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Transnational Governance for a Global Economy Ada Demb As the 21st century approaches, there are many pressures prompting changes in corporate

board behavior. The author characterizes the current responses as TQM (more of the same, only better) or reengineering (transformation). To respond adequately to the reality and complexities of a global economy, the author argues that approaches to both corporate governance and boards are in need of reengineering. Directions for board transformation are illustrated with a new framework based on the orientation and constitution of boards. Five new board configurations and the path of evolution are presented. Key words: Corporate governance; Boards of directors; 21st Century; Global Economy; Global interdependence.

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ow do we begin to think about the role of boards for the 21st century? This is the challenge put before us by the Academy of Management Symposium “Transformation of Boards of Directors for the 21st Century”. If boards are to change, what pressures will provoke those changes? Are we seeing responses today which can serve as the basis for further evolution? Does the current debate about boards and governance adequately address fundamental needs for change? What is the nature of the gaps between the pressure and the response, and from the gaps can we deduce the implications for transforming the roles for boards of directors in the 21st century? These are the questions this paper will explore. My purpose in undertaking this exploration is to stimulate those with expertise in this area to reach for new paradigms which can truly accommodate the corporate governance requirements of a global economy. The goal is not to find and defend “truths” about the future, but rather to identlfy dimensions which can serve as a catalyst to further discussion.

1. The Role of Boards in Governance To appreciate the role of boards in governance, it is first necessary to pose a definition

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of corporate governance, and to identlfy the key players in the process. In our book, The Corporate Board, which explored governance and the role of boards eight countries, Fred Neubauer and I proposed this definition: . . corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders” (Demb and Neubauer, 1992, p. 187). The keywords are process, responsive, and stakeholders. An examination of the process in any setting quickly reveals that many more institutions, groups and individuals are involved in governance than boards. How boards fit into this picture, i.e., how responsibilities should be divided to assure that boards make a unique and distinctive contribution becomes a key question. The mechanisms used by industrialized nations to monitor and guide their corporations can be grouped into four clusters which represent a de facto system of governance (see Figure 1): the pattern of ownership in the national setting, the regulatory context, the tendency of that society to exert direct pressure on corporations and the structure of boards (Demb and Neubauer, p. 17). The relative impact and structure of each element can be shown to differ across national settings, reflecting important cultural and historical values and traditions. Responsiveness can be framed more simply as “performance accountability”. This de‘I.

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Societal Pressure

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Figure I: The Governance System (after Demb and Neubauer, 1992)

ceptively simple term focuses attention on four critical questions: to whom should a corporation be held accountable? for what should it be accountable? according to what standards should its performance be judged? and precisely who, should be held accountable? Standards for accountability are valuebased and change constantly. Consider recent dramatic changes in regulations about insider trading or environmental concerns. The scale of financial and human capital under the control of our major corporations leads almost inevitably to a concept of accountability framed in stakeholder terms. By 1989, there were only 19 countries with a revenue larger than the annual budget of General Motors” (Goyder, 1993, p. 65). In 1990, the ten largest corporations in the world employed 4.3 million individuals. Using family size between 4-5 members, they were directly responsible for the welfare of some 17-21 million people. In South Africa the same year, the largest corporations accounted for 25% of the population. The original shareholder concept of corporate accountability is swamped by this new reality. From a review of this definition, it becomes apparent that in a governance environment where corporations must demonstrate accountability for a much broader array of performance indicators, there is an urgent need to reframe the governance process, and within it, delineate a role for the board which utilizes its unique capabilities.

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2. Pressures for Change This symposium poses the question: what aspects of this governance context are likely to change in the 21st century? and in what directions? Three sources provide partial answers to these questions: corporate directors, other practitioners and scholars, and perspectives articulated by the author (and her co-author) in their 1992book on corporate boards (Demb and Neubauer).

2.1 Corporate Directors Between 1989and 1992, approximately eighty corporate directors participated in a longstanding workshop at the International Institute for Management Development (IMDLausanne) based in Switzerland. In the Monday morning session participants in the International Program for Board Members used a diagnostic device to select the governance sphere from Figure 1where they anticipated the greatest changes in their home countries, and to indicate the nature of the change. The directors highlighted changes in three spheres: the regulatory sphere anticipating new requirements in financial, environmental and other social regulations; ownership anticipating more active postures from institutional investors, in particular in the Anglo-Saxon countries; and societal pressure - anticipating greater public interest

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expressed through either the press or elective processes (perhaps leading to regulation) related to the environmental and social areas.

