How corporate leadership should change to improve governance and avert another crisis
Yesterday ResearchRecap featured HBS professor Bill Sahlman’s provocative if problematic proposal for a new “monitor of management excesses” to address the systemic corporate governance flaws that contributed mightily to the near collapse of the financial system.
Now, in a similar vein, Booz and Company partner Richard Rawlinson offers thoughtful suggestions on how corporate leadership can and should change to address the same issues.
Writing in strategy + business Rawlinson expects a move away from the “CEO as hero” model toward a more diversified team approach with greater focus on corporate responsibility and risk governance.
Selected excerpts:
The quickest impact on business leadership in business will probably be felt at the board of directors level. Driven by fear of the risks that have been exposed, board leaders will start by changing their own behaviors. Directors want more visibility into corporate practices and risks, and more data to directly verify more dimensions of corporate performance.
There could be a renaissance of institutions with a tradition grounded in cooperatives or member-owned organizations, of which there are many in Europe (including some, like Rabobank Group in the Netherlands, that have weathered the storm in financial services reasonably well).
…. leadership team members will have to learn to recognize the power of the unknowable. We have found out the hard way that conceptual financial models, which seemed for a time to provide a new means of rapid growth, can actually obscure the underlying realities of the economic system. We now have some catching up to do as we recognize the failure of these models to comprehend and control the complexity and interdependence of our world.
Leaders in financial services might do better if they understood that we human beings are all limited, that our best course is to accept that we are intrinsically prone to get things wrong, that we need to keep our wits about us, and that to succeed in the arcane world of finance, we need most of all to stay grounded in day-to-day reality.
In composing teams, boards will tend to favor a diversity of characteristics, and they should guard against the drift toward homogenization. Further, power and control will be separated more actively and structurally. There may be a segregated, internal governance structure in some organizations — beyond the CEO’s control, but reaching down into the company — whose role will be to audit and hold to account those with primary decision-making authority.
Central corporate leadership at the financial-services firm Barclays PLC is entirely devoted to governance, leaving day-to-day and even month-to-month management to the divisions. The center has a strong risk control function, but also governance roles across many other areas of the business. And despite Barclays’ extensive involvement in the debt market and other troubled markets, it has avoided many of the problems facing other banks.
Of course, there is a risk that such governance models will simply re-create the old bureaucratic staff structures that hobbled companies in the 1960s and 1970s. What we will need is tightly limited roles and processes, a separate voice and perspective, and a smaller number of resources and processes.
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