Corporate Governance Epics and Fails
Corporate Governance establishes the controls and policies to inculcate corporate behavior and guide organizations toward their goals while controlling risks and assuring the business complies with regulations and fiduciary responsibilities. The idea behind corporate governance is to set the parameter which defines the relationships between shareholders, stakeholders, management, directors, and others within the sphere of the companies influence. Corporate governance influences how a company operates and manages not only the day-to-day business but long-term business as well.
Corporate governance allows a company to ensure that business strategies are employed effectively and efficiently while serving as a system of accountability to the company’s executives, management, and staff. Most often, the board of directors helps to interpret the objectives of shareholders into strategic plans which can be executed by the company’s management. The board then serves as oversight to the operations and strategy in a limited capacity while providing direction and offering counsel and evaluation of risk.
Of course, when corporate governance is neglected or altogether ignored, bad things can and do happen. Such is the case with WeWork which has been in the news recently. In a recent article by Wayne Cooper, Cooper highlights the folly of a C.E.O. and how his antics shed a negative light on C.E.O.’s in general.
At Ferguson Interests, we like to keep our clients and friends “in the know.” In our quest to stay informed and keep you informed, we found an article that might pique your interest. The section is in its original context on www.chiefexecutive.net.
Talk about timing.
In August, The Business Roundtable got a ton of press for their ballyhooed pledge to move America’s public companies towards a new “stakeholder” model of capitalism. It was time, the CEOs of the nation’s largest companies said, for companies to consider a broader range of interests beyond just shareholders. Employees, customers, communities—they all needed to be part of the mix when it comes to the “who” of a modern free-market economy.
In doing so, as our columnist Jeff Sonnenfeld wrote, the Roundtable was returning to its roots, and doing a favor in the PR campaign for capitalism (which, for the record, remains the most powerful force for improving the lives of people ever developed).
But more: They were also following the lead of most individual CEOs we know. The tens of thousands of chief executives at mid-market companies who—far from the spotlight and unheralded in the pages of Fortune—work hard for their owners, improve the lives of those who work for them, and play fair with others. That may not be the pervasive stereotype of CEOs. But it’s true.
So why are CEOs taking a beating these days? Why do the throngs cheer when Sen. Elizabeth Warren and other political leaders denounce CEOs broadly as unethical scoundrels? Why the call for their public persecution?
Meet Adam Neumann.
As the company formerly known as WeWork prepares to go public, SEC filings detail multiple instances of CEO Adam Neumann’s self dealings with the company (hilariously renamed “The We Company” given recent news). In addition to leasing back to the company various buildings that he has a personal investment in (which present clear potential conflicts of interest), recent filings revealed that he personally reserved the trademark for “We” through an entity he owns before initiating the company’s rebranding and then sold these rights to the company he leads for $5.9 million in stock.
In an amended S-1 filed this past Wednesday, the company announced that it is unwinding this agreement “at Adam’s direction”. But if he wasn’t forced to reveal this information and hadn’t faced the public outcry, would he have undone this transaction? That seems unlikely. The bigger question: why do it in the first place? I think we can guess.
That Neumann even tried to pull this off is an affront to his shareholders, employees and customers. Neumann’s investors entrusted him with billions of dollars, his employees entrusted him with their careers, and thousands of his tenants have entrusted his company to shelter their operations. Neumann stands to make billions of dollars in the IPO, on top of the hundreds of millions he has already taken out in private sales recently in advance of the IPO. To say that Neumann is ethically unfit to lead a public company is an understatement. Public company CEOs should act beyond reproach and avoid deals that even have the appearance of being self-serving. True leaders, of course, know that already.
Great companies have strong business models and great leaders. So while the We Company’s core business model (engaging in long-term lease commitments with landlords and then sub-letting this space on shorter term leases at hopefully higher prices) has yet to be challenged by its first recession, its CEO has already been tested. Investors now know: Caveat Emptor.
As for the rest of us, we’re stuck. Yes, the vast majority of CEOs work hard to win alongside their employees and shareholders and customers and care deeply about the system that underlies it all. But perception is just as important as reality.
Thanks to Adam Neumann, that perception took another big hit.
What Are the Benefits and Impact of Good Corporate Governance?
Unlike those C.E.O.’s who seemingly do their best to make the rest of us look bad, there are some benefits to operating a business where quality corporate governance is preeminent.
These benefits include:
- Efficient processes — when a company is in order, processes become the gears of a well-oiled machine.
- Visibility of errors — as things are done consistently, errors, problems, and issues stick out like a sore thumb.
- Reduced costs — good governance identifies areas for improvement and even more efficiency, ultimately lowering costs.
- Streamlined operations — takes the guesswork out of conformity, it is conformed to goals, or it is not.
- Compliance is assured — all of the above lend themselves to checks and balances which ensure compliance within an organization
Good corporate governance also has a more significant impact on the ‘D.N.A.’ of an organization leading to a culture of excellence. When expectations are high, achievers shine, and those who are not consistent with the fabric of the organization stand out like a bad patch on good pair of jeans. Also, good corporate governance equates to quality products and services, which lend themselves to better performance, culminating in a great business, and improved reputation. Furthermore, good corporate governance results in protection for the company by bringing clarity to problems and issues as they arise. Finally, proper organizational governance aids in reducing those things which pose a threat to a company and can severely impact the business (i.e., safety issues, legal issues, etc.).
How Can Ferguson Interests Help You?
At Ferguson Interests, LLC., we tackle these kinds of issues head-on. With over ten years of experience in creating value for public companies, growing them in some instances from $30 million to $350 million dollar businesses, Rob is adept at helping small and middle market companies with some of their toughest business challenges. Rob is a member of the National Association of Corporate Directors and brings expertise and direction to companies who may be looking at developing a board of directors.
Rob is an expert in leadership development specializing in helping business owners and leaders develop corporate governance in their businesses.