Business leaders are expected to successfully manage rapid complexity. This is hard to do well. Seismic economic turbulence arising from globalisation, covid-19 and one of the greatest upheavals in technology since the industrial revolution are among the current challenges for leaders today. But on top of this, shareholders, governments and citizens now expect organisations and their leaders to act in ways that meet the wider needs of society. This increases leadership complexity and risk.
All of this is happening in a world where business has a trust problem, where capitalism is being challenged, and where the fracture that has opened between business and society is deep. These must be addressed if we are to rehabilitate business and ensure that it meets societal and stakeholder expectations.
Governance is the key. In this blog, I identify how governance has evolved and how today’s governance architecture now offers a concrete opportunity for leaders to demonstrate the power of business as a societal force for good.
Governance 1.0 has its roots not in the industrial revolution of the 1780s but in the corporate wild west of the 1980s. It was then that a little-known politician, Margaret Thatcher, came to power in the UK. Her industrial inheritance was the UK as the sick man of Europe.
At the time, British industry was in a death spiral, overwhelmed by international competition and undermined by strong Trade Unions and weak management. The medicine to save the patient administered by Mrs Thatcher was strong. A ruthless culling of heavy industries and a fearless belief in the reinvention of the country as a world beating service provider.
But casualties were many. The phrase that there was “no such thing as society” supercharged productivity and produced an economic recovery while simultaneously sowing the seeds for a divided society – and (ultimately) a decoupling from Europe some 40 years later.
This was an age of wealth culture. Executive reward was propelled ever upwards driven by the benchmark of American bankers as de-regulation exploded the restrictive practices of the City. Mergers and acquisitions were rampant, Wall Street movies told us greed was good, and shareholders focused on returns with little interest in how the business made money. Boardrooms were male and pale, directors’ contracts were long, accounting standards were lax, and reward schemes unregulated. Spirits were entrepreneurial, risks were taken, money was made, and in the main shareholder value was delivered. Good governance was, to use a phrase of the time, ‘for wimps’.
The market of course reaped what it sowed. Failures and fraudsters hit the headlines, pension funds were plundered, fantasy profits exposed and the first demands for improved corporate governance were heard as the wild west of the 1980s turned into the responsible 1990s.
Governance 1.0 was born in the form of the Cadbury Report issued in the UK in 1992. It sought to impose governance in a measured way where ‘comply or explain’ became the order of the day in the UK and the standard that the world would follow.
In its wake came Greenbury, Hampel, Turnbull and Tweedy that began to impose structure, discipline, transparency on remuneration, and new norms in accounting and risk management reporting. Excesses were constrained, risk corralled, society and shareholders satisfied, at least for a while. But Governance 1.0 was targeted at the protection of shareholder interest and shareholder value. Boardroom behaviour was largely left to another day.
It was only at the turn of the Century, however, that the true impact of globalisation was felt on jobs and wages. Suddenly it became clear that shareholders were not the only people in need of care and attention. Boards were expected to take care of a much wider group of stakeholders, and that required another governance rethink. This time, board composition, board behaviour and board effectiveness came under the spotlight. What emerged was the Combined Code under Derek Higgs.
This was undoubtedly Governance 2.0. Published in 2006 it was a major step forward, but nothing could stop what was to occur within the next 24 months.
The excesses of a rampant banking system drove the West to the brink of financial disaster. Boardroom and bankers’ behaviour destroyed or damaged the reputation of trusted companies. And high-speed broadband together with the connective power of new social media put a spotlight on the cavernous gap between the wealth of the few and the poverty of the many.
It was then that the mood changed. Public anger rose and society registered its disgust and mistrust in its politicians and their policies, and in business leaders and their behaviour. This produced the third phase of good governance.
Governance 3.0 was imposed by government and central banks which restricted the excesses of banks by imposing demanding new capital ratios, constraining loans, and forcing financial prudence in the boardrooms of banks and their customers.
Control on capital, however, was not enough. Society now demanded new controls on capitalism itself. And so is now born Governance 4.0 – a heightening of corporate social responsibility to include a duty of care – not just to shareholders, immediate stakeholders, or the wider business community – but a corporate responsibility by business for the health and safety of society and the world at large.
At the basic level this has resulted in changes to fairness in rewards – salaries, bonuses, pensions – and a refocusing of productivity in pursuit of prosperity for the many not the few. But beyond that, it has produced governance improvements in risk management, better boardroom behaviour, improved ethical oversight within supply chains, greater protection of the environment, new expectations around the preservation and policing of human rights, and the pursuit of total transparency in corporate reporting.
These changes are important, of our time, and very welcome. They are not optional extras but absolute obligations if we are to succeed in aligning business with society, and capitalism with social responsibilities.
In this, management will be judged on deeds, not words. Corporate responsibility objectives will be measured, monitored and reported. The delivery of ESG – not EPS alone – are now the initials on which business will be judged. It is a change of behaviour that is mandatory, recognising that if we are to recruit the best, to do our best, to thrive in business, and to survive as a planet, we must do more and we must do it now.
Sir Roger Carr is Chairman of BAE Systems plc and a Senior Advisor to KKR. In addition, he is Chairman of the English National Ballet, a Vice President of the Royal Navy and Royal Marines Charity, and a Visiting Fellow at the University of Oxford.