How to Make Boards Work This page is intentionally left blank How to Make Boards Work An International Overview

Edited by

Andrew Kakabadse Henley Business School, University of Reading, UK and Lutgart Van den Berghe University of Ghent, Belgium Selection, introduction and editorial matter © Andrew Kakabadse and Lutgart Van den Berghe 2013 Individual chapters © Respective authors 2013 Softcover reprint of the hardcover 1st edition 2006 978-1-137-27569-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2013 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries

ISBN 978-1-349-44633-9 ISBN 978-1-137-27570-7 (eBook) DOI 10.1057/9781137275707 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. Contents

List of Figures vii List of Tables x Notes on Contributors xi

Introduction 1 Andrew Kakabadse and Lutgart Van den Berghe

Part I The ‘Outside In’ Perspective 1 Exposing the 20th Century Corporation: Redesigning 21st Century Boards and Board Performance 11 Nadeem Khan and Nada K. Kakabadse 2 Corporate Income Inequality and Corporate Performance: Any Correlations? 44 Filipe Morais, Andrew Kakabadse, Nada K. Kakabadse and Adrian Pryce 3 How Chinese Styled Executive Remuneration Works: Evidence from Chinese Red-Chips 75 Jessica Hong Yang and Nada K. Kakabadse 4 The Secret to Boards in Reinventing Themselves 95 Ouarda Dsouli, Nadeem Khan and Nada K. Kakabadse 5 Reinventing Board Effectiveness: From Best Practice to Best Fit 137 Lutgart Van den Berghe and Abigail Levrau 6 Fine-tuning Board Effectiveness Is Not Enough 153 Lutgart Van den Berghe and Abigail Levrau

Part II The ‘Inside Out’ Perspective 7 An Effective Board Makes the Necessary Trade-offs 187 Lutgart Van den Berghe and Abigail Levrau

v vi Contents

8 Promoting Effective Board Decision-Making, the Essence of Good Governance 211 Lutgart Van den Berghe and Abigail Levrau 9 The Appropriate Board Chair: A Reality Check 268 Abigail Levrau and Lutgart Van den Berghe 10 The Leadership Attributes of the Chairman of the Board: An International Study 292 Andrew Kakabadse, Nada K. Kakabadse, Chris Pierce and Frank Horwitz 11 CEO/Chairman Role Duality Desire: Resistance to Separation Irrespective of Effect 311 Nada K. Kakabadse, Andrew Kakabadse and Reeves Knyght 12 High-Performing Chairmen: The Older the Better 342 Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse 13 Aligning the Board: The Chairman’s Secret 360 Nada K. Kakabadse, Reeves Knyght and Andrew Kakabadse

Index 381 List of Figures

1.1 Towards a new charter for the eco-corporation 21 1.2 Global industrial corporate change – patterns of innovation for sustainability 24 1.3 Closed trust relational networks of corporations in society (1900–2012) 27 1.4 Diverse open trust networks of corporations in society (2012–2050) 33 2.1 Executive pay, 2007 as per the ILLS estimates based on the annual reports of 15 of the largest corporations in the respective countries 46 2.2 Percentage of all income obtained by shop floor employees as a percentage of all employees (Domestic Operations only) 59 2.3 Ratio of average executive board compensation (R6) to average and median shop floor employee pay (R1) (2007–2010) 61 2.4 Company (domestic operations) CGI** & Ratio Rank 6/ Rank 1* (2007–2010) 63 2.5 Investors’ performance measures: CGI, EPS & SP (2007–2010) 64 2.6 Employee performance measures: CGI, TURN and ABS (2007–2010) 65 2.7 Financial and accounting performance measures (Domestic Operations): CGI, SAL, EBITDA (2007–2010) 66 2.8 Financial and accounting performance measures (Group of Companies): CGI, SAL, EBITDA (2007–2010) 66 4.1 How to make boards work 117 4.2 Selection criteria 119 5.1 Extract from the Walker Report (2009) 141 5.2 Top 5 drivers for an active board of directors in unlisted companies 143 5.3 (Required) evolution in board evaluation 149 6.1 A congruence model for board effectiveness 154 6.2 Board effectiveness tool 155

