is the following: any private actor in the financial markets aware of an emerging bubble would have no interest in popping it – quite the contrary in fact. Thus governments have to develop the necessary abilities to monitor the markets for real, as opposed to spurious or apparent, value creation. Responsibility for effective functioning of the system cannot be fully delegated to private actors any more than it can be wholly outsourced to individuals. It rests with the stateholder.
2) Corporate boards must be held responsible for effective governance in the public interest
Of course, increased supervision by the regulatory authorities is not sufficient. Boards themselves must truly embrace their fiduciary responsibility to the public and to the entire system with greater zeal. The time has come for the Chairman of the Board to take on an explicit role as CGO – or Chief Governance Officer – and commit to keeping the corporation on a socially responsible course. Society will not allow private agencies to go on unless they also serve some public interest.
Once and for all, the “Chairman-and-CEO” role must be separated in those countries where it is still permitted – and immediately in companies with stateholders. Board members must commit to being fiduciary agents of the stateholder as well as representing conventional shareholders and the company itself. And this is perfectly compatible with the imperative of long-term value creation.
3) Stateholders must themselves commit to exemplary corporate governance
Given their huge stakes in private companies, stateholders must exemplify the new standards of governance described above – especially when managing their own stakes in major financial organisations. Transparency is critical. The secrecy so dear to the banking industry (and also on occasion to governments) cannot be espoused by stateholders. Extensive honest communication, not spin, is what is now required by both customers and the public. We believe the public will return their appreciation with greater trust.
The responsibility of the stateholder is to ensure that the corporation is serving the public interest, whether in conventional corporate-social-responsibility activities, in a fair representation and management of stakeholders, and in fair business and employment practices. Most important and simple of all, the stateholder must insist that management is executing according to plan – with an explicit and thorough anticipation of risk. The public interest was violated in so many ways in the latest crisis, because massive failures in business and public governance.
This is a formidable task. The question is: do governments have the manpower to fulfil their stateholder responsibilities? And the answer is probably ‘no’, unless it does so in partnership with the private sector.
4) Representing the stateholder must be recognised as a public service by senior executives
How then are governments to be represented in the corporations they partly own? This time, the answer is surprisingly positive, especially if you’re a senior financial executive or similar. After all, the chance to represent the stateholder to the best of one’s ability is golden in a sector that seeks redemption. Without huge financial incentives or bonuses, but with the plentiful benefits and virtues of public service (and suitably reduced pay), this new role should become de rigueur for those seeking to retire after a successful executive career. The job of governance is simply too important and too difficult for under-experienced and overburdened government employees, however well-intentioned.
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Our plea to governments is unambiguous: “Welcome, Stateholder. You represent our biggest hope for substantial reform in corporate governance practices, not simply as a regulator but also as an example to all in the board room. You are essential to rebuilding public trust in the financial industry and to reconnecting business with society, both economically and morally. To borrow an all too familiar expression, this reform opportunity is … too big to fail!”
Robert Gogel is a serial turnaround executive and co-founder of the European Executive Council (EEC), a think tank of senior multinational executives. Ludo Van der Heyden is Solvay Professor for Technological Innovation at INSEAD. EEC members and INSEAD Professor Jean Dermine are thanked for valuable input, though responsibility for the opinions expressed above remains the authors’. An earlier and longer version of this article was published in Strategy + Business Online (October 2009).
