Diversity trumps ability?

The wonderful Nell Minow tweeted a link to this article, which cheered me enormously although the paper it links to by Abigail Thompson has too many numbers for my liking. The paper by Hong and Page which Thompson critiques is here but for those of us who struggle with the numbers there seems to be a simpler version of Page's thinking here.

Male, stale and frail

Male, stale and frail - catchy, isn't it? A new stick to beat boards with, more boringly known as board refreshment - which sounds to me like the drinks orders at the dinners they regularly enjoy (and I'll get back to the role of dinners in corporate governance one day).

But while catchily alliterative, it's an insulting little phrase. How does the OED define frail?

Liable to break or be broken; easily crushed or destroyed; weak, subject to infirmities; wanting in power, easily overcome; morally weak; unable to resist temptation; habitually falling into transgression.

Nice. Let's all take a pop at older men.

As the FT article linked to above says: 

"Demands for board refreshment usually explode into the open after a scandal, or when a company’s performance sours, or if there is an egregious example of executive pay." 

Yes, boards must be held to account but at that point it's clearly too late. But too much corporate governance commentary takes the position, explicitly or implicitly, that many boards are not doing a proper job and that it's being left to activist investors to put things right. 

Corporate governance regulation is policy made on the hoof. The academic literature is now huge and in many ways unhelpful for underpinning policy because the results reported tend to be equivocal. But the core principle of non executive director independence has been around for long enough to be tested and, as far as I'm aware, there is still no convincing evidence that independent NEDs can effectively perform the oversight function expected of them. 

They try - my goodness, they try. I've recently been interviewing company secretaries and their accounts of what NEDs do make it very clear that, in many large UK companies, this ostensibly part-time role is hugely demanding. I'm astonished that people are still keen to take it on (and there's another question for research: what motivates NEDs?)

Another insight from company secretaries: increasing regulatory requirements magnify the challenge for boards in managing their time between compliance requirements and the need to focus on strategy. This is nothing new: the Hampel report stated that "the emphasis on accountability has tended to obscure a board’s first responsibility - to enhance the prosperity of the business over time." But there is a danger that compliance means an ongoing preoccupation with board composition seeking to satisfy a range of quantifiable expectations about gender, age and ethnicity, none of which has been shown to affect performance directly. Boards should surely be focusing on how to appoint people with the skills, knowledge and experience (which may reside in individuals of any gender, age or ethnicity) that will combine to make the board effective - a combination which will change over time and should be addressed through the regular process of evaluation.

The FT article helpfully provides a link to this view with which I heartily concur.

The history of the term "corporate governance".

A tweet today led me to this interesting paper by Ronald Gilson "From Corporate Law to Corporate Governance".  The work of US legal scholars writing in this area is always worth reading, although I sometimes find their US-centric focus frustrating. And at first glance, there are points that I might quibble about in Gilson's discussion, although I agree with his conclusion about the importance of recognising change and the need for adaptability in governance arrangements.

But I have yet to read the paper properly as I was brought up short by footnote 8, which begins:

 "Brian R, Cheffins, The History of Corporate Governance in The Oxford Handbook of Corporate Governance (2013), nicely tracks the emergence of the term corporate governance. He notes that the term only came into vogue in the 1970s in a single country – the United States."

In writing the Cadbury book, I thought it would be helpful to explore the origins of the expression "corporate governance" so I did considerable research on this. The first example I could find occurred in a 1953 paper by David F Cavers, a US legal scholar, entitled "The Economic Consequences of Atomic Attack". Cavers was concerned about the need to sustain the US economic system in the event of attack. He sets out in considerable detail where problems would arise and, in the context of dealing with the property of those who might die in such an attack, he stated that "Flexibility in corporate governance would also be needed." (p33) He didn't define the term and this is the only instance of its use in the paper. That suggested to me that the term was already in use, certainly among legal scholars in that era.

The earliest detailed discussion of corporate governance that I found was in the work of a US management scholar, Richard Eells, in his book "The Government of Corporations" published in 1962. In the preface to his book, he wrote:

"During the last ten years, in various studies of the modern corporation and its role in our free society, I have repeatedly had to touch on the subject of the present volume peripherally. But only within the last few years has it been possible to discuss the subject of corporate governance systematically, as I have tried to do here."

Eells, who had a business background, wrote about companies from a pragmatic perspective which may be why his work was largely neglected by later scholars more interested in theory.

I suppose "came into vogue" implies the start of the wider discussion of the term but I do think it's important to know its earlier history. (Encountering Professor Cheffins at a conference, I did challenge him on this but he was airily dismissive.)