REGULATIONS AND PROCESSES AFFECTING OUTCOMES

In the wake of these governance issues (that is, the failures of the Enron, Sunbeam, Tyco and other corporates mentioned earlier in this Chapter) Sonnenfield (2002) asks whether the directors were asleep at the wheel or if there was gross or criminal negligence on the part of board members. The facts, Sonnenfield says, were that the boards followed most of the accepted standards in attendance, equity involvement and financial skills and passed the tests that would normally be applied to ascertain whether a board of directors was likely to do a good job:

And that’s precisely what’s so scary about these events. Viewing the breakdowns through my lens of 25 years of experience studying board performance and CEO leadership leads me to one conclusion: It’s time for some fundamentally new thinking about how corporate boards should operate and be evaluated. (p. 106)

This raises the question of the standard of board process - something, it is contended, that starts with an effective agenda system. Sonnenfield suggests that to build an effective board - something he believes cannot be legislated for but can only be built over time - it is necessary to create a climate of trust and candour, foster a culture of open dissent, utilize a fluid portfolio of roles, ensure individual accountability and evaluate the board’s performance:

I can’t think of a single group whose performance gets assessed less rigorously than corporate boards. In 2001, the NACD surveyed 200 CEOs serving as outside directors of public firms. Sixty-three percent said those boards had never been subjected to a performance evaluation. Forty-two percent acknowledged that their own companies had never done a board evaluation. A 2001 Korn/Ferry study of board directors found that only 42% regularly assess board performance. (p. 113)

A more recent survey by Korn Ferry (the 33rd for the year 2006, p. 16) showed that regular director evaluation was more common in the Asia-Pacific region where a majority (60%) state they have these on a regular basis compared with 48% in Europe and 38% in the Americas.

Leighton and Thain (p. 3) point out that “without fundamental change the entire board system will continue to be attacked as impotent and irrelevant” by shareholders, stakeholders and the public. The board’s central role (p. 279) is to “focus management on the rationalpursuit of increasing shareholder value.” Sonnenfield (2002) adds:

We all owe the shareholder activists, accountants, lawyers and analysts who study corporate governance a debt: in the 1980s and 1990s, they alerted us to the importance of independent directors; audit committees, ethical guidelines, and other structural elements that can help ensure a corporate board does its job. Without a doubt, these good governance guidelines have helped companies avoid problems … but they are not the whole story ... if a board is to truly fulfil its mission … it must become a robust team - one whose members know how to ferret out the truth, challenge one another, and even have a good fight now and then. (p. 113)

What boards should do seems obvious. However, whether or not that be achieved by regulation (that is, externally) or is subject to good process (that is, internally driven) is open to debate. If good boards are about good process then directors and board chairmen should be looking for high performance models. They should be pursuing good process, duplicating and establishing their own models and demanding high standards of them. There is still much to measure and research if boards of the future are to structure and operate effectively and if stand out organisational performance results then improving board process has sound commercial foundations.

The minimum starting point of this process is the regime imposed by current New Zealand law. In this the statutory duties are dictated by The Companies Act 1993. This requires that directors have a duty to act in good faith and in the best interests of the company (Section 131); that they exercise their powers for the proper purpose (Section 133); that they comply with the Act and constitution (Section 134); that they avoid reckless trading (Section 135); that they avoid obligations which they know the company will be unable to perform (Section 136); that they ensure a duty of care, diligence and skill (Section 137) and that they observe the self-interest transaction rules outlined in Section 139 to 149. These basic legal obligations are shown clearly illusrated in the diagram attached in the Appendices.

Schedule 3 of the Companies Act sets out the proceedings of the board. This schedule covers the requirements of electing a chair, giving notice of meetings along with requirements for a quorum, voting and resolutions. But other proceedings of the board it leaves for the directors to regulate. While providing a base starting point the Act is not a guide to perfect process as Farrar (2001) points out. In providing a comparison of directors duties in troubled New Zealand and Australian companies he points out that the New Zealand law is “incoherent and strangely incomplete” (p. 112) even if the legal systems in both New Zealand and Australia are more rigorous for directors than those faced in the United States.

