What Corporate Governance?

by Chikashi

We humans generally like order and predictability.  We like to force everything to fit in prefabricated categories.  We love it when one concept can be applied universally.  I am not sure about characterising this tendency as being boring, but I think that there is definitely an element of laziness.  One concept that seems to be running amok is corporate governance.  When I first heard the term, I thought that it might be the name of a BDSM club in the Meat Packing District (probably misheard it as ‘corporal governance’), but it turns out that it has nothing to do with having depraved fun.  However, it is very fashionable, judging from how frequently one comes across the term.  Except it’s like a mosquito in one’s bedroom on a humid night.

The fundamental concept of having checks and balances (policies, procedures, organisational structure) in order to ensure that people are working in the interest of the shareholders is admirable.  However, I think that the peripheral noise drowns the fundamental context: in the interest of shareholders.  

The whole point is to ensure that the gaggle of hired suits are working not in their own self interest but for the interest of the shareholders.  The American custom of one individual holding both the chairman and chief executive positions marginalises the point of having a board of directors and in turn makes an absolute joke out of ‘corporate governance’.  That is, if the company is not owner managed.

If the company is managed by its controlling shareholder(s), then the interests of the managers are fully aligned with the interests of the shareholders.  (Of course, this does not eliminate the potential for errors, but that is a separate matter.)  As such, the whole notion of corporate governance, as designed and applied to companies managed by employees, becomes mostly redundant.  And yet, there is a blind rush to force privately held, owner managed companies to adopt corporate governance structures. Even if the company is listed, if it is managed by the controlling shareholder(s), then I would submit that the concept is not applicable in a meaningful sense.  In other words, I believe it is a big waste of time and money.

Of course, it would be beneficial for these businesses to have certain things clearly defined, such as key decision making and succession planning processes, but the fundamental bits that are meant to address the principal-agent problem is redundant.  And yet, we keep hearing about it with no regard to the type of company at hand.  Pissoirs are being sold to women by clipboard Nazis too keen on ticking all the boxes for the sake of ticking boxes.

Actually, I had a classmate in high school whose mother was a visiting professor of Japanese history from Columbia University.  On their first visit to Japan, they stayed at a country inn.  The professor went to the communal lavatory in preparation to retire for the evening, and never having seen a pissoir before, she brushed her teeth and rinsed her mouth in what she later learned was a pissoir.  She made history that night.