vii viii List of Figures

6.3 A systems framework for board effectiveness assessment 156 6.4 A congruent and best fit board role 157 6.5 Board typologies in function of relationship with management 161 6.6 Board typologies in function of decision-making role 162 6.7 Reflection questions 167 6.8 Evaluation process of executive management 169 6.9 Conceptual model of the strategy cycle 171 6.10 Aspects of the strategic decision-making process 172 6.11 Reflection questions on strategy 172 6.12 Reflection questions on M&As 173 6.13 A board’s strategic role in practice 175 8.1 The guidance on good decision-making, given by the Belgian Corporate Governance Code 212 8.2 Effective board decision-making thanks to group dynamics (2.2) 213 8.3 Benefits of group decision-making 214 8.4 Suggestions for board decision-making 215 8.5 Standard flow of activities in the decision-making process 216 8.6 Extract from the Walker Report regarding pressure for conformity 217 8.7 A recipe for constructive dissent 220 8.8 Extract from the Walker Report regarding the lack of challenge 221 8.9 Steps for effective and constructive decision-making 224 8.10 Recipe for managing conflict in the boardroom 225 8.11 Reflection question on board dynamics 228 8.12 The minimum requisite behaviours 230 8.13 Reflection questions on altering board behaviour 232 8.14 Methods for individual director assessment 232 8.15 Attitude elements 233 8.16 Effective non-executive director behaviour 235 8.17 Director types 236 8.18 Flaws in board meetings 239 8.19 Tips for a director regarding board information 242 8.20 Ten key questions on the company’s business 244 8.21 Some business reflection questions 244 8.22 Recommendations for the use of outside board advisors 246 8.23 Extract from the Walker Report regarding director education 247 8.24 Elements of a board (vacancy) profile 258 8.25 Individual and group-oriented selection criteria 259 List of Figures ix

9.1 Extract from the OECD guidelines on board leadership 269 9.2 The role of the chairman 273 9.3 Extract from the Walker Report regarding board leadership 276 9.4 Decision-making styles of chairpersons of BEL-20 and BEL MID companies 279 9.5 Ten tips and tricks for a non-executive chairman 286 9.6 Selection criteria for the chairman 287 9.7 Extract from the Walker Report regarding time investment by the board chair 287 10.1 South African chairman performance 307 12.1 Performance: the chairman 352 13.1 Boardroom behaviour 371 List of Tables

1.1 Internal corporate characteristics 13 1.2 Externalities of the corporation 15 2.1 Dominant theories on executive pay 53 2.2 Key academic contributions 54 2.3 Evolution of dividends, average executive compensation and average and median shop floor employee pay 60 2.4 Summary of significant Pearson correlations 67 4.1 Females on boards across continents 98 4.2 Average age of boards 100 4.3 Boards structures across regions 105 4.4 Characteristics for making boards work 118 4.5 Sample for model testing 120 4.6 Results 121 5.1 Types of monitoring 139 8.1 Individual director types 236 8.2 Competencies in function of the nature of the company 255 8.3 Competencies in function of the company’s strategy 255 8.4 Competencies grid 256 9.1 Comparison of board chairperson and CEO leadership 270 9.2 Board structure in Belgian listed companies 271 9.3 Chairman nomenclature 271 10.1 South African response segmentation 300 10.2 Age and board position of respondents in South Africa 301 12.1 Chairman’s attributes for effective performance 348

x Notes on Contributors

Ouarda Dsouli, PhD, Postgraduate Researcher, University of Reading, UK. Jessica Hong Yang, Lecturer, Henley Business School, University of Reading, UK. Frank Horwitz, Director of School, Cranfield School of Management, UK. Andrew Kakabadse, Professor of Governance and Leadership, Henley Business School, University of Reading, UK. Nada K. Kakabadse, Professor of Policy, Governance and Ethics, Henley Business School, University of Reading, UK Nadeem Khan, PhD Researcher, University of Reading, UK. Reeves Knyght, Managing Partner, Mayfair Investment Management Ltd, UK. Abigail Levrau, Doctor Assistant, Member of the Management Committee, University of Gent, Vlerick Business School/GUBERNA, Belgium. Filipe Morais, Postgraduate Researcher, Henley Business School, University of Reading, UK. Chris Pierce, CEO, Global Governance Services Ltd, UK. Adrian Pryce, Senior Lecturer, Northampton Business School, University of Northampton, UK. Lutgart Van den Berghe, Professor of Corporate Governance and Executive Director, University of Gent, Vlerick Business School/ GUBERNA, Belgium.

