Does good governance require a fresh approach?

An extract from Ruth Keating’s winning submission for CGIUKI’s essay competition, in memory of Tom Morrison FCIS

‘…Good corporate governance should reduce corporate arrogance by encouraging the views of dissenters. To discuss this theme this essay will first consider modern examples of failed corporate governance, second will follow a discussion of a ‘too big to fail’ corporate atmosphere and finally ways in which the views of dissenters can result in good corporate governance.

1) Modern Examples of Failed Corporate Governance

Most companies are aware of the popular list of values circulated and seek to transpose them into their own corporate governance strategy. Yet, the incorporation of the ‘spirit’ of these principles, even if they did not encompass all of them verbatim would be much more valuable to a company. For many, corporate governance is a system to solve the moral hazard problems business produces, and how to best deal with this through managers keeping industry accountable to shareholders.1 In this way suppliers of finance to corporations assure themselves of getting a return on their investment.2 The following quotes show that many high profile companies attest to the highest standards in pursuing good corporate governance:

“We foster this trust through transparent and responsible corporate governance, which takes the highest priority in our daily work.”3

“We maintain our commitment to the best corporate governance practices. Our board of directors consists of ten people, nine of whom are independent. Our audit, nomination, and governance, finance and risk, and remuneration committees are formed exclusively of independent directors with expertise in their respective areas. Our board meets regularly without the presence of the CEO. Committees and Board conduct an annual self-assessment. Last year the attendance rate of the directors at meetings was 96%. We have a programme to introduce new directors and the continuing education for all of them. We have a risk committee, an independent chief risk officer and the highest standards of risk management at all levels of the company. Our internal controls are adequate, as certified by independent auditors. We have incentive plans based on stocks to promote greater alignment of interests of our executives.”4

“We want to be proud of Enron and to know that it enjoys a reputation for fairness and honesty and that it is respected.”5

What is of note is not what these statements espouse as to what is good governance, but rather the practical working reality of the businesses who apparently held themselves to these standards. The first of these quotes appears from Volkwagen’s Corporate Governance guide, the second quote from Lehman Brothers’ 2007 Annual Report and the final quote from Enron’s Ethics Handbook 2000. The question is, when corporate governance strategies seem clear, where does it all go wrong? The answer to this question lies in the lack of congruence between corporate governance policies as written down and corporate governance in reality.

In essence, this failure to properly practice corporate governance lies in an absence of belief that these corporate governance values are valuable. But corporate governance is much more than system of rules; it is a philosophy of management. If companies are to exhibit truly good governance, that requires a fresh approach to corporate governance. This means not, treating corporate governance as a checklist of requirements or mere pro forma. At times accepted standards of practice can be viewed as hoops to jump through. However, some of the greatest and most widely populated corporate failures of both the 20th and 21st century can be stripped away to times where proper principles were not followed, or indeed were ignored.

2) Too Big to Fail

The reality is that often the ‘corporate governance’ objectives can seem quite aesthetically pleasing – but they do not go far beyond this.

The quote of Volkswagen cited above warrants consideration in this regard. An unanswered question at Volkswagen is what level of knowledge did members of the management boards have of the rigging of emissions tests. The 2014 report for the supervisory report claimed “the Supervisory Board was directly involved in all decisions of fundamental importance to the Group”.6 That might at first reading seem a worrying statement in light of recent events, however the reality is that this was probably the opposite of what was in fact happening inside Volkswagen. The issue here is that there is a direct link between poor governance and a dip in confidence in Volkswagen, resulting in significant value destruction for Volkswagen’s shareholders with a 23% drop in share price following the admission.7

If one looks at some of the starkest failures of corporate governance one of the most interesting facets of the debate is this juxtaposition of corporate governance failures, and yet at some point all of the above mentioned companies, Enron, Lehman Brothers, were successes, if not giants. But the problem is that at times this success only serves to entrench an atmosphere of corporate arrogance which only further serves to cement bad practices. The sense that they cannot lose; that they are too big to fail. The problem with this sort of approach is that it is incredibly short sighted and relies more on luck than design.

At times it can seem as though corporations increasingly view governance as a box ticking exercise. Principles tend to be viewed as restrictions rather than an integral part of the success story, instead having the status of being sterile and repetitious. A central issue is that when companies are successful there is an inherent bias towards thinking that the current business model is working and in this way is beyond criticism. The above examples demonstrate that although successful companies may seem to be running perfectly, corporate arrogance, or indeed even banal corporate satisfaction can mean that successful companies can eventually crash. This essay argues that good corporate governance requires and is indeed dependant on dissenters in order to test and develop robust governance.

3) A Fresh Approach – The Need for Dissenters

Against the backdrop of corporate governance failure often co-exists an atmosphere of corporate arrogance. Symptomatic of this is an approach to corporate governance, and in particular incentives, that is extremely short sighted. At Enron, shortly before its collapse, there was a wholly inadequate incentive scheme in place that placed its entire emphasis on contracts signed.8 The impact of an incentive scheme like this is that managers and employees’ attention is focused almost entirely on short terms results and closing deals. This will always be an essential part of successful business. But it should not be all that a company and its employees focus on. Indeed, in the case of Enron much effort was placed in earning million-dollar bonuses for investments that would later lose the company money.

The problem is that the current framework allows no room for dissonance, or at least no structured method by which it can be harnessed. Indeed, dissonance is not implemented as a fundamental part of the overall corporate ecosystem. This lack of dissonance results in an atmosphere of corporate arrogance, where companies are thought too big to fail. The way to counter this is by incorporating the views
of dissenters.’

Ruth Keating


  1. Jean Tirole, Corporate Governance, Econometrica (2001), Vol. 69, No. 1, pages 1 - 35.
  2. Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, Legal Determinants of External Finance, The Journal of Finance (1997), Vol. 52, No. 3, pages 1131 - 1151.
  3. Corporate Governance Policy of Volkswagen. Available at <>
  4. Lehman Brothers’ Annual Report 2007.
  5. The foreword by Kenneth Lay to the Enron Code of Ethics Handbook 2000.
  6. Quote available at <>
  7. ‘Volkswagen Drops 23% After Admitting Diesel Emissions Cheat’ by Naomi Kresge, Bloomberg 21 September, 2015. Available at <>.
  8. Alexandre Di Miceli da Silveira, ‘The Enron Scandal a Decade Later: Lessons Learned?’, Homo Oeconomicus (2013) 30(3): pages 315-347.

Tom Morrison Essay Prize

The Tom Morrison Essay Prize is the brainchild of ShareGift, a charity which specialises in accepting donations of shares to generate funds for charities, and The Chartered Governance Institute. Essays demonstrating an original perspective were sought on the following topic: Does good governance require a fresh approach?

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