• Marco Nerino

Investors should prioritize substance over form when pressing for corporate governance changes

Box-ticking compliance is particularly dangerous in situations of risk and uncertainty. A more flexible corporate governance would help companies to get through the current coronavirus crisis.

© Financial Times



What makes a good corporate governance? Over the past years, governance experts have attempted to answer this question, sometimes successfully, sometimes not. The trick is that there is no universally accepted answer. Or, to be more precise, the only acceptable one is “It depends”.


For example, can we say that a board composed entirely of independent directors is superior to a board with only insiders? The answer is “It depends”. There are many characteristics other than independence, such as directors’ experience and engagement, which could affect board performance. In addition, there are exogenous factors, such as the current pandemic, which could affect the ability of some directors to fulfil their duties. Focusing on board independence without considering the broader context could lead to a misevaluation of board quality.


We can better understand this by analysing the board of Lehman Brothers in the years before the company collapsed. From a structural point of view, there was nothing unusual in Lehman’s board. It was unstaggered and with a majority of independent directors. However, from a more subjective standpoint, it was lacking engagement and expertise to understand the risks that the company was undertaking. This is because Lehman’s board, despite being formally independent, “[…] was too old, had served too long, was too out of touch with massive changes in the industry, had too little of their own net worth at risk, and was too compromised for rigorous independent oversight” (testimony from Nell Minow at the Congressional hearing on the financial crisis, October 2008).


Lehman’s bankruptcy shows that box-ticking compliance does not always reflect good corporate governance. This is because governance quality is heavily dependent on context. If directors are unskilled and unengaged, they won’t be effective in their monitoring and advisory functions, no matter how many of them can be classified as independent. Of course, this might not have negative consequences when business is booming. However, box-ticking might prove disastrous when companies face risk and uncertainty. In such situations, the priority should be to build a skilled, experienced, and engaged board to make sure executives are taking the right decisions.


Have we learned this lesson? Apparently not. Some activist investors are still pressing companies to adopt corporate governance standards without considering their relative context. For example, climate activists have recently campaigned, unsuccessfully, for splitting the roles of chief executive and chairman at Exxon and Chevron. Glass Lewis and Egan-Jones, two large proxy advisers, also supported these campaigns. It is not sure whether this governance change would have made boards more independent and accountable to shareholders on climate change risk. However, it would have risked weakening leadership and decision-making right when oil producers are facing increased uncertainty about their future because of coronavirus. As shown by Lehman’s collapse, in situations of risk and uncertainty, what matters is not only independence, but mainly the ability of boards to support executives in their strategic decisions.


Now more than ever, investors need to abandon a box-ticking approach to corporate governance. The coronavirus crisis is posing unprecedented challenges which could undermine the survival of many corporations. Therefore, investors should prioritize substance over form when asking for corporate governance changes. Boards need skills, leadership, and flexibility to take fast and effective decisions and safeguard the interests of shareholders and stakeholders. A box-ticking approach to corporate governance would only increase significantly the risk of new corporate failures.

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