xi Introduction Andrew Kakabadse and Lutgart Van den Berghe

Corporate governance challenges have increasingly been gaining soci- etal attention and attracting media coverage. In parallel, the academic world as well as numerous service providers have heavily invested in researching governance practice and subsequently have questioned what value has been gained from such emphasis. The upgrading of the quality of governance knowledge and insight has undoubtedly positively impacted on the quality of governance implementation. Yet still there remains the critique that the attention given to governance has not sufficiently been capable of addressing fundamental societal and corporate concerns. Business leaders in par- ticular have criticised researchers and commentators alike for drawing on overly simplistic assumptions of a complex reality and equally not sufficiently understanding the inside workings of boards of directors and the impact it has on governance practice. To a certain extent such critique has foundation. A greater proportion of research undertaken is based on secondary data, limited to publicly available disclosure of issues of governance application. Indeed, most academic researchers remain at a considerable distance from board prac- tise and rely on governance characteristics which can easily be retrieved and assessed from external sources. Moreover governance publications, although robust from an aca- demic research perspective, have a somewhat limited and narrow scope in addressing the complex interactions between board directors. The academic tradition of singly focusing on one or other input factor (often due to the lack of sufficient access to board directors), such as a separa- tion of the roles of CEO and board chair, or on the effect of number of independent directors sitting on the board, does not provide sufficient insight into what is happening behind ‘closed’ boardroom doors.

1 2 Andrew Kakabadse and Lutgart Van den Berghe

In reaction to such a minimalist approach, this book stands out. It offers a distinct collection of penetrating views into boardroom practice and governance application. The editors of this book themselves have decades of board experience, whilst concurrently working as academics in universities and business schools. They and the authors invited to contribute to this collection of original works have pursued practice- oriented and doctoral research concurrently, and this has resulted in academic publications as well as the development of numerous practi- cal tools. In fact, this book is built upon the virtuous circle of ‘practice inspiring theory’, emphasising that the philosophy of theory through action improves governance application. What this book brings is a fresh look at the ‘thinking and doing’ of governance. Although politicians and corporations increasingly ‘pay more attention’ to corporate governance, there still remains the global challenge of reinventing governance structures and processes in order to cope with the breach of trust in business world over this last dec- ade. The need for repositioning traditional governance thinking and a reconstruction of what value boards bring to the complex corporation of the 21st century, is here given due attention. This book tackles the twin challenges of insightful governance think- ing and board value from two different but complementary angles. First, governance and the role of the board is examined from an ‘out- side-in’ perspective. Based on international expertise and research, gov- ernance is scrutinised within a broader framework of cultural diversity and social and political complexity. In effect, Part 1 presents a macro and holistic framework that combines the basic questions concerning the purpose of the corporation with the geo-political phenomena that confront boards of directors. The authors raise existential questions on the role of corporations in society and emphasise the need for reinvent- ing boards. In Part 2 the view offered is that of ‘inside-out’ with the focus on examining the optimal functioning and interaction of boards of direc- tors with the management, the company, the shareholders and other relevant stakeholders. The purpose behind the exploration is to high- light ways to make governance and boards more effective in the interest of long-term value creation. The perspective taken is that governance is not an end in itself, but a means to an end. The book’s path-breaking contribution is to question the belief that governance codes and public monitoring can alone bring about the necessary improvements to board functioning. The need emphasised is for more granular fine tuning of board practice to the challenges at Introduction 3 hand, rather than a cut-and-paste of international best practices. Rather than reiterating what boards and their directors should do, the contri- butions to this collection take into deep consideration the processes and qualities necessary for effective board decision-making and their crucial impact on board effectiveness. Chapter 1, by Nadeem Khan and Nada Korac-Kakabadse, examines the challenge facing boards now and into the 21st century. Particular attention is given to examining the purpose of the corporation in a global environment where the ever greater ownership of wealth lies in the hands of an ever diminishing minority, all this set against concerns of sustainability and of social and human rights. The question is asked what will the world be like in 2040 and specifically what will be the role of boards by that same year. This chapter sets the scene for the rest of the book by emphasising the need for board dialogue as a primary requirement for innovation and sustainability. Having raised such a question, Chapter 2 focuses on a particular issue of boardroom debate, remuneration. Filipe Morais and col- leagues report a study examining whether the ever greater inequality of remuneration in corporations impacts on corporate performance. The authors constructed a corporate GINI index (CGI), which high- lights that increased sales (a measure of corporate performance) leads to increased remuneration inequality between staff and middle man- agement, on the one hand, and top management, on the other. The chapter questions for how long boards can continue to ignore such trends especially when key government agencies such as the Central Intelligence Agency (CIA) are predicting social unrest as a result of greater social inequality. The theme of executive remuneration is continued but with a partic- ular focus on China. Chapter 3, Jessica Hong Yang and Nada Kakabadse, reports the results of a qualitative study of board influence and executive remuneration practice in Chinese state-owned enterprises (SOEs). The results highlight the power of the CEO in determining levels of execu- tive remuneration. The stated position is that SOE executives should be on a comparable scale with other state officials. In practice, however, CEOs of SOEs are reported to be wielding substantial influence over the board, shaping executive compensation according to their desires. Similar to findings in other studies, this preliminary study indicates that increased SOE executive remuneration is not linked to increased organisational performance. Instead non-transparent, personalised and idiosyncratic, executive-determined remuneration is the order of the day. The recommendation made is that government has to improve the 4 Andrew Kakabadse and Lutgart Van den Berghe