2.2 Other Practitioners and Scholars The changing dimensions of corporate ownership are identified as a dimension in transition by other influential members of the governance discussion. In the U.K. and U.S. institutional investors are transforming their role in corporate governance by playing far more active roles, in annual meetings and in public debates on such issues as executive and director compensation (Lublin, 1995).Influential individuals such as Angus Matheson comment publicly that institutional investors are prepared to embrace a broad stakeholder view, consistent with the trends anticipated by the IMD participants: As we move to the next millennium it is likely that issues hitherto largely ignored will gather prominence in corporate affairs. Environmental and social issues, both national and global will attract attention as political and economic barriers are reduced. The importance of the interrelationship of employees, customers, suppliers and shareholders . . . will gather momentum. . . . All this will increase the responsibility of pension funds and others , . . It will depend upon the willingness and ability of financial institutions to accept and respond to this challenge. I believe that they can and will rise to the occasion and that this process is already under way (Matheson, 1994,p. 179).l In a recent article Robert Monks (1994) suggests a new mechanism, a committee of long-standing shareholders, to allow shareholders to behave as informed owners and to exert more focused influence on the boards of large companies. Their comments illustrate two examples of the re-establishment of ownership influence in the U.K. and the U.S., two countries where it had been diffuse and somewhat weak as a governance mechanism by comparison for example, with Japan and Germany. In the U.S. there is sustained pressure to mod* board structures and composition to improve board effectiveness in dealing with the financial and strategic performance of companies, as the research community seeks demonstrable relationships between such issues as bankruptcy and the reporting of negative performance (Daily and Dalton, 1994; Abrahamson and Park, 1994). Along


with Monks, experts continue to frame the role of the board in a monitoring context . . . most often, seeking to improve the board's ability to uncover signals of declining corporate performance well in advance of failure, so that steps can be taken to remedy the situation. The logic can be paraphrased: because corporations are so complex, it will be increasingly difficult for boards to be meaningfully involved in strategy (beyond the choice of CEO), therefore the monitoring role becomes even more critical. The same complexity which stymies board involvement in strategy, is equally likely to limit the board's ability to provide meaningful financial oversight. Effective boards, with excellent information, may have already reached the limits of this aspect of their role. Owners and regulatory processes (formal legislation and informal "codes") working alongside boards, will adequately fulfill the financial monitoring role. For the 21st century, we need to conceive of the role of boards in new terms.

3. The Response: Re-Engineering

or TQM? Across the industrialized world, the response to these pressures is most characterized by the remarkable degree of convergence. In 1987,when we began our research on governance and boards, the conventional wisdom strongly discounted the possibility of meaningful comparisons of board behavior across national boundaries, legal systems, and board structures. Contrary to these expectations, the research reported in The Corporate Board revealed a set of paradoxical tensions which destabilized board decision-making that were universal across the eleven companies involved in the study, headquartered in eight different countries. Today, we observe even more remarkable similarities among the themes which are the focus of governance discussions across the industrialized world - in the U.S., Australia, the U.K., Germany, and even Japan. Three themes represent the focus of the current debates and current efforts to change the way boards and governance systems function: internal board structures and processes, a role for professional directors, and the institutional role in ownership. In order to assess whether the proposed changes will respond adequately to the pressures, we might start by distinguishing the author's approaches to the improvement of board performance and governance: some offer recommendations for improving boards,

