In the book Zombie Economics, John Quiggin explained how dead ideas – assumptions about market economics refuted by the 2008-09 financial crisis – live on in the minds of many people, including those charged with cleaning up the mess. While not supported by evidence or analysis, these narratives persist as “dead ideas that still walk among us.” Why? Largely because they advance the interests of particular (typically elite) groups who want to believe in them and make them true.
Likewise, corporate governance best practices are typically based on intuition, opinion and rhetoric. Such thinking has been elevated – mandated by regulators and rated by a burgeoning class of governance experts for whom such standards become self-serving. The same is true in respect of prevalent ideas about leadership – the sanctum of the top-flight business schools, consulting firms and those upon whom the title has been bestowed. Consider the following examples.
Despite the commonly held view that best practices for the structure of corporate boards have an impact on their performance, there is little supporting evidence. Nor of how board practices contribute to effectiveness.
While independence of directors is defined and regulated, research finds little or no relationship between those definitions and corporate outcomes. Delaware courts have recently begun to consider social relationships in evaluating director independence – something regulatory requirements do not address. A deeper understanding of what truly fosters independence of thought among board members might advance thinking about board quality.
Executive compensation would benefit from a clearer understanding and communication of how best to align pay and performance. Regulation encourages reliance on executive compensation experts who tend to benchmark against peer groups and are rewarded for coming up with ever more complicated arrangements. The result is often a mechanical ratcheting up of compensation and proliferation of obtuse disclosure. This confuses investors, rather than improving outcomes or clarifying how pay and performance are aligned.
Consider the 55-per-cent pay increase awarded to the chief executive officer of Loblaw Cos. Ltd. in 2022 (with advice from two compensation consultants – neither independent). The justification was based on comparison to a peer group skewed to high CEO pay and the fact that a large portion of the increase was long-term payouts – arguably of limited relevance in motivating a controlling shareholder.
Likewise, our ideas about leadership are often based on untested narratives. For example, the assumption that there are universal attributes to leadership focuses on who has these exceptional qualities before determining what the qualities are. A study of “presidential greatness” demonstrated that 86 per cent of the variance in the rankings of U.S. presidents could be accounted for by knowing how long they served in office, for how much of their term the country was at war, whether there was any scandal associated with their presidency, and whether they were assassinated or a war hero. Only the last has much to do with the leader’s character (and it’s hard to be a war hero if your country isn’t at war).
Presenting leadership as an essential and universal set of qualities serves existing leaders and those who train them. Such stereotyping reinforces alienating notions of hierarchy.
A recent PwC paper addresses behavioural factors that lead to bad board decision-making. Boards are susceptible to rigid group dynamics that degrade decision-making in the face of crisis situations. They often double down on bad decisions to avoid admitting failure. Boards fail to take advantage of the collective intelligence that diversity is intended to foster by failing to create a culture that encourages dissent. We need better research on how such group dynamics can frustrate high-level boards.
Corporate governance is social science – the factors that determine effectiveness are contextual and complex, but should be susceptible to measurement and analysis. It’s not hard to study the interactions among board members to better understand how they contribute to effective governance.
Good governance matters. Rather than fixating on how to manage governance ratings, it is time for more on evidence-based analysis. The challenge, in part, is overcoming an inertia fuelled by those individuals who currently control the narrative and are heavily invested in it, despite its well-understood inadequacies.
In response to the recession in the early 1990s, the Toronto Stock Exchange adopted guidelines outlined in a report titled Where Were the Directors? Thinking about the role of the corporation and importance of good governance has evolved substantially, but critical thinking about best practices remains deficient. Perhaps the time has come to focus on “where is the research and analysis?”
Edward Waitzer is a lawyer, a senior fellow at the C.D. Howe Institute and a former chair of the Ontario Securities Commission.
Published in the Globe and Mail