Chinese legal and supervisory mechanisms, as leaving that to boards is unlikely to address concerns of income inequality. Having raised fundamental questions about board capability to address sensitive governance concerns, Ouarda Dsouli, Nadeem Khan and Nada Kakabadse in Chapter 4 explore how boards could reinvent themselves in order to more efficiently address the governance chal- lenges being faced. The chapter identifies four critical characteristics determining board performance, diversity, leadership, cultural dynam- ics and sustainable innovation. A study of how boards fare along these four scorecard dimensions is reported for the 100 most sustainable glo- bal companies. The findings offer interesting insights into boardroom practice, largely determined by regulatory and cultural differences. In particular, European firms seem more concerned with board diversity and leadership than do their Anglo-American counterparts. However, the key message from this chapter is that board directors need to stand above their context and innovatively emerge with sustainable solutions that deliver value to their firm and society at large. Regretfully few boards are identified as being able to do just that. The theme of value continues in Chapter 5 by posing the question of whether board effectiveness can solely rely on attending to governance codes. The authors Lutgart Van den Berghe and Abigail Levrau acknowl- edge that a plethora of governance codes have induced a box ticking mentality amongst board directors. It is acknowledged that governance codes are a useful first step, but the need is to move beyond that taking account of all relevant contextual factors. The message is, adopt a holis- tic and systematic approach. Chapter 6 by Lutgart Van den Berghe and Abigail Levrau further pur- sues that holistic perspective by identifying a systems framework that can act as a board effectiveness assessment tool. External contrasting factors, such as regulation and societal norms, are integrated with cor- porate contingency factors, where the leadership of the board is recog- nised as the primary influence. This highly insightful chapter uniquely offers a balanced discussion between the twin outputs of governance, namely monitoring and mentoring. Having viewed governance from the outside, Part 2 analyses the main functioning of the board and discusses how these impact on the exter- nal world. Chapter 7 by Lutgart Van den Berghe and Abigail Levrau examines the tensions and trade-offs that occur on boards. The chapter emphasises that reaching consensus amongst directors is fundamental to effective board performance. However, consensus is not just about agreement but much more about how independent, free thinking Introduction 5

