Corporate constitutions

Economist
October 28, 2010

“Revolutions” can take place in surprising places. The past decade has seen nothing less than a revolution in the command centres of capitalism: corporate boardrooms. The ancien régime of club ties and long lunches has been swept aside, and replaced by a new order based on transparency and accountability.

The new order has its roots in the work of sans-culottes such as Sir Adrian Cadbury in the 1990s. But it was given a powerful shove in 2001-02 by debacles at Enron and WorldCom, and the subsequent Sarbanes-Oxley legislation. Reformers in America and elsewhere argued that checks and balances were just as important in the corporate realm as they are in politics. Companies needed to have powerful shareholders and independent directors to keep a watchful eye on managers. In 2009 both the New York Stock Exchange and the NASDAQ demanded that companies should have a majority of independent directors.

Booz & Company’s annual survey of the world’s biggest public companies shows how far-reaching this revolution has been. Firms now routinely separate the jobs of chairman and chief executive: in 2009 less than 12% of incoming CEOs were also made chairmen, compared with 48% in 2002. CEOs are held accountable for their performance—and turfed out if they fail to perform, with the average length of tenure dropping from 8.1 years in 2000 to 6.3 years today. Companies have turned to a new class of professional directors, and would-be directors sign up for bespoke courses at business schools because Sarbanes-Oxley makes them personally liable for the accounts that they sign.

This model is quickly becoming the norm around the world. But is it quite as robust as the reformers claim? The financial crisis of 2007-08 provided the toughest possible test. Some firms weathered it much better than others: America’s Citigroup and Switzerland’s UBS experienced severe losses whereas JPMorgan Chase and Credit Suisse (also in America and Switzerland respectively) suffered far less damage.

Corporate reformers immediately seized on the crisis as yet more proof of their arguments. Banks had always been badly managed, they argued. And banking CEOs were past masters at bamboozling shareholders and directors. Nell Minow, one of the most industrious of the reformers, flatly declared that “the recent volatility” proved that the “need for better corporate governance has never been clearer or more pressing.”

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