The past decade has been one long field day for researchers who, like me, focus on corporate performance. From Enron to Parmalat to AIG, we’ve seen a steady harvest of case studies from this period.
A theme that has emerged from these cases is the critical need for corporate governance. That’s not to say a radically new governance model is required. We can do nicely with the classic model, which I would describe as consisting of four fundamental processes: deciding how to deploy corporate resources, evaluating those decisions to determine whether they make sense, implementing the decisions, and monitoring the results to keep the entire process on a good course. Management is responsible for the deciding and implementing, while the corporate board does the evaluating and monitoring. Ideally, these two sets of processes should be separated so they don’t cross-contaminate; the people spending the money shouldn’t also be the people who judge whether it’s a wise use of the money. When properly implemented, this model works well, as has long been the case at most of our big companies.
No doubt government regulation has its place, particularly if it targets specific areas such as the transparent and accurate reporting of accounts. But the major regulatory measures of the past 10 years have been exceedingly complex and tough to understand. They’ve basically amounted to job-creation bills for the lawyers and accountants hired to find loopholes on the one side against another army of lawyers and accountants closing the same loopholes on the other side. The corporate governance systems that work best are those with guidelines that are easy to grasp and easy to enforce.
Corporate boards are not mere collections of figureheads. Indeed, they are bound to a fiduciary duty imposed by law. Looking at the past decade’s corporate collapses, one can’t help concluding that some boards failed to do their duty. They didn’t provide the necessary vigilance that could have forestalled events caused by bad managerial decisions. Board members are the ones ultimately accountable for how the organization conducts its business. The buck stops at the board, not management. Hence, more attention should be paid to board structure, director behavior, and board dynamics.
One way boards have been compromised in their supervisory role has been when the positions of board chairman and chief executive have been vested in one person. Watchdog groups rightly worry that such arrangements reduce the independence of the board. But this has become common practice among U.S. companies. The hazard is that people who vet their own decisions aren’t likely to admit to mistakes. Moreover, research has shown that large companies with strong, separate chairmen are generally less prone to the types of spectacular blowups brought on by the reckless investment bets behind the collapses of the 1990s and 2000s.
Business schools can play a significant part in preparing their students for effective and ethical corporate governance. For starters, they can make them sensitive, as future business leaders, to the technicalities of managing in an institutionalized environment where there are fiduciary responsibilities and laws about corporate governance. Not many students immediately comprehend that if you’re a manager or CEO, you have a moral and legal obligation—to your workers, your customers, and your stakeholders—to perform your role to the best of your ability.
Secondly, it’s essential that we help students understand the purpose of business. A business exists, fundamentally, to make a profit. Otherwise, it can’t provide jobs, produce goods and services, or do right by its employees and shareholders. Strange to say, not enough business schools help their students gain this broader perspective, which can go a long way toward instilling an ethical, social-minded philosophy in everyday operations.
Business ethics, with its sometimes elusive gray areas, is a subject we take very seriously at the Carey Business School, which is why we require course work in leadership ethics in all our programs and try to include ethical discussions in every class where appropriate. We stress to our students that being ethical businesspeople is not just about following the letter of the law or using the law for selfish benefit. It’s about looking at business issues in a societal context that will inevitably raise ethical questions. Whether launching a marketing campaign, reporting financial results, acquiring another company, or closing a plant, effective managers must always consider the broader stakeholder community and how it will be affected by their decisions as business leaders.
If our big companies—and the boards that oversee them—were guided by such a philosophy, we would probably see far fewer cases of corporate malfeasance. And as a researcher in this area, I suppose I would have less grist for my mill, but that’s a trade-off I’d be willing to accept.
Phillip Phan
Interim Dean and Professor
