BEYOND Corporate Governance

Introduction

Let us fast-forward from 513 BC when Heraclitus declared, “There is nothing permanent except change” to the sixteenth century when Niccolò Machiavelli wrote, “There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.”[1] Clearly, change is here to stay. And today, even the nature of change is changing!

In the early 1990s,[2] in a graduate school for future generals (the US Army War College), the term VUCA was coined. The goal was to anticipate and describe the world after the Cold War. VUCA means:[3]

• V: Volatility. Speed and magnitude of change.
• U: Uncertainty. Lack of predictability of past incidents to predict future outcomes.
• C: Complexity. Several challenging factors involved in an issue.
• A: Ambiguity. More than one interpretation; lack of clarity.

Each of these elements is already quite challenging to understand and deal with. But in a VUCA world, the elements do not operate in isolation. They are networked. This very interrelation triggers an erratic, unforeseeable confluence.

VUCA also describes today’s fast-changing, turbulent business environment. As this book will show, rational planning processes often fall short or even fail. The solution is agility. This calls for strategic vision, multifaceted risk management, and true change leadership.[4]

Change in a VUCA World

Because change involves human beings and can trigger emotions, uncertainties, and contradictions, it is not enough just to manage change. True change leadership recognizes and anticipates the human factor, which is even more challenging in a VUCA world with its increased, multilayered complexity and speed.

The VUCA leadership mindset needs to embrace new opportunities and not be threatened by changes such as rapid technological advances, a globalized economy, and the dramatic rise of both e-commerce and the virtual workplace.[5] Modern, agile talent recruiting and management processes—emphasizing leadership assessment and development, employee engagement and growth, stretching people, risk-taking, and open discussions about change—are major factors in achieving targeted business performance.[6]

In the past, when a civilization went through a disruptive technical revolution, the subsequent change in the world was profound but slower moving. For example, the invention of the printing press by Gutenberg, the mass production of books, the printing of the Gutenberg Bible and the wide spread of Luther’s theses arguably triggered the Reformation; two centuries of religious wars, including the Thirty Years’ War; and the separation of Europe into Protestant and Catholic sectors.[7]

Today’s changes are different, with their speed and breadth—and pervasive media influences—having an intense impact on more people at once than ever before.[8] Successful change leaders and recruiters know that people matter—a lot. It is tempting to dive into rational plans and processes rather than face the more challenging yet critical human issues. But as this book will show, mastering the “soft” side of change management needn’t be a mystery.[9]

This book brings together theory and findings from the fields of law, business, and psychology and applies them to the phenomenon of organizational derailment—such as fraud, corruption, and corporate scandal—in an effort to determine the causes of such negative outcomes. In doing so, it supplies novel insights of use to business leaders, recruiters, stakeholders, and practitioners.

Specifically, the book is concerned with making sense of why, despite organizations’ investment in legal support, corporate governance, and leadership selection, there remains much conflict, especially within the “magic triangle” of owner, board of directors, and management that leads to excesses, fraud, and scandals. Moreover, this book assesses how change as a trigger, the human factor as a root cause, and leadership as an accelerator serve as hidden key drivers for such derailment, and it examines what can be done about it.

Since this book focuses on derailment within organizations, it is necessary to understand the term. Derailment is an obstruction that diverts the organization from its intended course. Examples are severe conflict, excesses, fraud, and scandal. What goes off the rails is the mission and performance of the business. Figuring out what triggers the derailment—and how to prevent it—is the focus of this book. (The significant types of derailment are explained in appendix 1.)

Corporate Governance Is Not Enough

In the 1990s and 2000s, infamous scandals and tales of excess surrounded international firms such as Enron and Tyco (US), the Royal Bank of Scotland (UK), ABB (Switzerland), Shell (Netherlands), HIH Insurance (Australia), Parmalat (Italy), and many more. What has been learned? How much has corporate governance, which was put on the map after these scandals grew in number and became public, contributed to improvement? The emergence of subsequent scandals—involving Lehman Brothers and AIG (US), Volkswagen (Germany), Petrobras (Brazil), Toshiba (Japan), FIFA (Switzerland), Barclays and Tesco (UK), the Abraaj Group (Dubai), Luckin Coffee (China/US) and others—suggests that corporate governance has not helped very much.

