The Age: Good governance not so great for shareholders

From Australia's The Age:

Leon Gettler

August 18, 2007

CORPORATE governance best practice might be desirable but it's not necessarily better for shareholders.

Management expert Sydney Finkelstein said there was no evidence to show that independent directors and separating the roles of chairmen and chief executives delivered results.

"It makes no difference," Professor Finkelstein said. "Even though intuitively we all wish it, but the data is quite clear on that.

"I see those as simplistic answers to corporate governance, and the nature of business is such that we often look for those simplistic solutions. The tougher solutions really relate to doing the assessment and understanding what's going on with the boards of directors in terms of their knowledge about what's going on in the organisation and the extent to which they can work effectively as a group," he said.

"It's good to have independence and it's good to have separation of the chair and CEO but don't expect those things to make a difference in terms of financial performance.

"The typical things that the so-called corporate governance experts look at have no impact on the bottom line in study after study.

"The research is quite clear. It doesn't make a difference. There are more important things than that and the more important things are the way a team in the board of directors works together, interacts and the extent to which board members are open-minded."

Professor Finkelstein, who teaches at Dartmouth College in the US, is regarded as an expert on systems that drive corporate failure. He has just been appointed to the American Academy of Management Hall of Fame.

His 2003 book, Why Smart Executives Fail, identifies blind spots and patterns of behaviour that unleash the storms of corporate pathology — flawed executive thinking and delusional attitudes that stop the company from reality-testing; breakdowns in communication systems that stop important information from getting through; chief executives convinced of their personal pre-eminence and systems that prevent the organisation from correcting its course.

Apart from teaching, he has developed diagnostic tools to assess the health of organisations.
He works with Canadian-based company Jackson Leadership Systems and has entered a joint venture with Australian board advisory firm Pro:Ned.

He said there were four reasons why companies failed.

First, was an inability to focus on the right strategy.

The second involved the company's culture. This was particularly true for companies that had once been very successful, and had been unable to move on when markets changed.

Third, companies ran into trouble when there was a breakdown in their communication and information systems.

Finally, when there was a breakdown in leadership, particularly arrogance and a lack of open-mindedness.

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