“The debate on corporate governance is often deeply conservative and backward-looking. Yet in the future, companies that orient themselves to engage with an environment that will be significantly affected by systemic risks will fare best. A key aspect of enabling company leaders to do so is to rethink what corporate governance is. But changes in corporate governance are akin to switching to a healthy lifestyle. It is impossible to tell how much each time you go to the gym or eat healthily contributes to a desired effect. We don’t really know whether making those changes will have the desired effects or might have unforeseen effects. But we all know that sticking with what we have will leave us worse off in the future. And that we will only achieve our goals if we start to move actively toward our goals.
Delivering the governance that we need for a future with major societal transitions, notably around sustainability, therefore requires joint effort, passion, and leadership.
In order for boards, organizations, investors, and societies to deal with those transitions, board members need a clear mandate and relevant knowledge to understand the risks and opportunities associated with those transitions. To enable such a mandate, the institutional setting for corporate governance needs to deliver a new definition of value. One that integrates a much larger set of risks and opportunities than those associated with the short-term shareholder value that dominates contemporary thinking about corporate governance theory and practice.” says Jeroen Veldman, Associate Professor Corporate Governance at Nyenrode Business University and Chair of the Nyenrode Corporate Governance Institute.
Corporate governance for the modern corporation
“Not many people will claim that exclusively serving short-term shareholder interests is the sole reason for a company to exist. Nor will many leaders claim it is their passion to do so. Before joining Nyenrode, I worked for Bayes Business School in the UK, where I led the Modern Corporation Project. In this project, I collaborated with academics, practitioners, and regulators to explore how and why corporate governance theory and practice remain so myopically focused on this objective. Interestingly, we found that basically, no one agreed with short-term shareholder value as the exclusive objective for corporate governance.
Academics from company law, economics, and accounting stated this objective was a relict from a recent focus on agency theory. That it contradicts received legal notions of the corporation; that it is a generally undesirable focus in terms of running a successful business, and that it obstructs the capacity for solving the crises contemporary societies are facing. Business leaders as well as major investors typically argued that such a myopic focus was problematic.
However, practitioners also argued that they felt that the prevailing institutional setting meant that they had little choice but to act according to this imperative. Executives argued that they may get sacked or sued if they operate beyond the confines of short-term shareholder value creation. Investors, even those keen to publicly express their desire for long-term value creation and stewardship, privately said that their fund managers continued to operate on the basis of near-term KPIs and performance bonuses and therefore continued to push companies toward short-term financial returns. Politicians were often conceived as limitedly knowledgeable of the complexities of the corporate governance field. As focused on their own near-term re-election interests, making them afraid to take unpopular decisions that could hurt their electorate. And as undependable in terms of setting a stable long-term focused regulatory horizon that would allow companies and investors to act on stable forecasts.
Collaboration needed to get unstuck
Our research found a broadly shared consensus between practitioners, academics, and regulators. The theory and practice of corporate governance provide the conditions for a continued myopic focus on the near term and on a limited set of interests. We also found that these groups agreed on the notion that this myopic focus provides significant negative effects on companies and societies Specifically so in the face of systemic risks that ask for a comprehensive transition. Despite this consensus and the recognition that this myopic focus leads to disastrous outcomes, all parties also reported they remained stuck in the rationale of the disciplinary assumptions that ruled their individual area. And they felt unable to engage with the systemic nature of the assumptions governing the field of corporate governance as a whole.
Providing a corporate governance system that allows dealing with systemic risk, therefore, requires a comprehensive approach. In such a comprehensive approach practitioners, regulators, and academics across the domains of company law, finance, accounting, and management work and act together to find supportable and implementable solutions. With that in mind, my aim is to collaborate with actors across these domains to raise awareness of the risks and opportunities in a rapidly shifting institutional landscape. And to share knowledge and concrete and actionable best practices that help make businesses and business models future-proof. In my work, I focus on the development of interdisciplinary debate, on stimulating debate between these groups, and on progressing from isolated problems to integrated solutions.
Nyenrode Business Universiteit uniquely positioned
The strong executive education program uniquely positions Nyenrode as a driver for this debate in the Netherlands. Building on the values of Leadership, Entrepreneurship, and Stewardship, Nyenrode has committed to being an academic thought leader in the domain of transition management. An example of this is the recent establishment of the KPMG/Nyenrode ESG Innovation Institute.
A key aspect of these new offerings is to show which institutional changes are coming at the world of corporate governance. This prepares executives and non-executives to understand how this will impact their strategies and operations. More important, however, is to show the rationale behind these changes. Understanding this rationale is necessary to understand not just how risks may be mitigated, but also which opportunities lie in the timely adoption of responsible and sustainable business practices. Understanding the rationale, therefore, allows moving from passive compliance to an active and involved role in moving the theory and practice of corporate governance forward.
This future-oriented approach to corporate governance drives Jeroen’s teaching; his academic research and outreach work; the agenda of the Nyenrode Corporate Governance Institute, and the development of research within Nyenrode’s alumni community.
To find out more about Jeroen and what he’s working on, follow him on LinkedIn. Or read his article in Management Scope (in Dutch) or check out an overview of his publications. Interview by Marjolein Baghuis (@mbaghuis) for Change in Context. To read interviews with other interesting people, book reviews, and other posts about change, leadership and sustainability, please subscribe.