The Biggest Problem With Corporate Governance Is Hiding In Plain Sight by Andrew Hunt
Corporate governance is a topic that has been moving rapidly up the agenda. From environmental records to remuneration, stakeholders are demanding more transparency and more control.
Yet in spite of all the legislation, policies and organizations that have sprung up on the back of this new found interest, there is one simple and glaring flaw that almost every company in the world is guilty of.
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To understand the problem, let’s begin with how listed companies are governed. At the top you have a board, typically consisting of a chairman and a number of directors, some of whom are usually independent or possess specialist expertise. Their job is to supervise the executive management in the running of the company. The board of directors is there to protect the long term interests of various groups: most obviously shareholders, but also other stakeholders like employees and local communities.
The key point is that the board of directors operates as the representatives, or agents of the company’s stakeholders. And, generally they are rewarded pretty handsomely for this.
In that sense, a board of directors is no different from any other agent you might employ to protect your interests: like a lawyer, publicist, head-hunter, mortgage broker, or even a nanny.
Now, when you employ someone to look after your interests, what is the very first thing you do?
You get their contact details. That way you have constant access to them. You can establish a dialogue and discuss your needs and motivations. Without the ability to communicate directly, there is little they can do for you.
And therein lies the key point: In every other example of agency, the principal gets direct access to the agent.
In corporate governance it’s basically the opposite. Where else do you pay people tens or hundreds of thousands to represent you, and in return you don’t even get their contact details? The majority of company directors go for years and never even hear from the very people they’re paid to represent!
If you’ve ever tried to contact a company director, you’ll know it’s a pretty onerous process. You will have to start by contacting the company; often they won’t even reply. At best you will have to go through management or investor relations who can control the dialogue. It is as if the system is designed to make it difficult.
This simple failure to make directors accessible undermines the whole system. What is the point of governance if you cannot get the right messages to the right directors at the right time?
Moreover, without broad access, governance becomes the preserve of a small and mistrusted elite. Hence, corporate access today is the expensive monopoly of a handful of investment banks and asset management behemoths. Unfortunately the financial elite tends to think in a fairly herd-like way. From completely missing the unconscionable behavior that precipitated the financial crisis to a total and persistent failure to rein in executive pay, they have proved not just inadequate but impervious to wider opinion. Are a dozen analysts wanting to know the minutiae of next quarters’ earnings really a more useful sounding board, than, say, insights from real customers, employees or a lone finance geek who has spotted something fishy in the accounts? The costs of effectively shutting out other stakeholders are too high to ignore. Only by improving access for the little guy can we level the playing field for investors and expose directors to the whole social spectrum.
So here’s the challenge: if you are a regulator or a listed company and you sincerely want to improve corporate governance, the best thing you can do is to make all directors publish a full set of direct contact details in the annual report and the company website, just like every other agent does. Really good directors should go even further, and actively encourage dialogue with stakeholders.
What corporate governance really needs is its own Facebook
Facebook’s success is that it is a great medium for continuous communication and sharing. What if company directors and executives had their own version of Facebook? A Facebook for directors would allow activists to identify the right directors and message them directly. They could message them publicly or privately, just like on Facebook. Others could “like” their comments, and directors could respond. Crucially, an open and transparent dialogue would mean directors could no longer hide behind a veil of ignorance or aloofness. They could not claim they were unaware of specific concerns. The age of the sleepy board resembling a gentleman’s club on a Sunday afternoon would be over.
Unless and until directors make themselves openly and easily accessible, corporate governance will find itself wanting.
Andrew Hunt is an Investment Manager and author of Better Value Investing: A Simple Guide to Improving Your Results as a Value Investor.