Corporate Governance: the new imperatives

Updated: Jan 28 2002, 05:30am hrs
We are living at a time of history when the gap between what can be imagined and what can be achieved could never have been smaller. The problem is we are still captive to history in the management of our resources and unable to capitalize the unlimited power unleashed by the knowledge economy. We are unable to recognize that we are living today not in an economy of hands or heads but the economy of hearts. We therefore need to develop frameworks that touch the heart and not the mind.

Key driver of the knowledge economy is innovation. Yet we have established rules and regulations, which are designed not to foster innovation but to kill it. We have wasted the whole of 1990s, teaching people to do it right first time not knowing that nothing of substance was ever done right first time. Thomas Edison had to blow out thousands of bulbs before he could make one light up. The model of “do it right first time” was for industrial economy where you were duplicating models. But today, when the customer does not want perfection of the same but something radically different, the only competitive differentiator is innovation. Innovation is not something you can order like breakfast in the Taj Hotel. That has to come from the heart of people who work with you.

Similarly we spent a whole decade of 1990s constituting committee after committee on corporate governance and in the end created a framework that has only caused an adversarial relationship among stakeholders. By defining corporate governance as a system of law and regulations designed to maximise shareholder values, we alienated employees who dedicate their lives to the corporation and sowed the seeds of distrust. Studies have indicated that employees contribute almost 70 per cent of the company’s assets. They have an equity in the company much more than that of shareholders and other capital providers.

How can you expect your employees to give their hearts to innovate when companies treat them as second class citizens The foundation of corporate governance is built with the glue of trust and transparency. The differential treatment of stakeholders erodes this trust. Not surprisingly, therefore, high profile corporate failures such as Marconi, Swissair and Enron are continuing to take place even 7 years after the Cadbury report, 5 years after the Greenbuy report, 4 years after the Hampel Report, 2 years after the Turnbull Report and the OECD guidelines on Corporate Governance.

Unfortunately all these codes address industrial economy paradigms. In the knowledge economy value of intangible capital such as the intellectual capital, reputational capital, cultural capital and emotional capital is far more than the tangible capital.

Market capitalization in the 21st century has little relationship with tangible capital. Companies in the last few years have been able to achieve market capitalization and raise capital way beyond their immediate revenue expectations. In the first six months of 2000, biotech companies raised $20 billion on stock markets to finance research in genomics with related revenues not expected for many years.

Consequently there is a growing mismatch between the shareholder expectations and customer aspirations. Studies of the profiles of investors and shareholders vis-a-vis customers indicate that most of the investors are over 30 whereas most of the customers are under 30. In fact half the world population today is under 30 and a third, i.e., 2 billion out of 6 billion between 13 to 19 years of age. This generational gap has caused the biggest divide much more significant than the ethnic or social divide. The values of the two generations are vastly different. In a millennium survey of 25,000 people across 23 countries and 6 continents last year, 56 per cent said that the brand equity of the company depended on its corporate citizenship, 40 per cent said it was because of Quality. Only 34 per cent said it was because of their management practices.

Morphing of industrial economy into knoledge economy has created a tectonic shift in public values. Companies can ignore this shift only at their own peril. Public hostility faced by Shell, Nike, Reebok, Ikea and Monsanto should provide lessons to corporations who violate the social license and show lack of environmental responsibility. In today’s market, successful companies will be those that recognize they have responsibilities to the society, community and the planet that go beyond compliance with law.

(Madhav Mehra is president of World Council for Corporate Governance)