Is Corporate Governance Enough?
By: Wendy Toscano
Tags: Change Management, Consulting, Corporate Governance

The following is adapted from Beyond Corporate Governance by

Isabelle Nüssli.

In the 1990s and 2000s, infamous scandals and tales of excess surrounded international firms such as Enron and Tyco (US), the Royal Bank of Scotland(UK), ABB (Switzerland), Shell (Netherlands), HIH Insurance (Australia), Parmalat (Italy), and many more. What has been learned? How much has corporate governance, which was put on the map after these scandals grew in number and became public, contributed to improvement? The emergence of subsequent scandals involving Lehman Brothers and AIG (US), Volkswagen (Germany),Petrobras (Brazil), Toshiba (Japan), FIFA (Switzerland), Barclays and Tesco (UK), the Abraaj Group (Dubai), Luckin Coffee (China/US) and others — suggests that corporate governance has not helped very much.

Corporate governance defines mechanisms, processes, and relations by which corporations are led and controlled. Berle and Means (1932) described a conflict of interest between owners and managers that called for control mechanisms (called the “principal agent” theory).This marked the start of corporate governance as a tool to separate and balance control and management to prevent or decrease conflicts between principals (owners) and their agents (management). In subsequent years, cumulative conflicts and scandals triggered an adjustment of hard law (corporate law) and soft law (corporate governance) around the world. However, derailment persists, often with its roots in conflict within the magic triangle of owner, board of directors (BoD), and management (e.g., CEOs).

The widespread acceptance of corporate governance standards demonstrates its importance. Yet, corporate governance has not contributed nearly enough to the reduction of severe conflict in business. This holds true for all types of organizations: public, private, nonprofit, national or international, successful, or crisis ridden. As stakeholders find new and creative ways to leverage new laws, regulations, and guidelines for personal gain, this even adds new layers of complexity. In many countries, increasingly strict legal frameworks have provoked a rising number of lawsuits against directors and officers, and these have amplified the need for insurance against liabilities. This adds another level of pressure in an already turbulent, fast-changing environment in a culture of media scrutiny that plays an increasingly greater part. It is time to stop, pause, and reflect on why stricter legal frameworks have not reduced conflicts of interest as intended. There must be other reasons and causes that are unaccounted for in legal frameworks that distort organizational dynamics.

Understanding past and current leadership selection and development can help owners and BoDs define the types of future leaders required to deal with the increased pressures of the VUCA environment. There is a lot that organizations can do to reduce the potential for derailment and maximize performance by improving leadership and organizational culture despite or because of change. With these points in mind, valuable advice and checklists will be supplied to owners, board members, CEOs, management teams, aspiring leaders, executive search firms, investors, lawmakers, and judges.

Often, leaders are viewed as superheroes, and even more worrisome, they try to behave as such. They are seen as invincible, having all the answers. This could be because leadership is considered rational. Both classic law and economics assume that leadership is a rational task carried out by rational leaders. The persistence of this assumption may be linked to a belief that leaders should not show their human side, including their weaknesses and shadows, because rational, pragmatic, and objective thinking is superior to feeling. But only superheroes are superhuman, and relationships within the

magic triangle of shareholders, BoD, and management often do not work very well. Severe conflict, excesses, fraud, and even scandal are frequent, sometimes with dramatic consequences (such as lawsuits, jail time, or financial ruin) for the individuals concerned, their organizations, employees, and society at large.

Linked to this, much has been written about company law (which governs the rights, regulations, relations, and conduct of persons, companies, and organizations) and about corporate governance (which defines mechanisms, processes, and relations by which organizations are controlled and directed). Most companies11 have a well-thought-out corporate governance system in place. This has gained importance after major scandals in the 1990s and 2000s: think of Enron, Tyco, and a number of players during the global financial crisis. It is designed to serve as a “magic tool” that solves all potential compliance-, power-,or role-related issues.But organizations are systems with their own dynamics, of which only a minor part is conscious and rational because they involve the complexity of both the business and the human element. If unable to express their human side, leaders can become susceptible to harmful practices, such as power games and risky and overpriced takeovers.Therefore, behavior cannot easily be predicted by just looking at organizations and their rules.

One would think that the extraordinary demands of our changing world would force leaders to focus on what really matters: clients, markets, products, employees. However, organizational politics, severe conflicts, excesses, and fraud do not seem to have decreased as societal change has increased. When power is involved, human beings are not entirely rational. British historian Lord Acton said, “Power corrupts, and absolute power corrupts absolutely.” But not all leaders act in harmful ways when faced with power and turbulent environments. Why might some people be more prone than others to such behavior? Drawing upon a psychodynamic perspective, this book will demonstrate that this is linked with deep-rooted personalities and behavioral patterns.Very often, changes made within a company affect the power balance within that company. The ways in which people react when their positions are threatened, together with their world views and how they assume roles and handle power, are often shaped by how they grew up.

Change triggers, emotions, and uncertainties. Too many well-thought-

out and well-meant plans go off the rails in business because of unconscious factors that influence behavior. The techniques applied by leaders to implement these plans and/or lead change often assume the rational side of behavior — their own, their colleagues’, and that of key stakeholders. The emotional side is neglected. Mastering the soft side of change management — in combination with the harder side that includes plans, processes, and governance — can reduce or avoid harmful outcomes and improve performance.