individuals meaningfully engage by challenging each other and yet still emerge as a collective body. Working through such contrasts requires trade-offs. Based on research and long experience, the chapter identi- fies the six cultural trade-offs that board directors need to consider. Through so doing, the reader is better able to determine the difference between negative, destructive board dynamics and positive negotiation and trade-offs in order to emerge as a more harmonious board. The capability to continuously lead through contrast and contra- diction draws attention to the need for board leadership, particularly through the role of Chairman. In fact, the remaining six chapters of this book examine the role, contribution and required leadership capa- bilities of the Chairman of the Board. Chapter 8 by Lutgart Van den Berghe and Abigail Levrau reports the results of an international sur- vey examining four key propositions, namely role, responsibilities, the nature of performance effectiveness and the need to encourage open debate amongst board members. In terms of role and responsibilities a fairly consistent picture emerges of chairmen across the world being attentive to their duties. However, in terms of communication, engage- ment and the softer side to board functioning, a more variable picture emerges. The overall conclusion is that the Chairman is pivotal in terms of influencing board and organisational outcomes and the area that most requires greatest attention is that of soft skills. Chapter 9 by Abigail Levrau and Lutgart Van den Berghe scrutinises the role of the Chairman differentiating between the internal facing and the external facing aspects of the role. It is clear that the roles of Chairman and CEO overlap and clear differentiation needs to be made between the two, particularly from the perspective of effective decision making. The authors offer a decision making grid contrasting the need for decision adoption against the concern for commitment to decisions made. The point emphasised is that board decision-making style is dis- tinctly correlated to the Chairman’s personality, disposition and values. Recognising the importance of the board chair, the authors conclude the chapter by offering 10 tips for chairmen on how to enhance their performance and in so doing, the performance of the CEO. Chapters 10 through 13 continue with the theme of what it takes to make the Chairman the effective leader of the board. Lutgart Van den Berghe and Abigail Levrau have already made the point that clear separation needs to be made between the role of the CEO and that of Chairmen in order that the leading of the firm and leading the govern- ance oversight process can be allowed to function. In Chapter 10, Chris Pierce and colleagues examine the particular case of South Africa and 6 Andrew Kakabadse and Lutgart Van den Berghe identify the Chairman of the Board as an isolated individual constantly rating their performance much higher than their other board members. The authors draw attention to the perceived social distance between the chair and other board roles and emphasise this as an area of concern that requires serious attention if boards are to be respected in South Africa. Along the same lines, Nada and Andrew Kakabadse and Reeves Knyght (Chapter 11) examine the particular circumstance of the USA. To this day, 75% of corporations have the same person as Chairman/ CEO/President. The authors question why this continues to be the case particularly in a governance climate of role separation. The qualitative study conducted by the authors concludes that the American psyche is Presidential. The one man making the key decisions is deeply interwo- ven into the fabric of the nation. Whatever governance wisdom prevails for the rest of the world, role unity is likely to continue in corporate America. Chapter 12 focuses on one particular characteristic of the high- performing Chairman, age. The study reported by Nada Kakabadse, Reeves Knyght and Andrew Kakabadse concludes the ‘older the bet- ter’. The reason? The wisdom that comes with age! The older Chairman exhibits a high level of reasoning and intellectual discourse but com- bined with a native intelligence on how to work through cultural and social dilemmas and conflicts. The outcome – ‘effective engagement’ – as opposed to the younger who are quick, mentally sharp and display how good they are, but in reality end up simply completing transac- tional deals. ‘Prophenisis’, in effect, practical wisdom, is a vital char- acteristic of the high performing Chairman. Bearing in mind that the United Kingdom has about 360,000 directors who are of pensionable age, the need to respect the particular contribution of the elderly direc- tor is now a pressing concern. The final chapter, Chapter 13, examines the particular skills of how high-performing Chairman align the varying interests of the board in order that shared and meaningful decisions emerge from the debate. The study reported highlights that the secret lies in the sharing of both positive and negative experiences with board members. In effect the legitimisation of boardroom encounters is fundamental to board members gaining the confidence to enter into open dialogue. The study emphasises that the Chairman’s balancing of powerful penetra- tive inquiry against nurturing a comfort of camaraderie, generates the positive culture necessary for open conversation. The challenge lies in surfacing inhibiting tensions, a cathartic experience, freeing up board conversations. Introduction 7

From an overview of governance and why have boards, to the par- ticular value-adding skills of the Chairmen, this book offers a unique collection of contributions that are not only intellectually insightful but are also practically useful for board directors and chairmen. From why boards, to what to do on boards, this original collection is the board members guide to making boards work. Part I The ‘Outside In’ Perspective 1 Exposing the 20th Century Corporation: Redesigning 21st Century Boards and Board Performance Nadeem Khan and Nada K. Kakabadse

