12 Propositions for Reforming Corporate Governance

Excerpt from Malik, Fredmund: The Right Corporate Governance Frankfurt/New York: Campus, 2012. S.31ff.

 

  1. Corporate governance that works can only and exclusively be derived from the requirements related to right management and the functionality of complex systems. Anything else is harmful to companies in the long run. Therefore, with regard to its content, corporate governance must be formulated from the perspective of control and management. It emerges neither from legal nor from financial formal rules, which nowadays dominate the corporate governance codes. Such rules are necessary but not sufficient. They can only fulfill their purpose if applied to the content of right corporate management.
  2. Corporate governance must form a unity with corporate policy and corporate strategy. Together, they form the constitutive basis for proper action of the top-level management bodies of a company.
  3. Corporate governance must uncompromisingly be geared towards the company itself and its performance in the market. Corporate governance must not be oriented towards interest groups, neither shareholders nor stakeholders. Orientation towards interest groups systematically leads to wrong decisions on the part of top management, and thus to an undesirable development of the company.
  4. "Best practice" and "good corporate governance", two key concepts in today’s understanding, are not useful criteria. Even if applied to perfection, they cannot prevent a company from getting into difficulty, nor can they generate success and a smooth functioning of the company. Some regulations of today’s corporate governance, particularly financial considerations, even increase the risk of failure systematically because they dictate or recommend misleading parameters such as shareholder value and value increase.
  5. It is evident that strict fiscal discipline is essential for proper corporate management. It is the foundation for the success of the company, but it is not its cause. The reasons for entrepreneurial success lie in other parameters, such as market position, innovation performance, productivity, as well as in the professionalism of management.
  6. The only suitable indicators of top management taking the right kind of action are customer value and competitiveness. These alone bring success, and they are the only parameters that cannot be manipulated. While shareholder value, the value increase doctrine and, in general, all the criteria oriented towards the financial markets certainly do have to be respected in managing a company, they are not suitable for guiding the strategic actions of the top team.
  7. In its current form, corporate governance essentially results in the misallocation of resources at the macroeconomic level. It is therefore hostile to investment and innovation, and it harms businesses’ current and future potential for success. It undermines crucial performance areas, weakens competitiveness, and thus achieves the opposite of what it aims for: improving long-term profitability. In fact, it is detrimental to it.
  8. Because of the damage done to long-term earning power, corporate governance ultimately also harms the interests of its declared target group, the shareholders – in part because it assumes all shareholders to share the same interests. Today’s understanding of corporate governance cannot meet the requirements of the socio-economic structure of shareholders. It damages the interests of those who currently form the most important shareholder group: the future pensioners. They are presently the main providers of capital, in the form of pension funds. Under current corporate governance standards, the managers of these funds are compelled to counteract the interests of their investors.
  9. Today’s corporate governance encourages and systematically justifies bad choices in filling top management positions. It creates the conditions in which a certain type of manager – the greedy, exclusively money-driven type – is allowed to move into key positions. Under different conditions, this type of manager would not stand a chance, because heading a company is radically different from managing money. Combined with the practice of tying managers’ income solely to financial variables, such as stock prices, which is common, this creates a vicious circle which will quickly and automatically lead the company into trouble.
  10. Today’s corporate governance leads to an inadequate training of junior managers. Due to its appearing very plausible on the surface, simplistically reducing management to a handful of money factors, corporate governance is taught in MBA programs worldwide. The result is a whole generation of inadequately trained potential leaders who are not even aware of the alternatives that exist. They will need to retrain from scratch.
  11. Corporate governance today is based on misconceptions regarding the nature and purpose of a functioning economic system, of the market, and of enterprise. This is reflected, firstly, in the wrong ideologies of neoliberalism and the “asset-driven economy”, secondly, in the mis-conception of the company as a profit maximization system, and thirdly, in the idea of management being based on power and control.
  12. The thinking and conceptual categories of today’s corporate governance derive from the 20th century and are thus oriented towards the past. With the fundamental economic and social change going on, these ways of thinking are rapidly becoming irrelevant. In the 21st century, the crucial capital is not money but information and knowledge, as both are necessary to master the complexity of global business.

 

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The Right Corporate Governance