To go beyond these statutory duties directors may consider various principles of good governance and best practice such as those outlined by the Australian Stock Exchange Governance Council (2003) or the OECD Principles of Corporate Governance (2004). Both provide competent starting points to lift process beyond the regulatory requirements. For example, the Australian Stock Exchange (ASX) defines (p. 11) the essential principles for directors as being: to lay solid foundations for management and oversight; structure the board to add value; promote ethical and responsible decision-making; safeguard integrity in financial reporting; to make timely and balanced disclosure; to respect the right of shareholders; to recognize and manage risk; encourage enhanced performance; to remunerate fairly and responsibly; recognize the legitimate interests of stakeholders. Following principles such as these may provide a sound roadmap for subsequent agenda and board process.

Further guides on good process can be found in the OECD Principles of Corporate Governance (2004) where there is a full section on Responsibilities of the Board (p. 58). More recently, and particularly in the light of the problems of the last five years, there have been numerous articles published by authorities such as PricewaterhouseCoopers (Point of View, the SEC’s new requirement, May 2010), by Harvard (Risk management and the Board of Directors, The Harvard Law School Forum on Corporate Governance and Financial Regulation, Lipton, Wachtell, Lipton, Rosen & Katz, December 2009) and the Audit Committee’s New Agenda (Harvard Business Review, Sherman,Carey and Brust, 2009). Like the Second Statement on the Global Financial Crisis from the International Corporate Governance

Network (March, 2009) these focus on post regulation effect and market reform in the light of both corporate failures and international financial breakdowns. As the latter states:

It is now widely agreed that corporate governance failures were not the only cause of the crisis but they were highly significant, above all because boards failed to understand and manage risk and tolerated perverse incentives (Introduction, 1.2).

A detailed list of recommended readings for the Corporate Governance and Financial Accountability Course at York University (Winter 2011) proposed by Professor Richard W. Leblanc demonstrates a new lead in the focus and attention being attributed to the subject of risk in the wake of the crisis.

2.9 SUMMARY

This chapter followed the development of the corporate form into the structure we recognise today. It traced the rise of the external investor and shows the implications for corporates who follow good governance process, for example, ease of funding. It also looked at the failures internationally of named companies and the subsequent development of interest by governments on the impact of significant companies on economies and the increasing scrutiny imposed on those companies by regulators, shareholders and other stakeholder groups. With the work of the board under increased pressure from all these factions it highlights the dearth of studies into board process and questions power and influence in decision-making. That leads into the area of this study in agenda setting and looks at who is seen to set and control the parameters of board discussion. It recognises that agenda setting is the exercise of power itself, the controller of board deliberations and the first act in governance of the corporate or, for that matter, any other organisation.

Also noted, was that the bulk of the sparse but current corporate governance literature of value originated in North America (Canada & the United States of America) and generally that research did not extend into international regimes where they are

smaller, or inherently different. Notable exceptions to this view are provided by Sir Adrian Cadbury (1995), a former chancellor of Aston University who showed strong interest in corporate governance, and Professor Morten Huse (2005) author of Boards, Governance and Value Creation. These are important contributions as shown, for example, by Higgs (2003) who considers Cadbury’s work a foundation stone of governance study in the United Kingdom. The international work in this respect appears to have been left mainly to global strategic commercial consulting groups such as McKinsey as evidenced in the McKinsey Quarterly publications (although across academia much has been written about boards and their directors in various organisation formats as noted by van der Walt, Ingley, & Diack, (2002)).

The critical themes that flow through the literature and will be explored in this research pick up the concept of Leighton and Thain (1997) and ask why directors - the apex of the control system - appear largely irrelevant. That belief is backed by Druker (1992) - directors were the last to know things had gone wrong; by Olds (Kristie, 2009) - directors were parsley on fish; and, by Deakin and Konzelmann (2004) - directors had failed to assess the risk. It will review the aspects of power and where board decisions are made as outlined by Useem and Zelleke (2006), Stevenson and Radin (2009) and Lewis and Considine (1999) and consider the director role in terms of the individual’s responsibility (Gillies & Morra, 1997) and how boards control (or should control) the agenda as suggested by MacAvoy and Millstein (2003) and Sonnenfeld (2002).

Finally, the process of agenda setting will be reviewed against the criteria laid down by Berghe and Levran (2004) that agenda setting is about doing the right things right.