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Women on Boards: “If that’s all there is [to boardroom diversity] my friends, then let’s keep dancing.”

[musical accompaniment for your reading enjoyment]


For the record, I am a firm believer that women tend to have distinct cognitive biases from men, offering a healthy and natural counterbalance in the boardroom (and in society).  In fact, I would like to see at least 3 women and 3 men on every board (more of either gender, even if the numbers are uneven is probably fine), in order to help validate and legitimize their perspectives.

However, my big concern with focusing excessively on the issue of women on boards (and even social minorities) is the inherent risk of trivializing more profound diversity considerations, politicizing the process, polarizing the participants, and thereby undermining the overriding objective.  The value of boardroom diversity (in the broader sense of the term) is not simply a matter of social equity (and recently also legal liability), but more importantly one of economic efficiency, because it reduces transaction costs.

Board members are expected to provide direction on increasingly complex factors affecting the corporation. Complex systems are unpredictable and full of uncertainty, with unknown cause-effect dynamics.  Board members are therefore valued more for their good judgment than the validity of their decision-making.  Boards that shun uncertainty, in favor of simplified, familiar solutions become rigid.  Conversely, those that embrace uncertainty by being open to new possibilities become dynamic and more adaptable.

The broader concept of boardroom diversity addresses the means by which boards obtain information from a sufficient variety (see requisite variety: “the minimum number of choices needed to resolve uncertainty”) of sources (or perspectives) to reduce (rather than avoid) uncertainty.  These diverse inputs could come from many different places, such as various levels of management, employee assemblies, company site visits, regulators, consultants, educators, researchers, advisory councils, industry associations, investor roadshows, customer forums, supplier panels, accreditation providers, rating and benchmarking publications, corporate ombudsmen, whistle-blowing services, community town hall assemblies, and online social media; all comprising a comprehensive corporate governance system.

Gender diversity in the boardroom, although important, on its own is entirely insufficient for reducing uncertainty and improving boardroom performance.  Clearly, openness to diversity must be rooted in the boardroom.  Directors need to be inquisitive, open to new possibilities, accepting of conflicting or unpopular cognitive biases, capable of abstracting from numerous considerations, and adept at synthesizing concepts.  This would suggest that, by contrast, the ideal personality profile for a board member should not be so diverse, but instead more narrowly defined, such as the Myers-Briggs’ Conceptualizers – Intuitive Thinkers, or more specifically the INTJ personality type (see also requisite organization: “matching employee capability to job complexity”).  If so, it might be useful to assess the typical personality type of current board members (which I would guess to be Myers-Briggs’ Traditionalists – Sensing Judgers), in order to optimize board member nominating criteria for improving board receptiveness to diversity; something “traditionalists” would be reluctant to do.  So offering homogeneous members of nominating committees a selection of heterogeneous boardroom candidates is unlikely to have much impact on board diversity.

The full potential of diversity can therefore only be realized by changing the systemic factors that preserve rigidity (see adaptive capacity).  This can be accomplished only in part by exerting external forces, such as regulatory quotas or investor suasion, which are likely to improve simple diversity metrics (i.e. gender and visible minorities), but possibly at the expense of realizing the full economic benefits of boardroom diversity.  We therefore need to be clear about our objectives.  Are we promoting diversity for reasons of social equity or business value?  If both, then the former objective needs to be codified as a policy consideration when defining strategy for the latter, accompanied by a business justification.  For example, an Asian board member could easily be business-justified to support strategic initiatives in Asian markets.

Contrary to conventional wisdom, boardroom diversity is not the responsibility of nominating committees. Rather, it is the responsibility of the governance committee.  Whereas the latter is responsible for defining board policies, nominating committees are responsible for complying with them.  The fact that most publicly listed companies combine the nominating and governance functions into one nominating and governance committee actually undermines the governance committee’s policy making responsibility by relegating diversity considerations to the nominating function.  I was pleasantly surprised to learn that, according to the Spencer Stuart Board Index 2011, 61% of S&P 500 boards have some kind of diversity policy.  However, knowing that human nature resists self-restraint, I was not surprised by the study’s finding, “Diversity is on the agenda, but the reality seems to suggest otherwise;” suggesting that nominating and governance committee members were generally reluctant to tie their own hands with highly prescriptive nominating criteria, preferring instead to retain flexibility in exercising their judgment.  There is likely a built-in, systemic disincentive for nominating and governance committees to codify stronger policies for board composition; tending toward simplistic generalizations and platitudes on visible (politically acceptable) diversity criteria, over specifics about the more fundamental and nuanced performance aspects of boardroom diversity.  Moreover, as diversity is a broader, structural consideration for resolving uncertainty in boardroom decision-making, it is clearly a governance committee responsibility; distinct from the nominating function.  Boardroom diversity initiatives should therefore begin with chairs of governance committees.