Corporate governance defines mechanisms, processes, and relations by which corporations are led and controlled. Berle and Means (1932) described a conflict of interest between owners and managers that called for control mechanisms (called the “principal agent” theory).[10] This marked the start of corporate governance as a tool to separate and balance control and management to prevent or decrease conflicts between principals (owners) and their agents (management).

In subsequent years, cumulative conflicts and scandals triggered an adjustment of hard law (corporate law) and soft law (corporate governance) around the world. However, derailment persists, often with its roots in conflict within the magic triangle of owner, board of directors (BoD), and management (e.g., CEOs).

The widespread acceptance of corporate governance standards demonstrates its importance. Yet, as the long list of examples throughout this book will show, corporate governance has not contributed nearly enough to the reduction of severe conflict in business. This holds true for all types of organizations: public, private, nonprofit, national or international, successful, or crisis ridden. As stakeholders find new and creative ways to leverage new laws, regulations, and guidelines for personal gain, this even adds new layers of complexity.

In many countries, increasingly strict legal frameworks have provoked a rising number of lawsuits against directors and officers, and these have amplified the need for insurance against liabilities. This adds another level of pressure in an already turbulent, fast-changing environment—in a culture of media scrutiny that plays an increasingly greater part.

It is time to stop, pause, and reflect on why stricter legal frameworks have not reduced conflicts of interest as intended. There must be other reasons and causes that are unaccounted for in legal frameworks that distort organizational dynamics.

This book will shed light on the three key drivers for negative outcomes that cannot be minimized or eliminated with a stiffer legal framework. In particular, the role human beings play, especially in leadership positions and during change, will be considered and discussed.

This book will demonstrate that there is a certain type of person that tends to derail. It will uncover elements that drive such persons and propose ways in which they might develop and improve. Derailments involve human aspects and can, to a large extent, be avoided or proactively managed through appropriate leadership and recruiting.

This book digs deep into human nature to understand how derailment arises and how it can be prevented or resolved. It works on the assumption that behavior can reveal why and how people engage in conflict. Discussion of relevant theory and evidence will shed light on how observation of behavior patterns induced by a person’s interests can help us discover and predict dysfunctionalities and provide valuable information on that person’s potential for development. An increased awareness of this can lead to better leadership.

Since opposing opinions, beliefs, principles, and/or values and interests are frequent among the magic triangle of owners, BoD, and managers, these people play a crucial role. They can either be the originators of bad conflicts or the skilled leaders who resolve and/or avoid them. What will differentiate any organization from others is the way conflicts are managed and derailment minimized.

We Don’t Need Superheroes

Understanding past and current leadership selection and development can help owners and BoDs define the types of future leaders required to deal with the increased pressures of the VUCA environment. There is a lot that organizations can do to reduce the potential for derailment and maximize performance by improving leadership and organizational culture despite or because of change. With these points in mind, valuable advice and checklists will be supplied to owners, board members, CEOs, management teams, aspiring leaders, executive search firms, investors, lawmakers, and judges.

Often, leaders are viewed as superheroes, and even more worrisome, they try to behave as such. They are seen as invincible, having all the answers. This could be because leadership is considered rational. Both classic law and economics assume that leadership is a rational task carried out by rational leaders. The persistence of this assumption may be linked to a belief that leaders should not show their human side, including their weaknesses and shadows, because rational, pragmatic, and objective thinking is superior to feeling.

But only superheroes are superhuman, and relationships within the magic triangle of shareholders, BoD, and management often do not work very well. Severe conflict, excesses, fraud, and even scandal are frequent, sometimes with dramatic consequences (such as lawsuits, jail time, or financial ruin) for the individuals concerned, their organizations, employees, and society at large.

Linked to this, much has been written about company law (which governs the rights, regulations, relations, and conduct of persons, companies, and organizations) and about corporate governance (which defines mechanisms, processes, and relations by which organizations are controlled and directed). Most companies[11] have a well-thought-out corporate governance system in place. This has gained importance after major scandals in the 1990s and 2000s: think of Enron, Tyco, and a number of players during the global financial crisis. It is designed to serve as a “magic tool” that solves all potential compliance-, power-, or role-related issues.

But organizations are systems with their own dynamics, of which only a minor part is conscious and rational because they involve the complexity of both the business and the human element. If unable to express their human side, leaders can become susceptible to harmful practices, such as power games and risky and overpriced takeovers. Therefore, behavior cannot easily be predicted by just looking at organizations and their rules.

