The Boardroom Battleground
Matthew Costello
Non Exec Director @ Codec Security | Working Capital Specialist | GAICD | Mentor?Advisor?Investor?Director
I've commenced my second AICD course today and for the second time I've had to consider what I'm learning - governance best practice, and what I've experienced - A battleground of conflicting interests.
So in navigating this I think I'll start the course with an hypothesis and see how I can work through the course material with these questions in mind.
My hypothesis is that Boards, whilst formally a governance function, act as the battleground for the conflicting interests of stakeholders such as shareholders, legislators, broader societal expectations, employees and related stakeholders. In navigating these conflicts, boards are charged with choosing sides on any given issue between these interests and for the most part will choose self interest, especially given the increasing regulatory reach in reducing the effectiveness of the corporate veil in protecting directors from liability. Regulation is increasingly the ongoing litigation of passed failures of boards to balance these conflicting interests or even pay any heed to interests other than shareholder returns.
1. Multifaceted Role of Boards: Boards primarily serve a governance function, but they also find themselves in the midst of various stakeholder interests. Shareholders, regulators, employees, customers, and society at large often have divergent expectations and demands, which can create a challenging landscape for decision-making.
2. Conflicting Interests: Boards frequently navigate conflicting interests among stakeholders. For example, shareholder demands for returns might conflict with broader societal expectations for ethical conduct or environmental responsibility. Balancing these interests is a key aspect of a board's role but can lead to difficult decisions and trade-offs.
3. Tendency Towards Self-Interest: The suggestion that boards might choose self-interest, especially in the context of increasing personal liability, is a critical point. The threat of legal and regulatory repercussions can indeed influence board decisions, potentially leading to a conservative approach that prioritizes legal compliance and risk mitigation, sometimes at the expense of other stakeholder interests.
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4. Regulation as a Response to Past Failures: Regulatory frameworks often evolve in response to corporate governance failures. Scandals and crises have historically led to tighter regulations, as seen in the Sarbanes-Oxley Act post-Enron and the Dodd-Frank Act following the 2008 financial crisis. In the Australian context, the Crown Resorts enquires, HIH, Centro and James Hardie responses and even the Banking Royal Commission. This evolution suggests that regulation is, in part, a mechanism to correct or compensate for areas where boards have not adequately balanced stakeholder interests.
5. Corporate Veil and Director Liability: The concept of the corporate veil offers some protection to directors from personal liability. However, increasing regulation and legal precedents are indeed piercing this veil more frequently, holding directors personally accountable for certain corporate actions. This shift can significantly influence board behavior and decision-making processes.
6. Balancing Act: Ultimately, the board's role is a balancing act – aligning the company's long-term strategy with stakeholders' diverse interests while navigating legal and regulatory landscapes. This requires a blend of foresight, ethical consideration, and strategic acumen.
7. Changing Landscape of Corporate Governance: The corporate governance landscape is continually evolving. Stakeholder theory, which emphasizes the importance of considering all stakeholders (not just shareholders) in corporate decision-making, is gaining traction. This shift is driving boards to consider a broader range of interests in their governance roles.
The hypothesis underscores the complexity of modern corporate governance and the challenges boards face in reconciling various interests, especially in an environment of increasing accountability and regulatory scrutiny. It highlights the need for a more holistic approach to governance that considers the varied and often conflicting demands of different stakeholders.
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1 年Excellent article Matt. Another layer of complexity is that boards do all this 'balancing of interests' in an environment where their access to information is heavily filtered by those interests. CEOs in larger organisations have a hard enough time understanding what is really going on internally, and other board members are further removed. Gerard Arpey, the former CEO of American Airlines, is quoted as saying that, when you move into the CEO role, “you've heard the truth for the last time.” The issue being that, when you're the CEO, people will tell you what you want to hear. A simplistic take is that none of this matters because, as the AICD says "Non-executive directors rely on management (or executive directors) to run the business and do not expect to be informed of the details of how the company is managed." On the other hand, the crises and regulatory responses you describe above are very much about how the company is managed. So in an environment where boards are expected to set the tone from the top in terms of values and culture, and may be held personally liable for failures in this regard, there appears to be an inherent tension between executive and non-executive accountability as corporate governance evolves.