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Resetting corporate governance: Lessons from the first 2000-10 decade

Ludo Van der HeydenMubadala Chaired Professor in Corporate Governance and StrategyINSEAD Abu Dhabi, Fontainebleau and Singapore

Confidential to Ludo Van der Heyden & Alain Goudsmet, co-Founder of Mentally Fit Institute & Eric Pillmore, former GE & Tyco Senior Executive

Not for further distribution without explicit authorization of authors

RTA BEST PRACTICES FORUM 2013 منتدى هيئة الطرق وا,واص1ت 0فـــــــضل ا,مارســـات ا'داريـــــــة

1 INTRODUCTIONMuch unsatisfactory behavior that questions

governance practice over last decade


‣ US rescues its financial sector in 2008 (TARP – AIG, Goldman Sachs, Morgan Stanley …) following Lehman Brothers collapse – and also Big 3 (actually GM and Chrysler, 2009 for 25 billion $ to avoid bankruptcy) - all under "Too Big Too Fail"

‣ UK rescues and nationalizes its banks and 500 Billion £ in its nationalizes its banks in 2008 (Abbey, HBOS, HSBC, Lloyds TSB, Nationwide Building Society, Royal Bank of Scotland and Standard Chartered)

‣ Libor scandal 2012: Barclays LIBOR market manipulation fraud To boost profits and mask insolvency (RBS, HSBC and Lloyds to follow, with nod from Bank of England)

1b INTRODUCTION : Much unsatisfactory behavior that questions



‣ 2013: Chair and CEO of JP Morgan Jamie Dimon apologizes for the "London Whale" trading losses, which cost the company more than $6 billion and led to the departure of Chief Investment Officer: "a real kick in the teeth" and "the stupidest and most embarrassing situation I have ever been a part of" - yet refuses either to step down from dual job (watch General Assembly of May 21)

‣ All this comes after 2001&2002: WorldCom (41 billion $ debt, misstatement of 3.8 billion$ in expenses, approved by Arhtur Andersen), Enron (11 billion$ loss to shareholders), Arthur Andersen dismantled (85,000 lose their jobs), …

1c INTRODUCTIONMuch unsatisfactory behavior that questions



‣ Kwok brothers in Hong Kong (Sun Hung Kai Properties, fired from Board in 2008, arrested for fraud), Parmalat in Italy (2001-2005, 14.3 Billion € debt, 8x reported by Grant Thornton, "quality alternative to Big 4), Shalid Balwa & Vineod Goenka in India (2011, DG Broup, partner of Etisalat) fraud & bribery of public officials, Olympus scandal in Japan (2011) when British-born CEO Michael Woodford exposed "one of the biggest and longest-running loss-hiding arrangements in Japanese corporate history"

‣ Raj Rajaratnam, the hedge-fund tycoon and Galleon Group LLC co-founder at the center of a U.S. insider-trading crackdown, was found guilty of all 14 counts against him in the largest illegal stock-tipping case in a generation (US, 2011), involving Goldman Sachs Director Rajat Gupta and McKinsey Partner Anil Kumar (contacts from Wharton)

1d INTRODUCTIONMuch unsatisfactory behavior that questions



2 SOME HISTORY The origins of governance


‣ Shareholders in XVI+th century hold "shares" of English ships that go to the Indies and return with spices, gold, …

‣ Shareholders meet in General Assembly (shareholder democracy) and appoint Directors charged to oversee the project

‣ Shareholder concern #1: Will i get my money back?

‣ Captain concern #1: Why deliver so much value to shareholder when I create the value?

‣ Employee concern #1: Who pays attention to me?

‣ «Delegated» or «Managing" Director» comes along on the journey ... then soon both come along («the principle of 4 eyes»)

‣ Governance is more about value preservation than value creation

2b SOME HISTORY The origins of governance


‣ Appointment of "Board of Directors" with a Chairman

‣ Shares traded on Exchange for liquidity, risk management, …

‣ Corporations receive legal responsibility: rights, liabilities, birth, death ...

‣ First joint stock company (1602): United East Indies Company & first bankruptcy due to fraud by Directors & first govt bailout (1800)

‣ Tulip Bubble that follows a period of economic chill in NL (1637), South Sea Bubble on UK government debt (1721) …

‣ Main question: are we learning? Are we progressing?

2c SOME HISTORY Have we made any progress?


3 DEFINITION What is governance?

- “Procedures and processes by which an organisation is directed and controlled. The Corporate Governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders - and lays down the rules and procedures for decision making.” (Source: OECD)

- “There is no universally accepted definition of Corporate Governance. A search of internet and academic texts will reveal a variety of alternatives. Ideas and opinions about Corporate Governance are constantly developing, making it difficult to describe what it is and explain how it works.” (Source: Chartered Institute of Internal Auditors – Global Professional Guidance).

Not a good start ...


‣ Different viewpoints & potential conflicts of interest (Stakeholder view?)

• Captain and crew create the value! (Agency view)

• Shareholders buy «control» and capture value! (Shareholder view)

• Customers and clients pay for everything (Customer view)

• Regulators need to constrain corporations (Regulatory view)

‣ Conflicts of interest are structural. Directors duty is to act in the best interest of the organization - even when they are chosen by the shareholder.

