January 10, 2020

Good Governance: Does Anyone Really Know What It Is?

Red state or blue state, Fox News or MSNBC, everybody can agree that when it comes to public companies, we’re all for good governance.  But what exactly do we mean by that term?  According to this recent Stanford article, nobody has the foggiest idea of what “good governance” really entails.  Here’s the intro:

A reliable corporate governance system is considered to be an important requirement for the long-term success of a company. Unfortunately, after decades of research, we still do not have a clear understanding of the factors that make a governance system effective. Our understanding of governance suffers from two problems.

The first problem is the tendency to overgeneralize across companies—to advocate common solutions without regard to size, industry, or geography, and without understanding how situational differences influence correct choices. The second problem is the tendency to refer to central concepts or terminology without first defining them. That is, concepts are loosely referred to without a clear understanding of the premises, evidence, or implications of what is being discussed. We call this “loosey-goosey governance.”

The article identifies several governance practices that have become talismans of good governance – including independent chairs, elimination of staggered boards and the absence of dual class capital structures – and concludes that empirical support for their impact on the quality of governance is inconclusive at best. Other common good governance principles, like pay for performance and board oversight, are poorly understood and difficult to evaluate.

This article really resonated with me. I’m very dubious about a lot of corporate governance “best practices,” because I think many of them simply reflect the ideological position that shareholders and not directors should have control over the destiny of public companies. If after decades of research, we still can’t answer the question “what makes good governance?” then maybe cynics like me are onto something here.

Board Agendas: What’s On the List for 2020?

Deloitte recently published its list of topics that are likely to feature prominently on the agenda of many corporate boards during the upcoming year. These include the usual suspects – oversight of risk, strategy, executive compensation, board composition & shareholder engagement – as well as some more cutting edge topics. This latter group includes the role and responsibilities of the company in society. Here’s an excerpt on corporate social purpose:

Perhaps the most dramatic development―or, rather, series of developments―that boards may need to consider in 2020 is the intense focus on the role of the corporation in society. Starting in late 2017, companies have been urged to focus on and disclose more about their “social purpose” and their place in society.

Several theories have been advanced as to the origins of and continuing pressure for corporate social purpose, including concerns about persistent economic inequality, climate change, and the availability and cost of healthcare, as well as concerns about the ability of governments to address these and other issues. However, regardless of the reasons, investors, media, and other constituencies are asking companies to look beyond their bottom lines.

ESG Activism: YourStake’s Portfolio Analyzer

It isn’t news that ESG issues are a high-priority item for many investors. Last year, I blogged about a new organization called “Stake” that was intended to help amplify the voice of retail investors on these issues. It looks like that platform – now rebranded as “” – is expanding its capabilities.

Jim McRitchie recently blogged that YourStake’s booth was getting a lot of traffic at the SR130 investor conference due to a new tool targeted at financial advisors. The tool is designed to allow retail investors to evaluate the environmental & social impact of their investment portfolios. While there’s still a lot of “noise” around ESG-focused investing, it’s interesting to see the development of tools like this one – particularly when it’s targeted to retail investors & paired with a platform that’s intended to increase their ability to influence the companies in which they invest.

John Jenkins