Despite its exalted virtues, boardroom diversity is fraught with risks of not only disrupting the status quo, but actually backfiring (see Why Diversity Can Backfire On Company Boards) to cause boards to become dysfunctional.  Governance committees should, therefore, mindfully initiate diversity initiatives by designing and orchestrating conditions for boardroom receptiveness in advance of introducing “diverse,” new board members.

Nevertheless, I applaud CalSTRS and CalPERS’ support for GMI’s Diverse Director Datasource initiative (3D).  It not only facilitates the process of implementing boardroom diversity programs, but also broadens the contextual platform for reforming our corporate governance systems with a more comprehensive boardroom diversity mandate.  In fact, I feel honoured and encouraged that my own director candidacy profile was recently accepted by 3D; notably for the diversity of my perspectives on how to fix the boardroom, rather than any visible diversity characteristics.

It’s time for dancing lessons my friends.



Humanistic Corporate Governance: A universal model for balancing power and aligning interests


This monograph attempts to add clarity to the complex subject of corporate governance by offering an alternative conceptual model for a corporate board as a parental archetype, and the firm as its android child.  Costly, systemic power imbalances and conflicts of interest, inherent in the conventional model, are resolved by applying ancient Roman property law principles (usus, fructus, and abusus).


by Alex Todd – GovernanceCommittee.com



Corporate governance is a complex subject.  It has been defined in many different ways, and has been the subject of countless debates about its purpose, roles, and responsibilities.  Corporate directors’ legal obligations vary across jurisdictions, and opinions about corporate governance best practices, their value, and the means by which to adopt them are conflicting.  Overwhelmed by the myriad factors that shape our understanding of corporate governance, it is not surprising that the state of corporate governance worldwide is in a state of crisis and is subject to unprecedented scrutiny.

Reactive regulations that restrict corporate conduct in response to a series of corporate scandals and financial crisis have opened a space for massive reform.  The accelerating downward spiral of systemic failures and regulatory plugs, combined with the emergence of powerful competitive forces, has put western-style capitalism at a crossroads.  The soul-searching dialogue to improve understanding and redefine the desired future of corporate governance is already underway.  Now, even conventional wisdom and the most cherished beliefs are on the table and open for discussion.  However, what is now accepted as “good” corporate governance, if left uncontested, will keep capitalism on its current, unsustainable trajectory.  Left uncorrected, marginalized anti-capitalist forces will gain power and momentum, threatening to swing the economic pendulum to its opposite extreme.  By definition, neither extreme is sustainable and both are undesirable.  Choices that consider the full complexity of the business environment need to be guided by principles and frameworks that promote adoption of balanced approaches for addressing ever-changing demands on corporate governance.

Conceptual Models

Complex concepts and interactions are difficult to describe and comprehend.  Often metaphors and conceptual analogies can be useful techniques for relating what is known and familiar to things that may be difficult to grasp.  A conceptual model is valid when it provides a context that reliably infers meanings to occurrences and helps clarify uncertain cause and effect dynamics.  It is difficult, if not impossible, to reach consensus about a complex subject when people’s perspectives are rooted in incompatible conceptual models.  It would therefore be misguided to attempt a diagnosis or design of corporate governance systems by relying on incompatible views about its fundamental nature.

Although desirable, it may be equally unrealistic to expect everyone to hold the same world view of corporate governance as it is for everyone to share the same political values or religious beliefs.  Nevertheless, an explicit expression of one’s concept of corporate governance would be beneficial for gaining insights into how to evolve corporate laws, corporate governance systems, and board practices.

