This is a piece of loose reflective work on my thoughts about corporate governance. It is not based on any study of rigor. Everything below this line is strictly my personal opinion, which means this blog post may be opinionated, skewed, controversial, naïve or all of the above.
Just in case you think whatever I am about to write is idiotic and eyeroll inducing (which it very well may be), here is a picture of my cats to make me feel better about posting this.
Let’s start with some rant about the impossibility of perfect corporate governance
I tend to think the strive towards perfect corporate governance is similar to trying to create a completely corruption-free national government, as it is an endeavour doomed to certain failure because there are always competing interests and never-ending agency problems.
Short of a one-person company or an extremely tight-knit family business, I cannot think of a corporate scenario that is free from the above-mentioned problems. I am particularly cynical as I have personally witnessed / experienced the following:
- A small exchange listed company where 3 of the directors breached fiduciary duty by misappropriating company assets and defrauding the company through sham tendering process. The 3 directors almost attracted criminal investigations.
- Within a really large organization I have worked for, there was non-stop mid-level managers misappropriating company resources and actively sabotaging each other’s career.
- I admit that I have never stopped thinking about my own personal interests when I was working for my previous employers or even when I embarked on entrepreneurial endeavours with someone else.
The baseline of the analysis (bottom-line?)
For the interest of making this blog post more streamlined, let me be the devils’ advocate and say all corporates’ sole purpose is to maximize profit and capital accumulation. And the purpose of corporate governance is to make sure everyone involved in a business align their actions with this (arguably psychopathic) goal.
Regardless, even when a corporation actually has goals other than profits, I think the friction points I highlighted below are almost always present.
The friction points
Corporates might be psychopathic, shockingly, the people who are in charge of or involved with them are not. Everyone has their unique interests and goals that may result in conflict of interests, and I tend to think a corporate is like a chunk of Swiss Cheese: the overall structure is the fermented milk solids (the common interest of all the members) and the holes are the latitudes given to everyone to fit their own interests and goals inside of the corporate pursuit. So, at times some people would just want to form bigger holes within the overall shape of the cheese.
Below are some examples of the holes I can think of.
- People have immediate financial goals and long-term career goals. A lower-level manager may try to compartmentalise information from their peers to gain advantages in their climb of the corporate ladders, and directors or higher officers may try to make decisions that boost short-term performance in the expense of future growth to pad their track record so they may pursue more lucrative career opportunities later.
- Corporates are much more resource rich than individuals, and corporate leadership are often given wide latitude in appropriating such resources. This is how some executives throw extravagant parties in the name of entertaining key clients, yet when you check the invitee list you would see more members of the company were invited than the actual clients.
- Check and balances are often (seen as) detrimental to efficiency and at times some level of misappropriation of company assets are treated as expense of doing business.
- People have egos, hence they make decisions out of hubris, or worse, when its evident a certain decision was not to the best interest of the company, they do not want to be held accountable or to correct the course.
- Supposedly, directors and officers should act in the best interests of the company. Yet, the company is not a sentient being that would discipline a director or officer that breached its fiduciary duty. At times the ultimate governance mechanism lies on the shareholders. Yet, shareholders each have their own priorities, and their decisions may not always align with the interests of the corporation. Remember at the beginning of the article where I said “some company directors almost attracted criminal investigation” because they defrauded the company? The major shareholders decided to put a lid on the situation because they worried that reports of the breach of fiduciary duty would do more damage to the share price. This is an extreme example but really shows how every relationship in the corporate world is interest based and at times the interested parties wilfully look away.
As we know, both the holes and the solids are the defining characteristics of a chunk of Swiss cheese. Similar wise, the interweaving of personal and corporate interests is never going to go away. I therefore think smart shareholders and lawyers can do whatever they can to try to promote better governance, but there really is no such a thing as perfectly governed corporate.
So, what can be done to achieve better corporate governance?
(Without rigorous legal research before writing this) I think much like any other area of corporate law, the statutory scheme only set out some baseline rules for corporate governance and left much more to the creativity of individuals who are involved in the design of a corporation.
A director or officer can attract civil or even criminal sanctions for breaching fiduciary duty or security offences, but much of the detection or prevention of such troubles are left for the members of a company to do.
So here are a few things I can think of that may advance better governance. (Hey, think twice before actually seriously considering my advice though, as this blogpost is not base on rigorous research and is from someone who actually failed his first entrepreneurial endeavour)
- Start with aligning everyone’s interests, especially long-term interests. Design the compensation package carefully, build them with certain portion of things that reflect long term growth of the corporation (such as options or bet-on agreements).
- Promote meaningful and frequent shareholder engagement. Don’t just leave the decision making to the shareholder AGM, perhaps build into the company constitution some list of decisions that must be voted through some special shareholder resolutions. (But then again this may not be a realistic option for larger corporations that have complex share structure or exchange listed shares available to millions of small investors).
- To reduce chances of corruption (especially at the mid-management level), give channels to regular employees to report their concerns, not just to their immediate supervisor, but someone higher on the corporate hierarchy.
- Mandate within the company that certain information cannot be compartmentalised (such as competing sales departments’ annual expenditure on client entertainment)
I hope this has been a worthwhile discussion on corporate governance before the lecture this Friday. If not, please don’t call me out on my blatant attempt at maximising my participation score which is much needed.