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Figure 2: Characterizing a Sample of the Current Dialogue but within the assumptions surrounding their structure and role that characterize the current governance system, and others propose new ways of thinking about both boards and governance. If we characterize the former as TQM-type approaches, and the latter as reengineering* the current dialogue can be grouped into four cells of a 2 x 2 matrix, as shown in Figure 2, with some current articles placed appropriately. Before briefly commenting on these approaches, several intriguing aspects of the matrix should be highlighted. First, few articles truly deal with the question of "re-engineering the board". Perhaps, this is not surprising because it is nearly impossible to reframe board roles until its context has been fully addressed - that of reframing governance. Second, the one article that does fall into this category is specific to board roles in one country - and likely, that will be the case for the time being. Radical changes in board behavior will be relative to current practice and so must reflect the idiosyncracies of a given national setting. So, the remark that few articles fall into this quadrant, actually means that (a) a quick scan of the literature shows few U.S., U.K. or continental discussions in this quadrant, and (b) articles dealing with the economies of South America, Africa, or central and eastern Europe who are in this midst of radical redefinition of board roles might help fill this quadrant. Third, those who are attempting to probe the murky area of reengineering corporate governance are engaged with such fundamental questions as the role of corporations in society and value structures around which expectations for corporate behavior can

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converge. The primary focus of those concerned with radical change reflects a concern with "how" corporations do business, i.e., corporate conduct, seeking new forums, new forms and new philosophies.3

3.1 TQM-ing the Board: lnternal Structures and Processes The advice offered to directors and management about structures and processes which will improve the internal performance of their boards falls into this category. At least four changes are fairly commonly recommended to improve the integrity and quality of board oversight and decision-making. (1) Broadbased debate in the U.K. over the Cadbury Report provoked serious attention to the separation of the roles of chairman and CEO. While not as well accepted in the U.S., as perhaps in the U.K. and Australia, the American version focuses on ways to balance the (potential) power of a combined Chair/ CEO, sometimes in the form of a "lead" director among the outside directors. (2) This recommendation follows on a strenuous discussion of the "appropriate" ratio of executive (or inside) to outside directors. The best-known search firms keep a running count on both the overall size of board and the balance. While the trend is clearly toward involving a critical mass of outside directors, there has not been overwhelming action following recommendations toward a majority of outside directors. However, the trend has been supported strongly by lead companies in the U.S., such as IBM and Sears, who have recently reshaped their



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boards. Germany, and other European countries with two-tier boards have worked with structures designed for insiderloutsider balance for many years. (3)Recently in the U.S., some public discussion has shifted from the “structural” focus on numerical balance, to more ”process’’ oriented concerns about the efficacy of outside director involvement. Jay Lorsch (1995)for example, talks about “empowering” the boards so that outside directors have the “capability and independence to monitor the performance of top management . . . , to influence management to change the strategic direction of the company if its performance does not meet the board’s expectations, and in the most extreme cases, to change corporate leadership” (p. 107). (4)Pound (1995)introduces the notion of a “governed corporation” and proposes that boards should not be concerned with sharing power, but with ensuring and engaging in effective decision-making. Smale (1995)and a group of CEOs echo the perspectives of Lorsch and Pound, emphasizing the independence of outside directors, the engagement of their time and attention, and the role of major shareholders.

3.2 Re-engineering the Board Radical, transformational change is difficult to propose - revolutionaries are seldom wellreceived in their own time, but the change can sometimes be recognized en courant. Viner (1993) illuminates a quiet revolution underway in Japan, which may move companies into configurations where boards are no longer honorary bodies, but true accountability structures. Movement in this direction is coming about through the natural pressure exerted by foreign institutional shareholders, and as a result of Japanese corporate capital requirements which drive these companies into the international market. The expectations of foreign investors are impacting local owners as well. “Consequently, the need for substantially higher returns on investment is forcing a widespread institutional reassessment of all portfolio holdings in Japan and a reformulation of stable shareholding with remarkable new emphasis is being placed on dividend returns” (p. 116). Viner pulls aside the curtain shrouding the shape of a re-engineered global governance system by pointing out the incredible power of the investment funds to instigate major world-wide changes in local governance systems.


