(January 19) – “So the 21st century begins. Already we know this much: Like the century just past, it will be shaped in no small way by the giant corporations that have come to symbolize modern capitalism. On the one hand, the future will again see the marvels of this economic system — the capacity to innovate, to create wealth and to serve large masses of people — yield dazzling new wonders. On the other, if the past is any portent, it will be a century whose potential is too often hobbled by the failure of many boards to grasp the nature of their responsibilities and to govern in a way that serves the interests of both shareholders and society,” writes J. Richard Finlay in today’s Globe and Mail.
“Boards have been associated with a succession of failures in recent years, including the collapse of Confederation Life Insurance Co., Livent Inc., YBM Magnex International Inc., Bre-X Minerals Ltd. and even the legendary T. Eaton Co. Ltd., to name a few. Indeed, the unavoidable lesson of the 20th century is the misadventure that follows when directors act more as slumbering pawns than the watchful sentries they are supposed to be.
“In the 21st century, the challenges to the governance of the corporation will come not just from investors and regulators, but increasingly from the community as a whole. And why not? The corporation has emerged as the defining architect of society’s hopes, prosperity and the nature of work itself. Governments everywhere are deferring to the primacy of the marketplace and the virtues of competitiveness. Functions once reserved for the public sector are routinely being handed over to business. The wealth of many global corporations now rivals that of most of the nations in which they do business.
“This ascendancy of the corporation creates a double entry in the public’s ledger, however. More and more, opinion is shifting to the view that corporate powers, now so important to the well-being of society, are powers held in trust for the entire community. Corporations, an increasingly popular theory goes, not only have duties to shareholders but to society as well.
“Not enough boards are prepared for either responsibility. Too many still measure their percentage of women directors in single digits, pay directors too little for what they should be doing, are reluctant to undertake assessments of their performance and are unwilling to place limitations on the number of boards on which a director or chief executive officer can serve. It is not uncommon, still, to see individual directors sitting on the boards of 10 or 15 giant companies.
“Dominance by management, at the expense of board independence, continues to be a problem in too many boardrooms, as does the failure of directors to ask discerning questions. CEO compensation, always a flash point among critics for exemplifying the gap between rich and poor, continues in its most excessive stock-option-driven forms to be the mad cow disease of North American boardrooms — leaving many compensation committees seemingly powerless to apply good judgment and common sense. Few boards take a serious role in monitoring their company’s ethical standards, privacy policies or the way customer complaints are handled. Director attendance, in many cases, remains spotty and therefore is unreported by nine out of 10 companies. Such shortcomings pose serious impediments to the performance of the corporate governance system and diminish the confidence of shareholders and stakeholders alike.
@page_break@”A new century deserves better. What is needed, in my view, is a new kind of director who understands the changing nature of corporate governance in the larger sea of human values and aspirations.
“Several years ago, in an appearance before the Senate banking committee held in the wake of the collapse of Confederation Life, I revived the concept of the professional director introduced in 1939 by William O. Douglas during his tenure as chairman of the U.S. Securities and Exchange Commission. Professional directors would sit on the boards of no more than five or six top companies and would devote their full-time attention to those interests. They would be expected to play a role in board scholarship issues — something rarely seen among directors today. Remarkably, fewer resources per person are devoted to the continuous education and improvement of directors than to any other core function of the modern corporation.
“This new class of professional director would be composed of men and women of tested experience and proven judgment who recognize that the global corporation of the 21st century will be expected to deliver profit and ethics, value to shareholders and leadership to society. Wise directors know that only in this way can the long-term interests of shareholders be protected. Anything less invites the kind of public displeasure that occurs whenever great power is seen to be disjoined from adequate responsibility.
“Ultimately, the business of mankind is the inescapable bottom line of business, as Charles Dickens said. The great destiny of capitalism is to lift humanity out of the shadows and into the sunlight of progress and achievement. Only the modern corporation is capable of creating wealth and prosperity on a vast scale and in a manner consistent with the expectations of a civil society. Only the well-governed corporation can ensure that it does.