Many corporate directors see themselves as representing shareholder interests in monitoring the activities of management, analogous to a watchdog delegate.  Other directors see themselves as independent guardians of the integrity of the capitalist system, analogous to judges ruling on management conduct.  Yet others may identify with being a sounding board for management, akin to a mentor.  Most would likely feel uncomfortable choosing any one archetype.  Instead, they might prefer to provide a description of their primary roles and responsibilities as corporate directors.  The challenge with picking just one archetype is that it may not fit all corporate forms (private, listed, non-profit, etc.) and situations, or it may not fully encompass the director’s conceptual model of corporate governance.  However, this is problematic, because it allows for inconsistencies and contradictions to infect any viable unifying conceptual model of corporate governance.

Consider the possibility that the purpose and role every corporate board, of any corporate form, in any situation, best fits a parental archetype[i].  A parent’s overriding objectives are to develop their child into a productive and valued member of society.  It is a complex role, because success depends on many factors both within and outside the parent’s control (genetics, family, friends, external influences, etc.), and there is generally not a direct cause-effect relationship between what parents do and how the child responds.  After giving birth to their child, parents create supportive conditions for the child’s development, protection, and self-determination.  These characteristics are strikingly similar to the role of a corporate board.  Similarly, the legal relationship between the parent and the child is essentially the same as the fiduciary duty the board has to the corporation.

Consider also the possibility that the corporation, a legal person in law, is an incomplete person, analogous to an android[ii].  A corporation exists as a member of society, but does not have the same human needs as natural members of society.  For that reason, corporations need to be socialized to fit in with society and function as productive and valued participants.  Left to their own devices, despite being comprised of individuals engaged in a common enterprise, corporations are distinct entities that do not have the same needs or sensibilities as the people with whom they interact and whose lives they affect.  As such, they need a systemic human connection that assures their productive integration into society.  That responsibility resides squarely with the board of directors.  Hence, the overriding purpose of corporate governance may well be to productively integrate corporations into society.

Although these analogies might sound reasonable in theory, closer scrutiny reveals significant incongruence with experience.  Most notably, for-profit corporations are considered to be the property of their shareholders.  Unfortunately, this contradicts the principle that people are not property.  It can therefore be argued that ownership of legal persons is analogous to slavery, which is illegal.  Any universal view of corporate governance would have to be equally valid for all corporate forms, including non-profit corporations that do not have owners, but instead have members who serve as their principles (effective owners).  The conventional view of the corporation as property considers non-profits to be a special case, and therefore invalidate its universality.


Another way to look at the ownership dilemma is from a property rights perspective.  Ownership of shares, does not carry the same rights as title to real property, such as a plot of land[iii]. Shares are an abstract legal instrument that conveys specific rights and obligations to shareholders, but does not pass on a title to the corporation.  It is therefore invalid to infer that stock ownership is the same as company ownership.  Shareholders are not company owners.  And since we know that members of not-profit companies are also not company owners, who is – if anyone?  This is where conventional wisdom breaks down.  Nobody owns a corporation, not even founding entrepreneurs.  A corporation is a legal person, and it is illegal to own people.

This clearly suggests a materially different conceptual model of the corporations in the western capitalist system, which is founded on inexorable principles of property ownership.  If corporations are not owned, but contracted, then what could be legitimate claims of shareholders and other stakeholders?  Under contract law, they are only entitled to what is contracted and mandated by law.  Shareowners have no innate claim to the property of a solvent corporation.  Although, shareholders typically have a right to sell their shares, vote for corporate directors and certain other matters, and claim the residual value of the corporation[iv], only equity participation is inherent to the concept of an equity share.  All other rights and obligations are contracted between the issuer (the corporation) and its shareholders.  It is therefore  not inconceivable that a corporation could choose to issue non-voting equity shares,  transfer-restricted capital stock, and/or even non-equity voting rights (as with members of non-profit corporations) to satisfy various corporate governance objectives.

If shareholders are only contractually entitled to equity participation, without ownership rights, to whom should corporate boards be accountable?  After all, even if one were to accept the possibility that the overriding purpose of corporate governance is to ensure corporations are productive members of society, then who in society should control the board?   Few would disagree that shareholders who have contributed capital to the business, capital stockowners whose capital is at risk of uncertain returns, are entitle to a voice on how the corporation is governed.  But should shareholders who purchased their shares from other shareholders, rather than the issuer, be entitled to the same rights?  The relationships of the capital stockowner and the market shareholder to the issuer are clearly not equivalent, and it would not be unreasonable for them to be entitled to distinct shareholder rights[v].

