The economic crisis led to significant changes in the principles of corporate governance. Previously, decisions concentrated on financial performance, but the new reality embraces “relationship performance” as well.
- By Anna Gonsalves
The economic crisis and globalization of corporations has led to an ongoing series of changes that continue to unfold, impacting every business level including corporate governance. Previously, most corporations were primarily directed by one person at the top who focused on financial performance and the corporate-shareholder relationship. The new reality is that the corporate governance role has expanded to embrace “relationship performance” as well, internally and externally. In this new paradigm, it will take exceptional leadership to deliver good results to internal and external stakeholders, the community and society.
To understand corporate governance as a model of influence, first consider the historical definition. In the past, it was recognized as a set of rules defining the relationship between senior management, the board of directors and stakeholders (primarily investors). The relationship aspect was mostly confined to outside investors and internal staff. If the corporation met financial goals and shareholders and investors were happy with stock prices, all was well. The Chief Executive Officer (CEO) focused on determining how much capital to raise, the methods for raising capital and the efficient use of capital. The directors hired and fired the CEO almost solely based on financial performance.
Market Backlash Changes Corporate Relationships
The 2007-08 economic and financial collapse coupled with corporate scandals like Enron, WorldCom, Barclays and Hyundai Motor, to name just a few, forced people to question the role, performance and relationship of the CEOs and their boards. It was believed that corporations around the world had become too focused on financial performance at the sake of ethics and transparency. The still growing list of corporate scandals, exhibiting executive level decisions approving profit-making without regard to methods, caused a market backlash leading to increasing government regulations and also to community empowerment.
A new corporate governance principle has emerged: Achieving financial performance should be accomplished with transparency, integrity, accountability and high-quality professional performance. Corporations are asked to become leaders in the community and achieve financial success by helping others achieve success also, and not make corporate decisions in a vacuum. The implication is that corporations have to develop relationships with the communities in which they operate and take responsibility for the full impact of corporate decisions. Legally and operationally, the role of the CEO and the board of directors changed because the directors are expected to assume greater oversight and responsibility for how the corporation influences the social environment, as well as the shareholder and staff environments.
The ability to influence stakeholders and society is seen in the increasing participation of corporations in initiatives involving sustainability, workforce training and business development. It is no longer acceptable to strip an environment for natural resources or pollute rivers with manufacturing byproducts. Workforce initiatives are not just focused on hiring current talent. They invest in training programs to develop a sustainable talent pool. Business development requires reaching into the communities and helping them prosper.
Responsibility to Society at Large
To change how corporate senior management and board of directors are able to use influence required structural changes. In May 2001, the European Union (EU) issued the Green Paper – The EU Corporate Governance Framework. The paper quotes from its Communication Towards a Single Market Act: “It is of paramount importance that European businesses demonstrate the utmost responsibility not only towards their employees and shareholders but also towards society at large.” To achieve this goal, the board of directors must represent financial, international and industry expertise, as opposed to personal or work relationships. They need to understand the markets in which the corporation operates, and ideally the board makeup will include professional, gender and international diversity.
This is a far cry from pre-recession boards that hired CEOs but assumed few responsibilities other than for meeting rote legal minimums. In the modern corporation, the board of directors are managers and not figureheads doing the bidding of the CEO. In fact, corporate influence on communities and communication policies with constituencies begins at the top, so the board relationship with the CEO had to change. Once mainly responsible for hiring and firing the CEO, the directors are assuming a more participative role, becoming partners with management and driving positive corporate influence in the respective communities.
The U.S. and Asian boards are undergoing the same transitions within cultural contexts. Communities have more ability to influence corporate financial performance than ever before, and some of that is technology driven. Social media has streamlined the ability to network and now small shareholders or community members can impact brand image. In the past, the corporation placed all the power in the hands of the CEO and the largest, controlling shareholders, but that is almost impossible now. In fact, the EU is addressing the need of corporations to give more power to the millions of small shareholders.
Corporations refusing to adapt and continuing to let CEOs make decisions benefiting a few financially, while leaving marketplace constituencies harmed, are quickly inundated with negative societal messaging. How the corporation communicates and interacts with shareholders, stakeholders and society matters very much today.
New Metrics for New Influence
The new governance principle brings new metrics. Boards hiring CEOs must consider factors beyond financial results in prior jobs. The CEO of the modern corporation has to exhibit integrity, the ability to manage risk, positive community impact through surveys and project results, successful relationships with investors and stakeholders, and the ability to develop and maintain transparency. Factors like earnings per share are still considered but are financial performance metrics and not relationship metrics.
Corporations must have boards that lead in these times of economic challenges and CEOs with integrity. The businesses that survive will develop the corporate relationships with constituencies that give them access to a talented, diverse workforce; a better understanding of global communities served; and the chance to turn challenges into opportunities in the way of new products and services. Relationship performance is now on equal footing with financial performance.