3.3 TQM-ing Corporate Governance Without the type of critiques provided by Blackburn (1994)and others, we would have little to guide us in moving forward toward reframing governance logic and structures. By pointing out the failures of internal and external controls, she complements the work of Monks (1995)and Sykes (1994)who focus heavily on the question of re-instating ownership as a vital force in the governance picture. In fact, both Monks and Sykes straddle the center line between the TQM and Re-engineering quadrants, as they struggle to propose workable solutions that overcome objections to the substantial involvement of institutional investors as owners, in the governance system. Their work probably points most clearly toward an ultimate reconfiguration of the governance system. Both Monks (1994)and Sykes (1994)specifically propose the establishment of a new class of “professional directors” as a possible solution to the problem of adequate board representation by institutional owners. For many years the closest approximation to a professional director might have been found in Germany, where senior executives from the major banks served on the boards of many companies. Clearly fully employed by their banks, nonetheless the level of staff support provided to these individuals in their capacity as board members, allowed a degree of oversight impractical for many board members who performed their role without staff. The proposition is given serious attention in the North American, British and Australian contexts because of the strenuous demands of the director role under the new conditions of performance accountability. Distributing responsibility for governance of major corporations among investors who each hold “relational” level portfolios in a limited number of firms is their other primary proposition. Within their own economies, and consistent with local definitions of “large shareholding”, institutional investors across Europe and North America are seeking to come to terms with the reality of their stake as owners of the corporate enterprise. Whether CalPERS in the U.S.,or LBnmodtagernes-Dyrtisfond in Denmark, institutional investors are in the process of re-inventing the meaning of ”responsible” ownership in the context of both their new governance roles and their continuing fiduciary responsibilities. Until recently, these dynamics appeared specific to so-called ”western” economies. However, in an article reprinted from the Nomura Research Institute Quarterly, two 0 Blackwell Publishers Ltd. 1996


Japanese analysts compare the U.S. and Japanese systems of governance as they seek governance solutions to the problem of low profitability among Japanese corporations. They comment: This review of developments in the United States leads us to observe that the situation in Japan today is similar, in two fundamental respects, to the situation existing in the United States in the early 1970s. . . . The crux of the current debate in the United States over corporate governance comes down to this: if shareholders are assumed in principle to be the owners of the company, what are the qualifications to be a shareholder? . . , The real problem in the United States has been the collapse of a balance in the stock market between speculative investors and "responsible" shareholders. . . . One might say that the crux of the problem of corporate governance in Japan is also a lack of "responsible" shareholders, as well as the fact that stable cross-holding of shares isolates corporate managers from the discipline of a speculative stock market . . . (Watanabe and Yamamoto, 1993) The two authors draw attention to the same problem addressed by Robert Monks's proposal for a large-shareholder committee. To find such similarities in two economies which are recognized by experts throughout the world as dramatically different, lends encouragement to those who focus on the universal aspects of our governance systems. There is an urgent need to focus more on convergence, rather than divergence if we are to manage a world economy, ecosystem, and social complex which continues to reveal new interdependencies as the 1990s draw to a close. These authors have been placed in the TQM quadrant because of a lack of attention to the one question which is fundamental to reframing governance: how to create a logic which transcends national boundaries and which incorporates the essentially-global, i.e., supradomestic, nature of our major corporations.

3.4 Re-engineering Governance:

Closing the Gaps Response to date leaves us with two major challenges yet to be addressed. First, governance systems do not yet accommodate the essentially transnational nature of business. Commerce is global. Very few enterprises perhaps the local drycleaners - operate en0 Blackwell Publishers Ltd. 1996

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tirely in a domestic market, and in a manner that is truly independent of non-domestic influence. While interdependence per se may seem a cliche, perhaps asking the question differently will yield new insights: How many of our major corporations deserve their domestic national label? Is Nestle a Swiss company? Is Ford American? Ownership is us global as the corporate franchise. The ownership vacuum distorts the performance of governance systems throughout the industrialized world. As a minimum, a reframed role for institutional investors globally, must characterize a new corporate governance logic. Second, governance systems neither adequately recognize the fundamental nature of the partnership between business and society nor do they help that relationship evolve. The partnership is illustrated most dramatically in the nations of central Europe, Russia, and Vietnam, as they seek to reestablish the vitality of their economies through market-based industrial structures organized eventually through some form of corporate structure. Business responsibility for economic development is inescapable. However, the shape and nature of the partnership remains to be defined, both domestically and internationally. For the 21st century, corporate governance must explicitly move beyond national mindsets and accept responsibility for defining u set of values to govern corporate behavior that both reflects and transcends national preferences. It is an ambitious goal, but the results of several initiatives are encouraging. Goyder (1993) and Skelly (1995) both begin to grapple with this aspect of the conundrum before us: Goyder as head of a major inquiry in the U.K. about the future role of corporations in society, and Skelly, through the Caux Round Table (CRT), which group has defined a set of "principles" which are intended to be a "world standard against which business behavior can be measured" (following p. 23). Can we move in the direction of a governance structure which is explicitly supranational? Logic certainly demands that the question be put on the table. Is dissatisfaction with the current system sufficient to move in the direction of supra-national governance systems? The answer is not obvious. There are important differences in the socio-economic logic which underpins the treatment of corporations in our different societies. The EC experience in harmonizing monetary, trade and other regulations demonstrates the glacial pace of developing common value structures which, ultimately, stem from an inherent mistrust in democratic systems of supra-national bodies distanced from local