Subordinated rights of one class of shareholders that expose these shareholders, without remedy, to oppression by a majority equity holder (analogous to dual class share structures, whereby one class enjoys disproportionate voting rights relative to the equity value of the shares they hold) is generally undesirable.  However, if the relative powers of the classified shareholders were distributed equitably, such meritocratic (distinct from democratic) share structures could be made acceptable.

Property Rights

Ancient Roman principles of property rights were designed to prevent oppression by any one property reliant party over another by balancing property rights between all property stakeholders.  No property stakeholder, whether landlord or tenant, was allowed to hold all three rights of fructus, abusus, and usus; namely the right to the yield from the land, the sale of the land, and to work the land.  Landowners had the right to abusus (sell) and a portion of fructus (yield), but not usus (forbidden to work the land).  The tenant had the right to part of the fructus and to usus, but not to abusus.  In the feudal system, no individual, not even the king, was allowed to own all three property rights[vi].  Consider the property rights enjoyed by today’s shareholders.  They enjoy all three rights; a portion of fructus in the form a residual share of the equity, abusus with a right to sell their shares, and usus with voting rights.  Based on ancient Roman principles of property ownership, today’s shareholders have disproportionate power over issuers and other corporate stakeholders.

Applying Roman property law principles to today’s capital markets may seem like a step back rather than progress, but what if it were to offer a simple solution to many of the problems plaguing modern capitalism?  Suppose that capital stockowners had the right to part of the residual equity of the firm (fructus) and the right to vote for corporate directors and other matters (usus), but were restricted from selling their shares on public markets (abusus).  This has historically been the customary practice of family-owned businesses, as they preferred to not exercise their right to sell (abusus) in order to keep the business in the family.  Suppose, also that all other shareholders retained their right to an equal proportion of the gains (fructus) and exclusivity to sell (abusus), but their right to vote (usus) were restricted or rescinded.  This could potentially eliminate the problem of shareholder oppression by removing the incentive of capital stockowners to expropriate capital resources from other non-voting shareowners.  It would also systematize long-term stockownership by contributors of capital (and specified opt-in shareholders), analogous to today’s buy-and-hold,  long-term shareholders.

This approach potentially offers an added benefit of unraveling the snarl of regulations that attempt to align management interests with shareholders.  By also replacing shares given to management with a class that restricts selling (abusus), same as capital stockowners, management interests would inevitably become better aligned with voting stockowners, and would remove a major incentive for them to “play the expectations game”[vii] of stock price timing and manipulation.  Corporate directors, together with other strategic stakeholders, could receive transferrable (abusus), non-equity voting (usus) shares.  This would give society a direct voice in corporate governance, rather than being relegated to proxy voting of equity shares.

A derivative benefit would be the cost savings associated with stockowners not having to vote on every issue, thereby largely eliminating the plethora of current incarnations of internal and external proxy voting resources.  Instead, voting considerations by capital stockholders would largely be oriented toward considerations that affect long-term financial performance of the business.  Voting by other stakeholders (possibly including trading shareholders) could be conducted via stakeholder councils elected to represent the interests of the firm’s strategic stakeholders.  As a result, relatively few proxy votes would need to be counted.

There are also other implications to this system of corporate governance.  Most notable is the means by which capital stockholders divest, since their shares would not trade on public stock markets.  Also, valuations for capital stock would likely differ from the stock market prices of tradable shares.  Special liquidity requirements for capital stockowners (such as modifications to those currently used for private equity, share buy-backs, share conversions, etc.) would therefore need to be addressed.


