| NAVIGATING THE TUG OF WAR BETWEEN OWNERS, MANAGERS |
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Corporate governance must capitalise on different perspectives to allow investors and managers to collaborate Management Review Business Day 26 January 2007 Jonathan Yudelowitz DESPITE ADVANCES IN MANAGEMENT INFORMATION SYSTEMS, research from business schools and the development of legalistic codes, corporate governance and the relationship between owners and managers is as vexing as ever. Regardless of clear objectives, brilliant and unique strategies or noble values – reality will always throw a spanner in the works between chance and intention. Corporate governance must capitalise on different perspectives to allow investors and managers to collaborate around this confusing reality. Non-executives’ demands for performance, feedback and advice must promote long-term return on their investment, without cramping the style or spontaneity of the business managers. Shareholders must provide perspective, without discounting viewpoints that compete with their own. While achieving above-average returns for pension funds and other investors, managers must feel rewarded for their ingenuity in dealing with the competing demands of customers, staff and investors, and the directors responsible for integrating the business needs through championing other stakeholder needs, while at the same time providing advice and feedback. In the post World-Com, Tyco and Enron world, shareholder activism has been promoted to resolve the crisis of governance that these scandals helped reveal. Legislation like Sarbanes-Oxley was designed to ensure corporate accountability. However, both have promoted defensiveness, which channels energy into maintaining dignity and control, and managers putting a positive spin on the status quo, hampering learning and progress. Often valuable and accurate advice is the most difficult counsel to accept. To retain a sense of security and to avoid embarrassment, competent and proud people, like business executives, often use their skill and knowledge to rationalise or resist input that may make them revise their opinion. Nevertheless, when there is trust in the relationship, each side will be able to hear, attach positive value, and integrate advice or feedback they receive from the other. Long-term real relationships, however, are core to private equity: the relationship with the fund managers and investors, between fund managers and executives of companies in which they are invested. An article in The Economist (Barbarians in the docks) calls this “patient capital”. “Patient capital” demands return on investment. It, however, accepts that each business has its own rhythm and dilemmas, needs a full range of strategic options and the flexibility and wisdom to choose between them depending on specific internal and external circumstances. The private-equity model provides something that is missing in the corporate governance of large, complicated organisations as well as in smaller organisations. That is people that are outside of the business and have enough current and nuanced understanding of the business dynamics to know when and how to engage, to prevent executives doing things for their own ends and remunerating themselves extravagantly – as seen in recent headline-grabbing reports on executive salaries. Greed and self-interested ambition stem from a similar drive and energy. The difference is that ambition is mindful of consequence of action and others’ needs, while greed is simply selfish. Much of what went wrong with private equity in the 1980s had to do with greed, yet every dynamic system has potential for greed. It has sunk public listed companies with up-to-date and comprehensive reporting systems, such as Enron. We need to forge corporate governance relationships which ensure that management ingenuity is channelled and traded off responsibly in an ambitious, self-interested, rather than greedy, way. Listed companies spend a lot of energy on managing the perceptions of investors, which are led by abstract analysis from people who do not understand the day-to-day running of business. The players in private equity are people who are in a long-term relationship that properly represents the various stakeholder interests. A global study conducted by Ernst & Young showed that private-equity-managed companies grew by 26% in value per year, compared with 12% for listed companies. Funds managed by Brait, a private-equity firm, have grown more than 30% in value over 11 years, outperforming the JSE, according to Business Report. That is because private-equity arrangements are better able to help business deal with the dilemmas resulting from the relationship between executives and investors who necessarily have differing agendas – investors think of returns, managers think about managing for the business itself, the staff, etc. It is ironic that the more complex our governance rules become and the more advanced the information systems to provide transparency are, the more apparent it has become that neither creates the conditions necessary to deal effectively with the dilemmas of business. As successful businesses and societies have shown, it is only high-quality, long-term relationships between stakeholders that allow the rules and information to be put to good effect. The private-equity model is far more conducive to the development of such relationships than public ownership, adhering as it does to basic business values and processes such as trust, conversation and common understanding. |
