Corporate Leadership
The debate over how companies are best governed is at least as old as companies themselves. That there is no one best way is suggested strongly by the fact that the world’s greatest companies have grown up under a number of very different governance regimes: Toyota and Sony in Japan, Coca-Cola and Johnson & Johnson in the United States, Marks and Spencer in the UK, to name but a few.
The differences between the regimes fall into four main categories.
- Accounting. Drawing up a company’s accounts and getting an outside auditor to verify themis essential. It enables investors to find outwhat managers are doing with their money. However, accounts prepared under different countries’ rules can produce very different results. Using British or American rules (which might be expected to be reasonably similar) can make a difference of as much as 50% to a company’s net profit. Even within a single country’s set of rules there is plenty of room for interpretation (and exaggeration), so that any one accountant is unlikely to come up with exactly the same figure for a company’s profit as any other. So essential is auditing to the health of the capitalist system that there are (relatively) free-market economists who believe that this imprecision (and scope for private enterprise) argues for handing over the auditing function to government or, at least, to a government-supervised agency.
- Company boards. The biggest distinction here is between Germany and the rest of the world. The German system has two boards – a supervisory board and a management board – their different roles explained largely by their names. Other countries have only one. But that one can vary greatly in its composition and powers. American boards are often stuffed with cronies of the ceo. French boards generally include someone who is or was a senior politician, or who is close to a senior political figure. German management boards, by law, must include workers’ representatives.
- Company bosses. “A fish”, as the old proverb says, “rots from the head.” Good governance depends crucially on the attitude of a company’s boss. “Manifestations of lax corporate governance, in my judgment, are largely a symptom of a failed ceo,” said Alan Greenspan, chairman of America’s Federal Reserve Board. “Once you as ceo go over the line, then people think it’s okay to go over the line themselves,” said Lawrence Weinbach, the boss of Unisys, a big American computer-software firm. Different countries have very different attitudes to ceos and to controlling them. In the United States, they are given a free rein to run things much as they like. In some cases (such as ge’s Jack Welch) this has enabled them to develop a “star” media profile. In the UK public companies often separate the role of chairman and chief executive, giving (in theory) a heavy counterweight to the ceo’s otherwise unbridled ambition. In Germany, ceos are watched carefully by the supervisory board. In France, they tend to be watched by the government. Warren Buffett, the so-called “Sage of Omaha” and one of America’s canniest investors, says that “ceos don’t need ‘independent’ directors, oversight committees or auditors absolutely free of conflicts of interest. They simply need to do what’s right.”
- The rewards. In Europe and Japan, managers’ rewards consist largely of salary and bonuses. Until recently, this was the case in America too. But then the idea arose that if managers were rewarded a bit like shareholders they would behave in ways that were more advantageous to those shareholders. After all, what incentive does a “salaryman” (as they call them in Japan) have to maximise the value of an investor’s stake in his employer? Giving senior managers shares and share options in their companieswas themainway that thiswas achieved. But it gave rise to some gross excesses. The average American ceo took home 40 times the earnings of the average worker in 1980; by 2000 that figure had risen astronomically to 530 times, largely because of the huge sums that a small number of senior executives gained from their share options. In his evidence to the US Senate Banking Committee in July 2002, Mr Greenspan said that in the latter part of the 1990s, “an infectious greed seemed to grip much of our business community … it is not that humans have become any more greedy than in generations past. It is just that the avenues to express greed had grown so enormously.” Share options, the widest of those avenues, took off in a spectacular way. The reason was obvious: in the United States they were (at least on paper) costless. Companies did not have to account for them in their books. In 1994, the US Senate persuaded the Financial Accounting Standards Board (fasb) to declare that options did not have to be expensed. The politicians were persuaded by the high-tech industry, where the practice was commonplace. It was thought to be the only way that entrepreneurs behind the high-tech start-ups of Silicon Valley could hope to lure senior managers from blue-chip firms to sign up to their dream. Many people, including Mr Buffett and Arthur Levitt, chairman of the Securities and Exchange Commission at the time, subsequently came to believe that the fasb’s ruling on this was a big mistake. Despite the total corruption of corporate governance at companies like WorldCom, Enron and Tyco, there is some evidence that corporate governance in the United States is improving.
The 2001 annual survey of American company directors produced by Korn/Ferry, an international executive search firm, reports that “outside directors are taking a greater role in the determination of committee membership and leadership”. Five years earlier, 57% of respondents said that their ceo/ chairman selected the chairmen and members of board committees (including the crucial audit and compensation committees).
By 2001 that percentage had fallen to 37%. This means that there are fewer opportunities for powerful ceos to stuff committees with people who are dependent on them for their livelihood and unlikely to deny them the millions that they seek.
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