Introduction

Governance oriented boards are prevalent across different economic systems (Hall and Soskice, 2001), cultures (Hofstede et al., 2010) and national boundaries (single/dual structure) in which they are the lead- ing clique within private, not-for-profit, public and hybrid organisations (Hermalin and Weisbach, 2003). Their purpose goes beyond regulation (Aguilera and Jackson, 2003), ameliorating the agency problem (Fama and Jensen, 1983; Berle and Means, 2009/1932) or shareholder wealth maximisation (Friedman, 1962) to balancing society’s needs and wants in a virtuous and accountable manner (Aristotle, 384–322 BCE; Smith, 1759). However, the emerging wider impacts of the corporation sug- gest deep concerns about the performance and management of board- directed organisations with respect to market dominance (Kim, 2012), lobbying dynamics (Child et al., 2012), board remuneration (Gregory- Smith and Main, 2012), financial management (Berger et al., 2012), competitive behaviour (Porter, 2009) and political power struggle issues (Cutting and Kouzmin, 2002). In this regard, we know very little about boards themselves, as they have operated largely behind closed doors (Useem, 2003) and have tra- ditionally had little active involvement in a corporation’s daily affairs (Scherrer, 2003). More importantly, we cannot understand boards in isolation (Useem, 1980). We require a holistic lens to critically appreci- ate the historical development, ongoing selective influences (Lewin and Volberda, 2003) and geo-political factors at play before peering into the boardroom itself to understand the detailed processes and issues that make a board work.

11 12 Nadeem Khan and Nada K. Kakabadse

An overview of the corporation

Take care of Fire, learn from Water, co-operate with Nature. Motto of Hoshi Ryokan, 718 A.D. World’s oldest currently operating company (46 generations) The world’s oldest continuously operating family firm, Buddhist tem- ple builder Kongo Gumi, closed in 2006 after 1,400 years. The firm had succumbed to an excessive $314 million debt, which resulted from the 1980s property bubble, coupled with social change in Japan (The Economist, 2004). Takamatsu Corporation purchased the assets. Thus, the prestige of this title has been passed to Hoshi Ryokan (718 A.D.). In this regard, family businesses have outlasted governments, nations and cities (O’Hara and Mandel, 2004) and contribute 70% to global GDP (Family Firm Institute, 2012). However, only 16% survive beyond a gen- eration (Davis, 2012). In the 20th century, some of the survivors have emerged as corporations benefitting from financially liberal market forces (Useem, 1980). In this regard, the world’s leading 2,000 corpora- tions currently employ 83 million people, have $149 trillion in assets and generate $36 trillion in revenue (Forbes, 2012). However, although these corporations represent 46% of global GDP (Economy Watch, 2010), one-third of the Fortune 500 corporations that existed in 1970 disappeared by 1983 (Investopedia, 2011). The term ‘corporation’ derives from corpus, the Latin word for body or body of people, or corparoe, the Latin word for physical embodi- ment. The essence of body of people infers communities, shared col- laborative understanding and common purpose. We can recognise the holistic embodied form whereby the parts contribute to the whole. In the historical business context (Hickson and Turner, 2005), Roman law (500 B.C.) recognised a range of corporate entities which included state and private bodies (universitas; corpus; collegium) in commenda form, or simply stated, a form of trust in which one delivered goods to another for a particular enterprise. We associate the modern context of the ori- gins of the corporation (Brown, 2003) more so with feudal and monar- chist governments that introduced legislation to enable shareholding. Mercantilism was alive and well. An example is Russia. In 1557, this nation granted monopoly rights for trade functions and risk manage- ment. The British East India Company was an English and later (from 1707) a British joint-stock company and megacorporation that pursued trade with the East Indies, but which ended up trading mainly with Exposing the 20th Century Corporation 13 the Indian subcontinent. The American government enacted the first limited liability law in New York (1811). This concept eventually spread to the UK in the form of the Limited Liability Act of 1855, and further across much of Europe. As such, Stora Kopparberg is one of the oldest industrial corpora- tions. Established in a copper mining community in Sweden in 1288, it merged with Stora Enso, the Finnish integrated group of companies, in 1992. The historic mine has become a UNESCO World Heritage Site in 2001. We note that Adam Smith wrote his Wealth of Nations (1776) not long after the East Indian Company’s 1772 collapse. By the begin- ning of the 19th century, the US and UK governments had granted increasing rights and progression of legislation in their charters along with associated governance of these bodies. Interestingly, Berle and Means published their seminal work, The Modern Corporation and Private Property (2009/1932), not long after Black Tuesday (29 October 1929). Thus, over time, the corporate charter has developed, while the essence of collaborative purpose and communities has degener- ated, leaving the corporation to become an artificial, transferable and immortal legal entity separate from human form along with its accountability and regulation of behaviour. The recent 2008 Global Financial Crisis (GFC) may provide us with an opportunity to recon- sider The Wealth of Nations (Smith, 1776) and the board’s role (Berle and Means, 2009/1932) from a new perspective as the characteristics of the corporation (Table 1.1) appear to be at odds with its purposeful function in society.

