Lessons from corporate governance

Leadership plays a focal role in the natural world wherever communal living is necessary for survival. It is observed from honeybees to buffalos. But it is most interesting among us humans, with our ballots and elections. The midterm elections of the past week, for example, displayed this process. Governance, indeed is omnipresent in our lives for as long as we are a collective entity.

As a citizen of the nation, you had cast your vote for your desired local and national leaders. As a citizen of a corporation, on the other hand, you may be casting your vote for your corporate leaders whenever your annual general meeting is. One election is under extreme media scrutiny, participated in by millions of registered voters. The other does not have the fuzz, done only by voting shareholders.

When you dip your toes in both highly hierarchical organizations, the overlap becomes interesting. So much that, over the past week, I often heard people ask, “Why don’t we run the nation like a corporation?” It seems logical. The board is qualified, the executives are duly screened, competition drives efficiency, and the votes accorded to shares held. So, can corporate governance work for public governance?

This coming June 7, the 2019 Global Corporate Governance Colloquia will be hosted at the Goethe University Frankfurt. The event aims to gather all the best research on corporate governance. The colloquia will involve top universities across continents, including Harvard University, the London Business School and the National University of Singapore.

Why all these efforts by leading academicians to train the spotlight on corporate governance? Because the successes and failures of corporations may offer lessons and insights on better public governance.

Energy company Enron, once upon a time, was an investment darling. But then it engaged in fraud by reporting estimated revenue as actual revenue. The revelations sent Enron’s stocks on a free fall; from a $90 peak value per share, it dipped to $0.26, effectively wiping out people’s savings and retirement plans. Enron’s CEO, Jeffrey Skilling was Harvard-educated. Its CFO, Andrew Fastow, had an MBA from Northwestern.

Telecommunications company WorldCom eclipsed Enron in losses. It recorded expenses as capital investments and reported a $1.4-billion profit when it had actually suffered a loss. The fraud resulted to 30,000 jobs lost and $180 billion in investor money wiped out. Its CEO, Bernard Ebbers, was a Mississippi Business Hall of Famer awardee, but was consequently labeled by Time magazine as one of the most corrupt CEOs of all time.

Financial services firm Lehman Brothers filed the biggest bankruptcy in US history; its downfall was central to the 2008 financial crisis. The firm invested heavily on subprime mortgages and failed to take action when defaults over these mortgages started to rise. Despite having survived two world wars and the Great Depression, the firm didn’t survive the tragic market crash. One year before it collapsed, Fortune had ranked it the “Most Admired Securities Firm.”

There is much political drama in corporations, even if these do not make headline news as often as political developments. And there is much to learn from corporate governance. For one, electing leaders is not a matter of mere intellect, but also of judgment of character. Corporations have failed despite their leaders’ illustrious credentials, sometimes because of a willingness to engage in criminal behavior, other times the inability to respond to crisis or a changing market, or simply because of plain incompetence.

Also, corporations are driven by efficiency and competition to the point of obsession. Executives are not immune to power and greed. But financial markets are highly skeptical institutions. All those accounting irregularities caught up with Enron, WorldCom and their like eventually.

At the end of the day, it all boils down to principles. As the paper “Parallels in Private and Public Sector Governance” put it, successful governance depends on “practices that build such things as commitment, trust and social capital.” It’s that easy and it’s also that difficult. Those principles are as true for a corporation as they are for the society at large.

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