One would think that the extraordinary demands of our changing world would force leaders to focus on what really matters: clients, markets, products, employees. However, organizational politics, severe conflicts, excesses, and fraud do not seem to have decreased as societal change has increased. When power is involved, human beings are not entirely rational. British historian Lord Acton said, “Power corrupts, and absolute power corrupts absolutely.”[12]

But not all leaders act in harmful ways when faced with power and turbulent environments. Why might some people be more prone than others to such behavior? Drawing upon a psychodynamic perspective, this book will demonstrate that this is linked with deep-rooted personalities and behavioral patterns.

Very often, changes made within a company affect the power balance within that company. The ways in which people react when their positions are threatened, together with their worldviews and how they assume roles and handle power, are often shaped by how they grew up.

Change triggers, emotions, and uncertainties. Too many well-thought-out and well-meant plans go off the rails in business because of unconscious factors that influence behavior. The techniques applied by leaders to implement these plans and/or lead change often assume the rational side of behavior—their own, their colleagues’, and that of key stakeholders. The emotional side is neglected. But as this book will show, mastering the soft side of change management—in combination with the harder side that includes plans, processes, and governance—can reduce or avoid harmful outcomes and improve performance.

Who Should Read This Book?

First, this book addresses owners and shareholders who select their board members and senior management. It also targets boards of directors who recruit CEOs and bear the ultimate responsibility and liability for their actions. By raising their awareness of the main drivers of conflict, this book will enable business owners and BoDs to spot people who might derail, either develop or exit them, and thus improve business performance and agility. Better understanding the psychodynamics of leadership in a changing environment will also enable readers to assess what types of future leaders are needed to meet the demands of a fast-changing business world.

The book is also a must-read for CEOs and management teams (potential CEOs). Awareness of the human drivers of conflict will permit them to lead change by anticipating its impact on people and power balances within a solid legal framework. It will also facilitate self-awareness, which is crucial for better management of self and others. Being proactive in learning about their own behavioral patterns and how they play out under pressure will allow leaders to stay ahead of and better deal with potential, severe conflict.

Moreover, discoveries from business and psychology, such as irrationality in decision-making and judgment, can and should be incorporated into the world of law. Since perceptions are based on personal experiences, it is impossible for judges to make interpretations without using personal lenses shaped by their own pasts. They are at least unconsciously biased. Like leaders, judges are well advised to start with themselves. If they become aware of their own emotions, perceptions, and patterns—and their origins—they will be able to increase their decision-making abilities in two ways: discovering when and how their own personalities influence their decision-making, and better understanding other people’s motives and drivers.

And finally, since this book sheds light on important elements of the assessment and installment of top leaders, it will also be of interest to executive recruiters and search firms. Furthermore, it will provide insights of value to anybody interested in understanding the different drivers of conflict, e.g., business consultants and practitioners seeking to reduce derailment and improve performance.

[1] Sattar Bawany, “Leading Change in Today’s VUCA World: Leadership Excellence Essentials,” HR.com, February 2016, 31.

[2] Johansen and Euchner, “Navigating the VUCA World,” Research Technology Management, vol. 56, no. 1 (2013), 10­–15.

[3] Chadra, “VUCA World: Provoking the Future,” Human Capital, vol. 20, no. 8 (2017), 14–18, 14f.

[4] Ibid., 14.

[5] Chadra, “VUCA World: Provoking the Future.”

[6] Chadra, “VUCA World: Provoking the Future.”

[7] Nicholas Davis, “Learning from Luther about Technological Disruption,” Finanz und Wirtschaft, November 6, 2017, https://www.fuw.ch/article/learning-from-luther-about-technological-disruption/; Christopher McFadden, “The Invention and History of the Printing Press,” Interesting Engineering, September 12, 2018, https://interestingengineering.com/the-invention-and-history-of-the-printing-press.

[8] Chadra, “VUCA World: Provoking the Future.”

[9] Bawany, “Leading Change in Today’s VUCA World,” 32.

[10] Adolf A. Berle and Gardiner C. Means, The Modern Corporation and Private Property, (New York: Macmillan, 1932).

[11] In this book, the terms company, organization, and businesses will be used interchangeably.

[12] Acton Institute, Lord Acton Quote Archive, http://www.acton.org/research/lord-acton (last visited May 1, 2019).