Table 1.1 Internal corporate characteristics

Twentieth-century Characteristics Purposeful function corporation

Board structure Human entity Legal entity Cultural dynamics Collaborative within society Monarchist/ feudal Diversity Stakeholders Shareholders Leadership Accountability to society Control of society Sustainability Beneficial trade Risk management Innovation Purposeful value Financial enhancement

Source: Designed by authors. 14 Nadeem Khan and Nada K. Kakabadse

Corporate cyclical change

Merck is the oldest chemical and pharmaceutical company which dates back to 1668 (Germany), whilst in the United States, some of the oldest companies include General Electric (1876), Bank of New York (1784), Cigna Insurance (1792), JP Morgan (1799) and Dupont (1802). Interestingly, a recent Japanese database survey by Tokyo Shoko Research (2009) of 2 million companies determined that 21,666 companies are older than 100 years. Further, according to the Bank of Korea, firms older than 200 years include 3,146 Japanese firms, 837 German firms, 222 Dutch firms and 196 French firms. Notable UK firms include the Royal Mail (1516), Bank of Scotland (1695), Oxford University Press (1586), Schweppes (1783) and Harrods (1835). This makes today’s household corporate names such as Microsoft (1975) and Facebook (2003), which boasts 1 billion users in 2012, the new chariots of global cyclical technological change in society. We may ask, had it not been for those years ago, teenagers Bill Gates or Mark Zuckerman, would we be just replacing the names or the phenomena? What forms will these or new emerging corporations take in a hun- dred years from today? Nevertheless, our society’s corporate elders, such as the China Gas Company (1862), Nestle (1866), Hong Kong and Eu Yan Sang (1873), Unilever (1885), Great Eastern Life Assurance (1908), IBM (1911) and Rolls Royce (1914) and their extended economic supply chains and net- works across the globe are continuously challenged to innovate and renew their value to society (Schumpeter, 1934) or suffer the ecological inevitability of systemic rebalancing (Adner and Kapoor, 2010; Kapoor and Lee, 2012). In the 21st century post-GFC era (Knyght et al., 2011), this is evident in the nationalisation and collapse of the banking sec- tor. Take for example, the Royal Bank of Scotland, which is now 82% owned by the UK government, whilst Lehman Brothers became the largest bankruptcy filing in US history and Northern Rock had a bank run on 14 September 2007 as news spread that it was seeking emer- gency funding from the Tripartite Authorities. Lloyds TSB, founded in Birmingham, UK, in 1765, and the US-based Citibank, which began in New York in 1812, are both among the wounded. Since the finan- cial crisis implosion from within the United States in 2008, 457 Banks just within the United States have failed (Federal Deposit Insurance Corporation, 2012). Beyond the corporate institution, in highly regulated, educated and developed 21st century societies (Table 1.2), it seems very odd that Exposing the 20th Century Corporation 15

Table 1.2 Externalities of the corporation

Board externalities Firm impact

Country Political culture and nature Industry Competitive innovation

Source: Designed by authors.