These proposals are clearly on the fringe of mainstream thinking about corporate governance.  They paint a picture of corporations as incomplete persons, rather than property; corporate boards as their parents, rather than representatives of owners; and shareholders as holders of contractual rights rather than owners of the corporation.  Boards become accountable primarily to stockowners who contributed capital to the corporation, but whose rights to sell their stocks are restricted.  All other strategic stakeholders have aggregated voting rights via a representative stakeholder council, which gives them a legitimate voice and counterbalancing power.  Executives are measured against financial and causal indicators of performance, regardless of share valuations, and do not receive tradable shares as compensation.  Together, these measures help to humanize the corporation and offer a humanistic approach to corporate governance that puts the needs of people with legitimate, yet diverse, interests in the corporation at the forefront.  One can expect powerful, vested interests to vehemently resist any attempts to move in this direction.  Nevertheless, open dialogue and vociferous debate about the desired future state of corporate governance is gravely needed.  Adding humanistic corporate governance to the discussion agenda could open new possibilities for correcting the inherent excesses of today’s capitalist system.

[i] Wikipedia, “Parenting is the process of promoting and supporting the physical, emotional, social, and intellectual development of a child from infancy to adulthood…. Usually, parental figures provide for a child’s physical needs, protect them from harm, and impart in them skills and cultural values until they reach legal adulthood, usually after adolescence.”

[ii] “An android is a robot or synthetic organism designed to look and act like a human.”  Wikipedia, Android (robot), June 1, 2011, http://en.wikipedia.org/wiki/Android_%28robot%29

[iii] Charles M. Nathan, A 12-Step Program to Truly Good Corporate Governance,  May 18, 2011, http://blogs.law.harvard.edu/corpgov/2011/05/18/a-12-step-program-to-truly-good-corporate-governance/

[iv] Ibid

[v] Roger Martin, Why CEOs Don’t Owe Shareholders a Return on Market Value – Harvard Business Review http://blogs.hbr.org/martin/2010/03/why-ceos-dont-owe-shareholders.html .

[vi] Pierre-Yves Gomez and Harry Korine, Enterprise and Democracy: A political theory of corporate governance, Cambridge University Press, 2008

[vii] Roger Martin, Fixing the Game: Bubbles, Crashes, and What Capitalism Can Learn from the NFL, Harvard Business Press, 2011

Alex Todd’s Interview Talking Points for: Trust Across America Online Radio Show hosted by Jordan Kimmel

Alex Todd’s Interview Talking Points for:  Trust Across America Online Radio Show hosted by Jordan Kimmel

1. The Road Less Traveled to Trust: My Trust Enablement journey from CompuServe to IBM and systems for online trust

I first became aware of the trust enabling power of digital social networks when I launched a couple of software products on CompuServe in 1991, several years before the Internet became popular.  I discovered that I was able to get acceptance for my new products faster, at a higher price point, with lower marketing costs, and fewer returns selling online in CompuServe discussion forums than by using traditional direct mail and telemarketing methods.  I was therefore not at all surprised when I learned of eBay’s success on the Internet a few years later.  Then about 10 years ago, while with IBM’s security and privacy consulting practice, my role was subject matter expert in public-key infrastructures (or PKI for short), a sophisticated system for enabling trust in cryptographic keys used to encrypt (or scramble) electronic information (systems used by the military, governments and financial institutions).  I felt much could be learned from PKI systems about the drivers for trust in any environment.  My efforts to extrapolate the core principles behind PKI led to the development of the Trust Enablement Framework that I have been testing, refining and applying to many areas of business (leadership, collaboration, sales and marketing, public relations, online social networks, electronic commerce, supply chain management, risk management, and business strategy) for the past decade.  These initiatives have allowed me to gain new insights into prevailing conditions for trust in business.

2. Trust Enablement: A risk management innovation – aka. Risk Management 2.0

I was excited about the possibilities for applying a systems-based discipline to diagnosing and designing conditions for trust, and saw an opportunity to formalize a new management discipline that would be complementary to risk management; whereas risk management is all about protecting what you have, Trust Enablement is all about getting what you want.  You can think of them as being the defensive and offensive lines of management (analogous to football).  In fact, I was really surprised that this void still existed in academia and management, especially because enabling trust creates far more value than managing risks.  In fact, it is quite easy to make a business case for improving trust by simply showing how it increases the volume, velocity and value of business transactions.  Making a business case for a risk management initiative is actually very difficult, because you have to assume that a risk event will occur, something that is by definition uncertain and hence, counter intuitively, a much softer measure than trust.  To this day, I find myself wondering why this is so.  Why would we continue to invest hundreds of millions of dollars in a risk management discipline that continues to fail us by repeatedly missing systemic risks, the impact from which is orders of magnitude greater than any isolated risk.  Trust and risk are actually very closely related.  You can therefore also look at Trust Enablement as being Risk Management 2.0 that inherently addresses systemic risks.  It does so by, in effect, turning traditional risk management inside-out and looking at risks from the business stakeholder’s perspective.  So Trust Enablement, or Risk Management 2.0 is in essence “reciprocal risk management.”  This may turn out to be the simplest way to introduce trust considerations into current business practice, as an improvement to an existing discipline that is already budgeted and well funded.  However, my experience has been that the risk management community is notoriously risk averse and the culture is not conducive to trusting, which inherently requires the acceptance of risk by making oneself vulnerable to others (the business stakeholders).