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influence and control. Further, those societies with long democratic experience hesitate to delegate control of a key resource to a third party - such as might be proposed with the intermediary role of institutional investor directors. And, finally, there are the practical realities of a certain national reluctance to "give up" the tax revenue which is derived from "domestic" corporations. Despite these massive obstacles, formalizing linkages among components of the system, especially in the ownership arena, may be both desirable and practical. And certainly, it is essential that industrialized market economies strive informally to find common criteria - that go beyond share price - which can be used to assess corporate performance. Because the pace of change may be glacial is no reason to avoid commencing surely, this lesson has been learned from the EC experience!

4. The Board Matrix for the 21st Century Despite the uncertain shape of the outcome of re-engineering systems of corporate governance, we do not have the luxury of awaiting the results. Boards play a pivotal role in corporate governance today, even if their ineffective presence only serves to fool the public into the belief that there is a safeguard of corporate accountability (see Blackburn, 1994). To progress in thinking about how their role will evolve during the next few decades it helps to distinguish two characteristics of boards: constitution and orientation. Constitution is a combination of composition and mandate; while orientation describes the topics, tasks and issues which comprise the board's portfolio. Using these characteristics, possible directions for board transformation can be illustrated (see Figure 3). The two characteristics refer to (a) the degree to which board composition, mission mandate, and working style incorporates local (domestic) or transnational attitudes, and (b) the extent to which the board focuses its attention on performance accountability issues that emphasize traditional corporate values, primarily the economic portfolio, or on a combination of issues which integrate new, as-yet-unformulated, questions of corporate-societal interfaces, i.e., the conduct portfolio. The exhibit shows five prototype boards to explain the dimensions further. The arrow labeled "TQM, Re-engineering" indicates that a position or movement toward the upper right quadrant represents more fundamental or radical transformation of the


board's role. The arrow implies that boards are expected to evolve from one situation to another over time - as the company evolves, as the local economy evolves, and as their situation becomes more inextricably intertwined in global governance. Companies, industries, economies and nations differ in their current attitudes toward and practice of governances. Therefore, boards today necessarily reflect a variety of both appropriate and inappropriate configurations. The Better boards are comprised of directors from the national setting focusing primarily on corporate performance issues. They have sought to improve along the lines recommended by the Cadbury Commission, Lorsch, Pound and others: there are more independent directors, spending more time on fewer boards; relationships with the CEO and top management have been clarified; and the board has been brought into a more energetic role in formulating and monitoring strategy and the criteria for assessing corporate performance. Stakeholder concerns, particularly in the conduct arena, are addressed as required by law. The Responsible board has bettered its internal structure and process in the same manner, but has extended the board's focus to explicitly question how the corporation can integrate community and societal goals into its value chain. Such companies might, like Patagonia (Scott, 1995), define a set of nine "Five-Year Environmental Goals", or might take the type of lead role in revitalizing inner cities described so eloquently by Michael Porter in his recent article: "Business people, entrepreneurs, and investors must lead the economic revival; and community activists, social service providers and government bureaucrats must support them" (1995, p. 70). This locally-constituted board explicitly takes on the question: how might this company interface more fully with government and community to address major structural issues in the society, consistent with the long-term health of the company? The Global board recognizes not only the need to better its internal performance, but has begun to internalize the transnational reality of its businesses. Be it GM, IBM or the Council for Ethics in Economics4, the company brings either domestic business people with extensive international experience or international professionals onto the board. The company addresses conduct issues in its day-to-day business, but requirements to improve performance in the economic arena, and efforts to fully engage the board so that the company might be considered a "governed corporation" in Pound's terms, con@ Blackwell Publishers Ltd. 1996


