3 Vital Questions on Building Strong Businesses

Maliha Aqeel of Canada's Institute of Corporate Directors (ICD) Director Journal asked me 3 tough questions about building businesses in today's fast-paced global environment. We talked about the governance divide: Europe vs. North America, the changing nature of corporate governance, the rise of activist investors, and what companies need to be alert to in the coming months.

In broad strokes, what do you see changing in governance today?

There are two universal governance trends today: a greater recognition of the need for transparency and a stronger understanding of the role independent directors must play in holding companies accountable. We are taking these issues even more seriously than before because we are under greater public scrutiny.

Both in the North America and around the world, media coverage of governance issues is getting stronger. In the past 12 to 18 months, the media has covered stories about active annual general meetings, executive compensation and board diversity at companies that include Facebook, Yahoo, Hewlett-Packard and Olympus. Information is moving freely and quickly, and the impact of business decisions is often global rather than insulated by geography.

In the media today, the story is no longer about the board of XYZ Company; rather journalists are calling out individuals on that board and holding them to account. In the U.S., the media is asking tougher questions than ever before, and that trend is beginning to appear in Europe now too.

The activism that the likes of Carl Icahn and Bill Ackman have popularized in North America is starting to heat up in Europe as well. Hedge funds and institutional investors are taking an active role in not only how companies make money, but also in whether they are doing the right thing. MF Global, AstraZeneca, Barclays and News Corp. are just a few examples of this “shareholder spring” that has forced boards to sit up and take notice of the investor voice.

Boards are being scrutinized by investors on a wide range of issues, including composition, competence, diversity, voting control and dual stock structures. The lesson for all of us as directors is clear: our role is to be independent, ask the hard questions and hold management accountable. If we don’t, shareholders and stakeholders throughout the ecosystem will hold us accountable for our complacency in jeopardizing the company’s future.

The Libor-rigging scandal and JPMorgan’s London Whale trading fiasco made clear that many executives in the banking sector have been operating in a manner that can only be described as tone deaf in a soundproof room. Corporate boards, and those of financial institutions in particular, need more directors that understand what these companies are doing and what they need to be doing. The directors need to have the courage to ask tough questions and take swift, strong action.

How does the outlook of European directors differ from that of North American directors at the moment?

There are certainly some philosophical differences in how governance is perceived and in how companies operate in Europe versus North America. In this regard, I see Canada as being closer to Europe than the U.S. But Canada is a hybrid in terms of its thinking and approach to corporate governance. In Europe, companies exist as part of a larger economic entity – the European Union – and every day they think about what impact they have on the larger economy. This is particularly true in countries such as Italy, Spain, Greece and France, where one company’s financial troubles can impact the economy as a whole. Indeed, we can see from the legislation that the EU is enacting, and its approach to companies, that the EU expects a communal approach.

In Europe, companies and directors generally ask themselves not just “are we going to make money today?” but “what impact will the company have on the larger economy?” European directors have a strong sense of connectedness and a more communitarian approach than their U.S. counterparts. In the U.S., the approach is more libertarian and individualistic; the focus is very much on making money for the shareholders, and there is less discussion about the impact the company has on the economy.. In Canada, there appears to be more of a linkage between a company and its community than you find in the U.S.

What do you think boards need to be alert to ahead?

I think companies need to make sure they are global in their outlook. This trend is taking hold in Europe, as slowly more people are being put on boards who are from outside the home country and who bring international experience and perspective. As an example, I sit on the board of an Italian public company that operates globally. This isn’t an issue just for companies that have operations around the world. Even if a company is not operating globally, it will be impacted by global events. So it’s very important to have people around the table that have a sophisticated understanding of how other markets and sectors will impact their companies.

Lastly, no matter where we serve on boards around the world, even the most experienced directors need to be constantly re-educating themselves. We all need to refresh ourselves and make sure that we are up to speed, both in sector related trends and shifts in corporate governance, and that we are contributing to the company as much as possible. As we start the 2014 boardroom season, we as directors need to listen, act with integrity and authenticity and feel comfortable with our actions.

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Lucy P. Marcus writes a column and hosts a TV series, “In the Boardroom with Lucy Marcus”, for Reuters on the intersection of boards and leadership. She is a board director of Atlantia SpA and BioCity, non-executive chair of the Mobius Life Sciences Fund, and the CEO of Marcus Venture Consulting. Ms. Marcus is Professor of Leadership and Governance at IE Business School, focusing on corporate governance, ethics and leadership.

This article originally appeared in the Director Journal, a publication of the Institute of Corporate Directors (ICD). Permission has been granted by the ICD to use this article for non-commercial purposes including research, educational materials and online resources. Other uses, such as selling or licensing copies, are prohibited.

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Photo credit: Christopher Michel