3b DEFINING GOVERNANCEMultiple viewpoints and interests


3c DEFINING GOVERNANCEAutonomy within a frame


4 BASIC GOVERNANCE TASKS a check list

‣ Setting the purpose of the company

‣ Setting the "culture", the "tone at the top," "the smell of the place" …

‣ Agreeing on goals: LT vision, MT performance goals, ST priorities

‣ Strategy (how do we get there?) Target segment, offer, business model …

‣ People : appointing, evaluating, remunerating, renewing or terminating of Senior Executives

‣ Finance: allocating, evaluating, remunerating, returning to shareholders, securing further investments …

‣ Performance management : are we reaching our targets? Do we go beyond?

‣ Communicating with stakeholders, assuming responsibility, ensuring legitimacy

‣ Crisis management: governance in the crisis becomes execution


5 RECURRENT CHALLENGESAnd increasing problems as we see

‣ Director and CEO compensation (and that of senior execs?)

‣ Growth (innovation or M&A?)

‣ Performance management (EVA?)

‣ Atrophy of listed firms in US (from 15,000 to 6,000?)


GE's core competence?

Common view: superior execution!

Our answer: superior (internal) governance by the corporate center!

6 BETTER PRACTICE EXAMPLEGE

© 2009 : Eric Pillmore


The foundation : Begin the year with GVR

- GOALS- Chairman announces goals for the year to all divisional VP’s and to all CEOs of business units (BU’s) - Goals are SMAR«T»: simple, measurable, achievable, relevant, transparent

- VALUES (the positive)- unyielding integrity, commitment to performance, thirsty for change

- RULES OF THE GAME (the negative)- if you display behaviour that violates the values, you are out- each individual signs the Ethical Passport- you are supposed to report on violations of the rules- all corporate rules identified, reviewed, communicated, trained

6b BETTER PRACTICE EXAMPLEGE


6c BETTER PRACTICE EXAMPLE Values at GE



6d BETTER PRACTICE EXAMPLE Values at GE



Focusing on the key ROLES : C-reviews

- All CEO’s reviewed for «fitness with goals» rent

- So are their C-level teams :

- organization- staffing- succession planning

By now: A good GVR frame has been provided for execution

6e BETTER PRACTICE EXAMPLEGE


6f BETTER PRACTICE EXAMPLE Searching for Leaders that make a difference



... and on PROCESSES :

- why we are doing what we are doing (i.e. the purpose and context setting process)

- how we allocate resources (i.e. capital allocation process)- how we are going to do it (i.e. the playbook);- how we are going to avoid failure (i.e. the risk management process)- how we ensure it’s done properly and effectively (i.e. the monitoring

and reporting process); - the performance improvement process (i.e. the GE Workout Process)

That completes the 2 key PERFORMANCE INGREDIENTS: RxP

6g BETTER PRACTICE EXAMPLEGE


6h BETTER PRACTICE EXAMPLEGE



6i BETTER PRACTICE EXAMPLE The corporate management does governance



Now all that is left: «I» ?INDIVIDUAL COMMITMENT to reach EXCELLENCE

Replacing traditional context of FRAME ONLY- constraint- compliance - control - contract

with a commitment to AUTONOMY WITHIN A FRAME- stretch and ambition- discipline - support - trust

The result is a very different «smell of the place» (Sumantra Goshal)

6j BETTER PRACTICE EXAMPLEGE


7 SUMMARY: GVRxRPxIA governance framework


8 STATE-HELD FIRMSSpecial governance challenges

‣ Point #1: governance (at least on inside) not that dependent on "owner"!

‣ Have good goal setting: are our goals not too fuzzy or unrealistic?

‣ Finding competent directors: what value and credibility do you bring?

‣ Appropriate diversity at board level: do we have «different» people from us?

‣ Independence of Directors: conflict of interest, ready to work for the org?

‣ Go beyond compliance : defining and managing performance ?

‣ Do we manage our stakeholders well: what about our licence to operate?


9 MAIN POINTSWhat did I wish to share with you?

‣ Governance appears to have made not that much progress over the last 400 years (compared with execution)

‣ A good operational definition of governance is «Autonomy within a Frame»

‣ Good governance models do exist: GE (for General Electric) is quite likely the best known and one of the most performing ones (suggest that one of GE’s core competences is governance by the corporate centre)

‣ A good performance framework is GVRxRPxI, which shows that the foundation for effectiveness consists of the triple: Goals, Values, and Rules of the Game

‣ Performance in governance is assured by the next ingredients: a good definition of Roles and well designed Processes

‣ High Performance or Excellence is the result of the commitment to the GVR foundation and to the performance ingredients RP by all Indivduals (the last element)


10 THANK YOU FOR YOUR ATTENTION !!!And herewith you will find some contacts

For questions on this presentation:[email protected]

For further information on governance:

www.insead.edu/governance

For further informa6on on directors training:

executive.education.insead.edu/international_directors

resetting corporate governance: lessons from the ﬁrst 2000-10 … › wpsv5 › links ›...

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