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Figure 3: Board Orientations and Roles sume the major ‘portion of time and energy. Directors visit subsidiary and joint-venture sites abroad, and it is likely that this company has a robust set of subsidiary boards who interact strongly with the parent board in the governance process. The Cosmopolitan board has moved into a new arena with respect to the board’s working style. Clearly achieving “governed corporation” characteristics, the board is not only fully engaged, but challenges management to focus its attention more on defining the purpose, decision-making processes, and engaging the creativity of the people in the company - than on defining structure and strategy and control systems (Bartlett and Ghoshal, 1995). The boards of Cosmopolitans will insist that the company take a more balanced attitude toward the conduct and economic performance arenas, and probably has considered adhering to the Caux Principles, if not already a member of group which developed the “Minnesota Principles”, including such companies as Medtronic, Car-


gdl and Dayton-Hudson (Skelly, 1995). These boards, with their top management, recognize that the company internally is functioning with a well-educated workforce that demands not only remuneration but also satisfaction from their jobs (Ackoff, 1994) and that externally, its ”survival and continuing profitability . . . depend upon its ability to fulfill its economic and social purpose which is to create and distribute wealth or value sufficient to ensure that each primary stakeholder group continues as part of the corporation’s stakeholder system” (Clarkson, 1995, p. 110). Actively involved with major shareholders, the board is beginning to see the benefits of functioning in a partnership mode with its key stakeholders. The Vanguard board is comprised of directors of broad national and international backgrounds who accept the shared responsibility with government and society, for addressing major structural issues. They have taken Ackoff ’s admonition to manage system “interactions” fully to heart and are moving



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forward to develop the attitudes and decision skills that will help them work with management to perceive the shapes of a future which can hardly be predicted half a decade in advance: ”. . . the focus of management should be on the way the parts of the enterprise interact and on how it interacts with other systems in its environment” (1994, p. 34). They will seek to understand interactions within the company - across business units and subsidiary activity, across technologies, among competitors and venture partners, across industries, and between business, government and community groups. Ryuzaburu Kaku, Chairman of Canon Inc., Japan, described the type of corporation which would need a Vanguard board in different words, in an April 1991 interview with Caspar Weinberger - his fourth level of corporation: There are four levels of corporations. The first level is pure capitalism. It is a fine system . . . but has its weakness, too, in the conflict and tension between workers and management. In the second stage management and labor share a common destiny. . . . The third stage is a corporation that goes beyond working for its own wellbeing and considers the well-being of the whole community. Many Japanese corporations are committed to the good of the nation. Unfortunately, this creates friction with other nations. Now we come to the fourth and last category of corporation, which I think is an ideal. This is a Corporation that works for coexistence with the whole of humankind, is borderless in thinking. . . . For the next century or two, nation states and perhaps a super sort of national organization, like the European Community, will be the main actors, but beyond that the world’s going to be one family. Corporations must be in the vanguard of this new concept. [Emphasis added, Weinberger, 19911

Boards in the vanguard of redefining governance

Where do we find such companies? In the U.K., some two dozen are already working with the Royal Society for the encouragement of Arts, Manufacturing and Commerce as part of the RSA project ”Tomorrow’s Company: The Role of Business in a Changing World” (Goyder, 1993). Companies whose boards are in the vanguard of redefining governance and board practice have evolved through several stages of corporate growth and awareness. In an almost Maslowian sense, companies like the people who work in them, first must deal with survival and security before they can move on to social concerns and ultimately self-realization5.The


impact of corporate activity, the irony of the success of the modern corporation in creating and distributing wealth, necessitates a completely new way of approaching the compatibility and even, convergence of corporate, societal and political objectives. The Vanguard role will step across corporate boundaries and challenge community, education and political leaders to work with corporations to find the convergence and to define roles for each institution consistent with its strengths and purposes.

