Each company or market failure has spurred politicians and regulators to tinker with public company boards. Sometimes this means changing responsibilities, more recently it has been composition. But the pandemic has revealed broader failure. The fragility of many businesses is clear; the crisis has shown the widespread failure of corporate governance to address operational and financial resilience. This calls for a more fundamental review of company stewardship.
The charge sheet is long. Over-distribution - with unsustainable dividends and share buybacks - has weakened corporate balance sheets. Leverage has risen. A few companies also damaged their brands by appearing to lack care for employees and customers. Their initial crisis response looked narrowly focused and tone deaf, seemingly insensitive to companies’ responsibilities in society. And many businesses with global sourcing cut costs using longer supply chains, raising the risk of disruption and reputational damage. In many cases these failings were driven by badly-designed executive rewards.
Not all the problems were of greed or reckless boards. Some caved-in too readily to shareholder demand for pay-outs. Where was the broader view of stakeholders? Perhaps the trend to shorter company lives is being driven not just by competitive pressure, but by a disregard for the importance of resilience. Certainly, shareholders want upside, but in long-term stewardship it is folly to neglect managing downside risk.
If the business world cannot get this right, expect government to step in. Corporate behaviour and survival matters for society, but politicians would prefer not to socialise the costs of this. In their view the business world needs to be better able to take care of itself, and in shape to deal with the aftermath of this pandemic and any future crisis. Bigger government could follow if business cannot fix its own governance. Public direction in sectors such as travel may be the price of bailouts. The crisis presented an opportunity for companies to demonstrate their values but instead headlines captured some disappointing treatment of staff and customers. Business has some work to do to win round public sympathy.
The challenge to company boards is broader than the current crisis. Investors want earnings that are repeatable; persistent success that survives challenge and competition. Nasty surprises like unforeseen fundraising or slashed dividends destroy shareholder value. Public company access to capital markets has recently saved many listed businesses, but at the cost of diluted future returns. Regulators require financial organisations to stress test. Why should other sectors look no further than twelve months forward as a going concern and be allowed such a superficial treatment of business risks in their annual reports?
Boards’ ability to deal more broadly with sustainability has been disappointing. In recent years, environmental, social and governance issues (ESG) have been the focus of shareholder engagement and voting, with little success. Change is slow. It seems boards will go to great lengths to ensure their own survival as a group, defending current strategies and management. Creativity is involved in many executive pay schemes but incentivisation on sustainability lacks imagination. Action on limiting board terms has reduced the tenure of chief executives - surely at odds with the long time horizons that businesses should be focused on.
Governance should be about holding management to account, alignment with stakeholders and society, and long-term stewardship. Oversight, insight and foresight. Many listed company boards seem to do none of these really well, instead just being something of a check on business as usual. It may be why the Anglo-Saxon governance model has not found favour in much of the world. The world’s biggest most successful corporations, such as the US technology groups, tend to work differently. It is time to look at the scorecard on governance.
Boards cost money, but it has taken an acute shock to question their value added. Adding resilience to the economy is not just a matter of public resource but needs a change in corporate behaviour. A new focus on sustainable growth may reduce shorter-term returns. But if shareholders do not drive a new purpose for boards, government will direct the change.
A version of this article was published on Financial News on 28/07/2020.