Back to Denning's piece in Forbes entitled Reward Directors' Performane with a Hefty Raise? published in Forbes on December 24th 2014. It should be said there is more than one concept found within this interesting and provoking article, and perhaps if anything that is its shortcoming.
Denning next uses the Forbes article to visit familar territory: the pursuit of maximizing shareholder wealth is "the dumbest idea in the world". This is a key issue for Denning related to agency theory and its Jensen & Meckling (1976) overtones leading to the over-arching goal of maximizing shareholder wealth. Denning argues this has led to a decline in corporate performance, offshoring of manufacturing, and other negative consequences as customers' interests are put behind a goal of short-term shareholder wealth maximization. At a third level, Denning ventures to the banking sector as one where the effects of shareholder wealth maximization have been "particularly dire". Here, the sorry list of banking scandals that Denning provides is indeed persuasive to argue for lasting structural change. However, banking is a business all about taking and managing risk, corporate governance here is different from non-financial firms as argued by Laeven (2009), Hopt (2013) and others. So the simplistic construct of short-term shareholder wealth maximization aim versus longer term, strategic and customer oriented aims becomes problematic indeeed.
At one level, Denning provides critical perspective on the January - February 2015 HBR literature penned by Barton and Wiseman (see my post below). While he is sympathetic to the outcry over board members lacking of engagement in strategy on one-hand, the idea of a greater director rewards for performance doesn't sit well with him given current director remuneration levels. Denning questions comments such as the need for boards to "select the right people" and "engage with long-term investors" and asks why this is not happening anyway. I think this criticism misses the mark somewhat. Markets change frequently and director profiles and experience may changes as well. I know many directors who say they are not present to run the business nor develop strategy, a job best done in the C-suite. They are present to monitor, guide, and advise management (as long as the management team is performing) and otherwise replace the management if needed. Finally, the fact is many directors leave primary investor communications to others (such as investor communications professionals) as extreme care needs to be taken regarding information disclosure, especially in listed markets.
Denning next uses the Forbes article to visit familar territory: the pursuit of maximizing shareholder wealth is "the dumbest idea in the world". This is a key issue for Denning related to agency theory and its Jensen & Meckling (1976) overtones leading to the over-arching goal of maximizing shareholder wealth. Denning argues this has led to a decline in corporate performance, offshoring of manufacturing, and other negative consequences as customers' interests are put behind a goal of short-term shareholder wealth maximization. At a third level, Denning ventures to the banking sector as one where the effects of shareholder wealth maximization have been "particularly dire". Here, the sorry list of banking scandals that Denning provides is indeed persuasive to argue for lasting structural change. However, banking is a business all about taking and managing risk, corporate governance here is different from non-financial firms as argued by Laeven (2009), Hopt (2013) and others. So the simplistic construct of short-term shareholder wealth maximization aim versus longer term, strategic and customer oriented aims becomes problematic indeeed.
Like Denning, I can see the argument that bank CEO alignment with shareholder wealth maximization contributed to many problems in the run up to the financial crisis. However, surely the big story has now moved on by 2015 to bank governance systems attempting to cope effectively with the tidal wave of regulatory driven changes. These changes (i.e., enhanced risk governance at the board level as required by Basel and CRD IV, the senior persons regime, and a battery of capital, balance sheet, leverage and other risk measures) are complex to implement, are not guaranteed to mitigate the next crisis, and importantly may stymie the flow of credit to individuals and firms. So in this regard, Denning's comment that "Regulators pursue individuals but remain indifferent to systemic failure" doesn't entirely sit well. Systemic risk does remain, however bank regulators are not limited thier response to these shortcomings to pursuing individuals alone. If anything, we are moving towards a patchwork of solutions looking for the next crisis.
Denning's article on corporate governance in Forbes is a worthwhile read and raises a number of provocative points. It also combines many threads relating to non-bank corporate governance, shortcomings of risk governance for banks, and long-standing debate about the role and aim of corporations in general. They are all clearly related concepts, but at the margin it is ambitious to include all these threads in one Forbes article.
Increasingly one observes that today corporate governance is a notoriously difficult subject to tame with the same theory (or practical solution for that matter) across different industries, marketplaces, geographies, ownership and firm structures.
Increasingly one observes that today corporate governance is a notoriously difficult subject to tame with the same theory (or practical solution for that matter) across different industries, marketplaces, geographies, ownership and firm structures.
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