All what’s wrong about governance correctness

A few weeks ago one of the UK’s biggest asset managers called Schroders was criticised for its decision to appoint its outgoing CEO as chairman.

Apparently, the move is contrary to the UK code of corporate governance which says companies should not move a chief executive to chairman. The financial media latched on to the story and said shareholders were annoyed about the move.

Interestingly, the media didn’t mention the fact that, although listed, Schroders is still a family business, with the Schroder family the biggest shareholders. This might partly explain why Schroders, although terribly polite about the media’s and shareholders concerns, didn’t change its decision. Family businesses can often go with their gut instinct more than non-family businesses.

The episode highlighted a bigger issue around corporate governance, which is increasingly following what is happening to politics and becoming obsessed with being correct. Yes, there are good reasons to improve the governance of businesses, particularly when it comes to transparency around salaries of top executives. And shareholders should be allowed as much information as possible to make informed decisions about their investments.

Increasingly, all businesses are being told by advisors to follow good governance. From a family business perspective, they are being told to follow good governance when it comes to succession, the appointment of non-family board members and splitting the family affairs from business affairs. And many family businesses, particularly those listed, are making efforts to improve their governance.

But, sometimes, good governance through the compliance of rules can stifle entrepreneurship and dynamism. Berkshire Hathaway, perhaps the most successful investment group ever, has been criticised in the past about its governance standards. But would it be as successful as it is if it had concentrated on satisfying the governance correctness brigade? Probably not, according to Lawrence Cunningham, a professor at George Washington University and an expert on the investor Warren Buffett and Berkshire.

If Berkshire beefed up its governance bureaucracy, he told Fortune magazine a few years ago, “it would slow decisions, you would miss opportunities, and there is no guarantee you would not have problems.”

Remember, also, Buffett is CEO – and chairman – of Berkshire. Maybe Schroders might have felt this was a pretty good role model when it decided to move its CEO to chairman. Who knowns, it may even be better for shareholders…