5. Special Opportunities Early in

the 21st Century Approaching governance and board roles from this new perspective puts new demands on corporate boards and their directors. To be an “informed” director requires a sophisticated understanding of many complex social and technological issues, far beyond the confines of the corporations, its businesses, or competitors. Strong networks among business, government and public sectors experts are needed. Mechanisms which solicit and effectively incorporate local community input on key issues must be devised . . . without imposing the equivalent of local school boards on corporate managers and boards. Directors will need to devote substantial time and effort to their new roles - perhaps as much as 30% of their available work time. Using our present concept of governance and boards, such a scenario would be unthinkable. It is the rare company that achieves a 10% involvement of its directors 26-30 days a year. Who then could play the role as described in the new scenario? Part of the answer comes in the form of demographics. The turn of the century brings with it the largest pool of experienced professionals in the history of mankind - the baby boom generation, both in North America and Europe. In 1996 these first “boomers” will reach the age of 50. For twenty years following, until 2016, this bulge in the population of the industrialized world can either create an enormous blockage to participation of younger professionals in all sectors of our economies, or can move into new and different roles as corporate directors. The baby boom demographics create the opportunity to undertake radical reemphasis with our governance systems because of the sheer size of the pool of senior talent that will become available. Yet, under present social structures, this group would not ordinarily seek to leave the workforce until age 60, or 65, beginning at about 2006. To enable our 0 Blackwell Publishers Ltd. 1996


societies to entice boomers into these roles earlier, several other structural changes would be required - some well beyond the scope of this paper. I would suggest that we would need radical new concepts of “retirement”. Rather than raising retirement ages, our nations must reconceive retirement in some sort of staged process, whereby individuals can move from full-time employment, to part-time consultative or directive relationships with firms - without financial penalty, and then to full retirement. It is this pool of talent that will be available to fill the market for the shareholder directors recommended by Monks and others: ”Elect to the boards of portfolio companies a core of professional directors who have the skills, time and incentive to monitor management performance on behalf of shareholders . . . The desirability of such a position - together with the capacity of institutional investors to remove a director would be sufficient to create the market for outside directors . . .” (Gilson and Kraakman, 1990).

6. Conclusions In closing here, it may be appropriate to evaluate progress in terms of the directions Fred Neubauer and I articulated in our book, The Corporate Board: Confronting the Paradoxes. Commenting in the last chapter in 1992, we identified the markers we thought pointed the directions for the twenty-first century. The core of the book spoke of the importance of improving (repairing) key processes that undermined board performance, such as the balance of power and responsibility between the board and management, the quality of the judgment capacity of the board, the information provided for decision-making, and the culture or working style of the board, including the degree to which the board share a common raison d’etre. Speaking specifically about the 21st century in the last chapter, we articulated a need to shift the focus of the board‘s activity (changing the balance of the board’s portfolio) and to increase the intensity of board member involvement with their duties and responsibilities: . . . boards will continue to play an important and central role in corporate governance, but that role will need to change as we move toward the twentyfirst century. The board will have more to handle, a bigger portfolio, and there will be a need to shift emphasis more toward the conduct arena6. The matter of economic performance of a company will remain the largest


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part of the portfolio, if only by a slim margin. As a consequence . . . we expect that the involvement of board members within the overall corporate governance system will intensify intellectually, emotionally, and physically. The increased intensity will in turn have many repercussions on board and board members - on the role, selection, qualifications, and continuing education of members, on the frequency of meetings, and on the organization of information flows, to name only a few. [emphasis added, p. 1991 Among the eleven boards (seventy-one board members) who participated in this research project, those few whose directors and executives were most satisfied with the quality of their performance, i.e., the high performing boards, made substantial demands for directors’ time and attention. For those corporations outside directors were devoting twenty-five to thirty days each year to board work, and at least one board insisted that its outside directors serve on no more than four additional corporate boards. Much of the current conversation about the internal functioning of boards is consistent with our comments about the need for a greater intensity of board and director involvement with corporate performance. In fact, there is remarkable convergence among leading commentators about the characteristics of boards that add value, whether they are called ”empowered” or “governed corporations”. Not surprisingly, several more key markers can now be distinguished. Of critical importance are the dramatic changes in the role of ownership in the governance picture, and therefore, of the potential role of institutional investor “directors” of one kind or another, within the board setting. A second element which has become much more clear through the thinking and writing of Ackoff and Toffler (1990), is the degree to which the modern corporation will need to deal with the symbolic, knowledge-based and emotional needs of an educated workforce. The structure of the corporation devised under Adam Smith was conceived to accommodate uneducated workers for whom a simplified production system had to be devised to yield large quantities of identical goods. Today, the corporate productive system must be totally rethought, to engage the creative energies of an educated workforce which must not only produce larger quantities of smaller runs of higher quality, more specialized products, but which must help the company reach into the future and recog-

