Statement of Principles
Corporate Governance is an essential aspect of risk management. What is important to the corporation, and should be of primary importance to the shareholders, is whether the company is storing up risks through weak or faulty governance mechanisms, risks which may eventually cause a massive destruction of wealth or even destroy the company.
Technical compliance with existing governance standards is only a means to the end of reducing long term risks, and may even be irrelevant, if those standards are inappropriate to the situation at hand. Thus corporate governance is not primarily a question of checking the right boxes, but of evaluating how the company is running itself, and what dangers there might be in continuing to run it in the same way. Properly conducted, a corporate governance inquiry should be forward-looking. It is not finished when one decides that the company in question has broken no laws and is unlikely to be sued successfully for its governance arrangements; that is only the start.
From the viewpoint of the investor, there are two related issues. One is that the company might blow up while the investor holds an economic stake in it, causing a major loss. The other is that the company may prosper, but without the investors sharing appropriately in that prosperity, and that there might be a massive diversion of wealth from the investors to other interests, whether it be the managers, the employees, the state, or some other outside interest.
Both these concerns are addressed by corporate governance, but again, only if it is examined in a forward-looking context. One must also consider the circumstances of the company, the stage in its development in which it finds itself, the country in which it is domiciled, and the businesses and countries in which it operates. There is no one size of governance which fits all corporations, and no one set of standards that can be applied mechanically across all borders.
Finally, there are the broader concerns of society. The company should not endanger the economy in which all investment and wealth creation must ultimately take place. Growth should not come at the expense of vital social interests. The company ought not engage in practices that might ultimately cause it to come into disrepute, damaging its potential to do business going forward and inevitably destroying shareholder wealth in the process. The company ought not rely upon business models which prove ultimately unsustainable, giving the illusion of growth when it is really sowing the seeds of its own destruction.
This is what the debate regarding ‘sustainability’ should properly be about. It should not be a codeword for blind application of someone else’s agenda, regardless of the impact upon the corporation, but of whether what the company is doing and plans to do in future is likely to lead it to a dead end, damaging the economy and the society in which it must exist. These issues go well beyond, but are also narrower than the general run of governance problems. They concern themselves with governance to the extent that a company’s mechanisms permit and encourage it to respond to the concerns of its shareholders, the ultimate owners of the corporation. Governance thus becomes itself a sustainability issue.
I do not believe that corporate governance is primarily a matter for compliance teams, who are only concerned with existing regulations, nor should it be confined to the realm of social responsibility, although that may be an important aspect. I certainly do not see it as an adjunct to public relations efforts. The goal of corporate governance activity should be to make the public corporation more responsive to its owners and to its users, so that the corporation is less risky, that it is a more efficient creator of wealth, and that it is a better long-term contributor to the global economy.
I also believe that corporate governance activity offers positive economic benefit to the corporation that engages in such self-examination, can improve the performance of key constituents of a portfolio, gives important insights into other holdings, and helps reduce the overall level of risk for the portfolio investor. It should not be seen as simply a costly activity mandated by fiduciary standards, by noisy beneficiaries, or by still noisier shareholders.
The recent crash in the capital markets, and the disappearance of more than a few ‘quality’ companies due to their having engaged in excessively risky practices, indicates clearly that other measures of risk than those usually taken into account by financial analysts need to be incorporated into both investors’ and boards’ assessments. Sharp reductions in expenditure for governance as a part of ‘cost-cutting’ at such a juncture in history seems ill-advised, to say the least. Use of a consultant can of course help bridge such gaps.
Investment Initiatives offers a broad range of counseling services to aid corporations in their self-evaluation of their governance, and in their dealings with dissidents and other concerned shareholders. Investors are offered assistance in focused engagements with their portfolio companies, in crafting enhanced investment strategies, in devising campaigns involving several companies or regulators with regard to broader issues, and also in fostering dialogue with other investors having similar concerns and goals.
—Andrew M. Clearfield