3. Beyond the Religion of “Good” Corporate Governance:  To the Science of Strategic Corporate Governance

When I used my Trust Enablement framework to analyze corporate governance best practices, I was looking for some indication that richer conditions for trust were associated with aspects of business performance.  I was delighted to uncover a correlation between richer conditions for shareholder trust and stock valuations, and surprised to concurrently find corporate governance styles associated with various other aspects of business performance.  I wrote about my findings in an article entitled “Corporate Governance Best Practices: One size does not fit all” that has been widely republished, most recently by The Singapore Accountant.  You can download a copy of the article from my web site, TrustEnablement.com.  Since then I have analyzed the corporate governance styles of more than 5,000 publicly traded companies in the United States and have found that a sample portfolio of those exhibiting the strongest indicators for one specific style generated a total return of 14% for the 4 year period from April 2006 to April 2010, which is huge considering the Russell 3000 was flat for the same period and the best performing Russell index only produce a 2% cumulative return.  Given the magnitude of this unrealized market value, I am now exploring opportunities to create Corporate Governance Investment Funds based on this screening method.   The overriding premise is that appropriate corporate governance practices can create fertile conditions for business that facilitate performance improvements aligned with strategic priorities.  Moreover, I believe that the most evolved corporate governance practices help management sustain value creating business activities by continually adapting to changing business conditions.

4. Beyond Performance-based Strategic Corporate Governance:  To Aspirational Corporate Governance Principles and Policies

This brings me to my chapter on corporate governance best practices that I contributed to the newly released Robert Kolb Finance Series reference book, entitle “Corporate Governance: A Synthesis of Theory, Research, and Practice”, published by John Wiley & Sons in October of this year.  In the chapter, I Introduce the Aspirational Corporate Governance (ACG) framework that highlights the critical considerations needed to design a board’s structures and practices for sustaining the value creation activities of the business.   ACG is founded on three principles:  1. Requisite Organization that requires board directors to have a higher cognitive capacity than management in order to be able to add value; 2.  Requisite Variety that requires boards to leverage multiple sources of input when relying on critical information that informs their choices, and specifically inputs from their strategic stakeholders; and 3. Adaptive Capacity that requires boards to strike an appropriate balance between empowering stakeholders and tying their own hands, which allows them to organically adapt to changes in the business environment.  In the chapter I show that ACG is consistent with OECD’s principles for good governance, but that national principles and institutional best practices tend to increasingly diverge from this ideal.

5. GovernanceCommittee.com

I conclude my chapter on corporate governance best practices by calling on governance committees of corporate boards to assume a leadership role in transforming corporate governance practices, because, whereas the board is responsible for directing the activities of management, the governance committee is responsible for directing the activities of the board.  In fact, I believe that if stakeholder trust is to become a valid business consideration and Trust Enablement is to become a legitimate management discipline, the mandate to make that happen must come from the board, under the direction of the governance committee.   I am now developing a peer support network and resources web site exclusively for corporate directors who serve on their boards’ governance committees, in order to help them assume a proactive leadership role in evolving their boards’ corporate governance structures and practices.  You can review the work in progress (currently only a prototype) and participate in the site’s design and development by visiting the GovernanceCommittee.com web site.

Alex Todd’s Comment on: The Big Idea: The Case for Professional Boards by Robert C. Pozen

Alex Todd’s Comment on:  The Big Idea: The Case for Professional Boards by Robert C. Pozen

Although I generally agree with Mr. Pozen’s thesis that a sound case can be made in favour of professional directors serving on corporate boards (see also Roger Martin’s HBR blog posting “Management Is Not a Profession — But It Can Be Taught” to which I comment in support of professional directors, albeit for entirely different reasons – http://t.co/Vr878mO), I have concerns about his prescriptive approach that constrains many viable possibilities.