Dramatic changes in the role of institutional investors



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nize the shape of important new needs, trends or technologies. Describing his value-based management system, the Chairman and CEO of LeviStrauss, Robert D. Haas, expressed his intent to make each of his workers feel as if they are an integral part of the making and selling of blue jeans. The rationale, in his words: We are not doing this because it makes us feel good - although it does. We are not doing this because it is politically correct. We are doing this because we believe in the interconnectedness between liberating the talents of our people and business success. (Mitchell and Oneal, 1994, p. 46) The image has shifted from a planned, monitored and controlled corporation, to a learning, engaged, self-governing enterprise and the board’s interaction with management must reflect this as well. Speaking of corporate governance further, we said in 1992: “A corporate board, the company and its stakeholders should be governed by three imperatives: partnership, adaptability, and responsibility.” (p. 199) Echoes of these notions are heard through the current discussion, as Porter calls for business to be active in revitalizing the inner cities, as the corporate need to adapt to the rapidity of an unpredictably changing environment is widely recognized, and as some observe that many corporations are already adjusting to the new realities of partnerships with institutional investors (Waitzer, 1994). Now the critical aspect of the governance equation which must be addressed is how to encourage companies to move into the vanguard of defining modes of transnational governance consistent with the reality of their role in the global economy. Waitzer admonishes us not to seek legislative solutions, and his words show wisdom. Rather, like corporate managers, we must find a way to help corporations define a set of “selfgenerated stretch targets that are aimed more at igniting ambition, than at imposing control . . .“ (Bartlett and Ghoshal, 1995, p. 138). Thus, the challenge for the few remaining years of the twentieth century is to find the spark that ignites corporate ambition toward reframing our concept of governance, and to fan that spark into a blaze of creative transnational dialogue.

Notes 1. Mr. Matheson is Chairman of the Investment Committee of the National Association of Pension Funds, U.K.


2. TQM means doing more of the same, only better, while re-engineering implies radical, transformational change (see Hammer and Champy, 1993). 3. See Demb and Neubauer, 1992, Chapter 3, The “Job” of the Board: Defining the Portfolio. “. . . society seems to judge the adequacy of corporate behavior in terms of two types of standards: economic performance and how the business is conducted.” p. 48. Economic performance include such concerns as technology, organizations, control systems, marketing, services, personnel, location, capital inputs. The conduct arena includes such concerns as employee welfare, domestic and international trade regulations, consumer issues, natural resource management (including the environment), labor issues, national security, and individual rights. 4. Based in Columbus, Ohio, the CEE is a small organization supporting an international network of business, academic and religious professionals engaged in improving society’s ability to address ethical issues. In late 1994, the Council brought both Canadian and Brazilian directors onto the board. 5. In his classic work in human psychology, Maslow articulated a hierarchy of needs through which individuals move as they seek growth and development. Individuals, he argued, could not move on to the satisfaction of “higher order needs” until the lower order needs were met. The needs are (from lower to higher) for: security (food, clothing, shelter), social interactions (friendships), esteem (selfand external), autonomy (independence of action), and self-actualization (self-fulfilment through growth). 6. See fn 3, for a definition of “the conduct” arena.

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Dr. Ada Demb is currently Associate Professor of Educational Policy & Leadership at The Ohio State University (Columbus, Ohio). Dr. Demb joined the university as Vice Provost for International Affairs in 1992. From 1986-1993, she was Professor of Corporate Governance at the International Institute for Management Development (IMD) in Lausanne, Switzerland, where she directed a major research effort on corporate governance and boards, and headed the International Program for Board Members. She has authored a number of papers and books on corporate governance and boards, among them (with F.-Friedrich Neubauer) The Corporate Board: Confronting the Puradoxes (Oxford, 1992). Prior to that, her work involved the direction of agricultural research and development projects in the South Pacific, while at the University of Hawaii, and comparative international research in the Soviet Union, Poland and Scotland while based at IIASA (Laxenburg, Austria).

Volume 4 Number 3 ru1y 1996