Good versus Bad Capitalism : a Call for a Governance Revolution

Ten years ago, Professor Mihaela Firsirotu and I wrote a piece for the C.D. Howe Institute titled Changing the Nature of Governance to Create Value (No. 189, November 2003). We argued that the fiduciary type of corporate governance, the obsessive refinements of guidelines and rules, was fast approaching the point of diminishing, if not negative, return.

We proposed a different kind of governance: value-creating governance. We made the point that there might be lessons to be learned from the kind of governance put in place by private equity funds in the companies they privatized.

Yet, we concluded our piece for the C.D. Howe Institute on a somewhat pessimistic note. There are four critical differences between private equity funds driving the management of a privatized company and the board of directors of a stock-exchange listed corporation:

• The board members of the privatized company, often made up of general partners of the fund, are compensated at a level and in a manner hardly conceivable for board members of a publicly listed company.
• Board members of the newly privatized company must not be “independent” and rarely are; a majority of board members of publicly listed companies must be “independent”.
• The boards of listed corporations must discharge fully all their fiduciary and legal responsibilities; that component of governance grabs a good portion of the time available to board members; privatized companies have none of these hassles and can concentrate on strategy, cash flow management, etc.
• The board of a privatized company will call directly on outside consulting firms to assess the company, its competitors and so forth, and the external consultants will report directly to the board. Now imagine that the board of a publicly listed company were to inform management that it intends to hire some firm to audit the company’s strategy and benchmark its performance. That would not fly well and would certainly create severe tensions between the board and management. Management would claim that the board is straying away from its governance role; it would contend that the company […]