I acknowledge his argument that larger boards make consensus-making more difficult. However, I take issue with his constraint on board size, and would caution against sacrificing perspective for expediency. Let’s leave the expedient decision-making to management. The board needs to be more deliberative. My recommendations would be to adjust the board size based on several sound and predefined, principles-based parameters, as recommended by the Governance Committee.

Which brings me to his second constraint of allowing for only three primary committees (audit, compensation, and nominating) and thereby not only excluding other possibly valid committees (depending on business requirements), but also explicitly excluding the Governance Committee. Granted, it is customary for boards to have a combined Nominating and Governance Committee, but that should in no way diminish the value of the Governance Committee function. In my view, this is the group of corporate directors whose job is to reflect on how the board functions and provide the leadership to appropriately refine and evolve the board’s structures and practices. I wrote about this in the chapter on corporate governance best practices that I contributed to the newly released Robert Kolb Series in Finance reference book “Corporate Governance: A Synthesis of Theory, Research, and Practices”, published by John Wiley & Sons, October 2010 (see http://bit.ly/eTmH9b).

This takes me to Mr. Pozen’s third constraint that requires all directors to have relevant business expertise, with perhaps one generalist for strategy and one accountant for the audit committee. I would agree that every board requires these skills, but find it difficult to restrict each of the two latter roles to only one person. One reason is that generally, more than one corroborating voice is required a message to be heard and seriously considered by the group. The other is that the role of the each of the cited committees requires more professional than industry expertise. The Governance Committee is no exception. It requires directors who are experts in corporate governance, not so much the business (over which the board presides), because whereas the board directs the activities of management the Governance Committee directs the activities of the board.

Finally, on the matter of director compensation, Mr. Pozen constrains the possibilities for influencing the motivations of directors to compensation, despite generalizing that they are already wealthy individuals. I believe elderly, rich directors would be motivate more by other factors, such as their legacy, than by pecuniary inducements. In general, one would expect that a person approaching the end of their life would be motivated more by shorter term than long term considerations, and compensation schemes that pay out over 4 years would similarly be ineffective. Instead, we need professional directors who are young enough to be motivated by long-term considerations that are more broadly designed to rely on more than just compensation. Perhaps a more fitting motivation might be a formal admittance to the “board” (analogous to lawyers being admitted to the bar), followed by opportunities to be recognized for their career of service on boards (similar to being recognized with a prestigious order of merit for public service) as a high-performing corporate director.

In conclusion, I agree with Mr. Pozen that a dedicated cadre of professional directors would make a valuable contribution to improving corporate governance practices, with favourable implications for both business performance and economic prosperity. However, I believe the evolution of corporate governance is better left to guiding principles and organic adaptation than arbitrarily prescriptive rules.

Alex Todd’s Comment on: The uncertain relationship between governance and performance by Stephen M. Bainbridge

Alex Todd’s Comment on:  The uncertain relationship between governance and performance by Stephen M. Bainbridge

Stephen, I agree, but its worse than complicated; the governance/performance dynamic is complex.

The fundamental problem with corporate governance is that everyone does not agree on what the board is expected to accomplish and on whose behalf. The debate has become polarized to the point where it is starting to sound like religion, especially when we start to use terms like “good” and “bad” corporate governance practices. Whose God are we following when we judge a “good” or “bad” corporate governance practice? See my poll: “Are corporate governance ratings more like religion than science?” at http://polls.linkedin.com/poll-results/89315/ymjga

Most studies to date have been flawed, because they start with the hypothesis that “good” corporate governance associated with “good” business results. What constitutes “good” in each use of the term? The reality is that there are more or less appropriate corporate governance practices for different kinds of organizations, and there appears to be a connection between the strategic priorities of a company and its corporate governance style. I wrote about this in my article “Corporate Governance Best Practices: One size does not fit all”, most recently published by The Singapore Accountant (see http://trustenablement.com/local/One_Size_Does_Not_Fit_All-ICPA_Singapore.pdf).

I have since validated the styles using corporate governance date for more than 7,000 companies worldwide (5,000 in the United States) and found the small sample portfolio of those that strongly exhibiting one of the styles produced a 14% total stock return over the past 4 years (that’s significantly above even the best performing Russell index). I am now planning to validating these results with a large pension fund. The corporate governance practices that comprise the “style” of the high-performing portfolio are both “good” and “bad”.

Alex Todd’s Comment on: Capitalism is Dead. Long Live Capitalism. by Gary Hamel

Alex Todd’s Comment on:  Capitalism is Dead. Long Live Capitalism. by Gary Hamel

Thank you for pointing out the elephant in our economy.  Our economic system of choice, capitalism, is evolving.  It is my hope, as it is yours, that its evolution will see it mature toward more aspirational levels of Maslow’s Hierarchy of Needs rather than slipping back toward its more primal origins.I believe we need to engage boards of directors and institutional investors to revisit their understanding of the nature of the corporation and their respective roles in helping to create a desired future.  I wrote about this in a chapter (Chapter 4: Corporate Governance Best Practices) I contributed to the newly released Kolb Series in Finance textbook “Corporate Governance: A Synthesis of Theory, Research, and Practice“, published by John Wiley & Sons.  I introduce the concept of aspirational corporate governance (ACG) to help governance committees of boards diagnose and design corporate governance structures and practices appropriate for the complexities of sustaining a self-regulating system of governance.  ACG allows organizations to adapt through innovation to create new possibilities for delivering value in a complex, uncertain world.

Alex Todd’s Comment on: Corporate Governance Ratings: Rating the Raters by Kimberly Gladman

Alex Todd’s Comment on:  Corporate Governance Ratings: Rating the Raters by Kimberly Gladman

My research supports your conclusion that “good governance can’t guarantee high stock returns, and that even bad governance won’t always make a company blow up anytime soon”. I would only add that I don’t believe there are inherently “good” or “bad” corporate governance practices. Instead, I believe there are corporate governance styles that better support different performance objectives and others that may be counterproductive.

I wrote about this in an article entitled “Corporate Governance Best Practices: One size does not fit all” (see http://trustenablement.com/local/Corporate_Governanc_Best_%20Preactices-mar08_icsa_intnl.pdf ). It’s interesting to note that using corporate governance practices data from April 2008, I recently traced the stock performance of a small sample of the 7,000+ companies in my model to see how each corporate governance style performed during the two years of the recession. I was surprised to learn that issuers with a “management influenced” board style significantly outperformed the others. Why? Apparently, because, as per my article, they were associated more with cash distributions to shareholders (read dividends) than any other performance measure. I also found it interesting that the worst performing style was the “management controlled” board, which most corporate governance experts would agree is an example of “bad” corporate governance practices. However, it’s not the “bad” corporate governance practices of these companies that are the cause of their stocks’ under-performance. Instead it is their vulnerability to business cycles, since “management controlled boards” were otherwise found to be associated with superior revenue growth, which was difficult to sustain during the recession. Incidentally, “management controlled boards” were also overwhelmingly the most likely to have been delisted during this two-year period.

My takeaway from this research is that corporate governance styles are a better indicator of expected business performance, not only stock valuations. Although one of these styles, the “trusted board style”, was originally found to be associated with higher valuations (share prices), it’s stocks underperformed during this economic downturn. Instead, it was the dividend-paying shares of the issuers governed by “management influenced” boards that were best suited for this economic downturn. Value investors may therefore want to take a closer look at companies with a “trusted board style” or those that exhibit the “bad”, “management controlled board” style during the current economic recovery.

There is no absolute “good” or “bad” in corporate governance. There are only more and less appropriate governance styles for achieving different business objectives at different times.

Corporate governance is more about strategy than it is about religion. One size does not fit all.

Alex Todd’s Comment on: Governance Problems in Closely-Held Corporations by Venky Nagar, Kathy Petroni, and Daniel Wolfenzon

Alex Todd’s Comment on:  Governance Problems in Closely-Held Corporations by Venky Nagar, Kathy Petroni, and Daniel Wolfenzon

I wonder to what extent these findings might be due to a tendency by widely held companies to externalize costs. I suspect that closely held firms (especially family businesses) tend more toward sustainable business practices and therefore choose to internalize more costs.