government institutions can freely create excessive debt (The Economist, 2012) without society questioning the decision makers about where the money is coming from and under what terms. Take for example, Greece, Ireland, Italy and Spain, who in recent months have all sought extended bailout funds from the European Central Bank (ECB). The United States recently announced its third quantitative easing programme (Katasonov, 2012) and critics have pointed to Greece’s recent bailout as the nation continues to maintain a proportionally large defence budget (Lendmenl, 2012; Smith, 2012). Whilst neo-liberal governments continue to increasingly burden the next generation’s tax payers, fore- casts suggest that just to reduce national debt to 60% of GDP, which economists regard as a manageable level, will take Japan until 2084, Italy until 2060, France until 2029 and the UK until 2028 (Ventura and Aridas, 2012). The deeper question is whether democracy is work- ing – considering that start-up businesses cannot obtain loans, but bank bailouts and government debts are spiralling. Further, it appears that the only real dialogue of value in competitive democracies takes place just before an election. As such, during 2008–2012, governments spent an extra $2.4 trillion due to the GFC, of which $1.9 trillion went to developed countries (two- thirds of this to banks). In contrast, the $500 billion that governments spent in developing countries went to manufacturing, education and health industries. In the East, although the Chinese and Indian econo- mies have recently benefited from the extended forces of neo-liberalism (Xu, 2011) and mass consumerism (Gerth, 2010), the concern is whether capitalistic history is repeating itself within these highly populated regions of the world. Is the East learning from the West’s sharing of ecological/technological advanced lessons? What are the far-reaching global impacts as the current growths of these economies slow down to reveal a new reality? In 2010 the developing countries China, India, Thailand, Indonesia and Malaysia received greatest inflows of capital and grew by an average of 8.4% (Forbes, 2012). We note the ongoing global economic hubs’ transition towards the East (Wolfensohn, 2010) 16 Nadeem Khan and Nada K. Kakabadse as evident by Petro China becoming the first $1 trillion corporation (Seattle Times, 2012) and the world’s largest global corporation in 2007 (Stainburn, 2012). In contrast, the US debt is officially at $16 trillion (2012) and a recent report has posited that it may more realistically be $50 trillion (Campbell et al., 2012).

The corporate geo-political phenomena

For us to have a deeper understanding of these social, natural and scien- tific phenomena, we must appreciate that the catalysts for 20th century corporations to develop have been major global events such as European feuds (World War I), emerging nationalistic tendencies (World War II) and apartheid in South Africa (1848). Over the centuries, these events have crystallised from within the complex Anglo-American bilateral relationship (1607–present) and European colonial intentions towards resources (Dutch, French, UK), among other geo-political shifts within society (Useem, 1980). However, the associated costs have been con- siderable and long-lasting. We have seen 160 million war casualties in the 20th century (Scaruffi, 2009). At the same time, renewed indus- tries such as textiles, railways, coal mining and information technology have spawned and expanded. The academic literature in Western management commonly refers to the corporation (Drucker, 1972) and its internationalisation patterns, exemplified by the East Indian Company (1602–1778), from an economic shareholder perspective (Friedman, 1962). In this respect, the more open-minded and liberated scholars have appreciated and progressed the more meaningful notion of stakeholders (Freeman et al., 2010), whilst corporate spokespersons have adopted politically engaged terms such as corporate social responsibility (CSR) (Carroll, 1999, 2008; Matten and Moon, 2008) and citizenship (Palazzo and Scherer, 2008) to their advantage. Stewardship (Davis et al., 1997; Donaldson and Davis, 1991) has compounded the natural tension of the agency problem (Berle and Means, 1932; Jensen and Meckling, 1976). This has resulted in an epis- temological and predominantly quantitative interpretation of competi- tion (Porter, 2009) by corporate boards and their resulting compounded structures. Therefore, at the dawn of the 21st century, incentivisation has become a sophisticated numbers game where targets and league tables measure performance (Forbes 2000; Fortune 500; IMD, 2012). More importantly, society’s capitalistic culture fosters an agenda of class division that is based on material wealth and segregation. Although capi- talistic and socialist systems offer opportunities, they are also inherently Exposing the 20th Century Corporation 17 open to cronyism and corruption which limits life-changing and world- impacting opportunities. Perhaps an equitable balanced system which avoids extremes may offer an integrated way forward. The intensification towards extreme environments coupled with the competitive nature of corporations has contributed to the deep- rooted oligopolistic practices (Akehurst, 1984) we observe. The cor- poration engages networks to protect her interests against societal pressures. This is exemplified by the formation of the National Foreign Trade Council (NFTC), founded in 1914 for the political lobbying of American corporations. In extreme cases, or hostile environments where lobbying may not work, corporations have engaged private independent agents in support of their agendas. Recently, Stiglitz and Bilmes (2007) identified that private security guards working for Blackwater and DynCorp earn $445,000/year compared with an American Army sergeant who receives $69,350/year. In this regard, the Business and Human Rights Resource Centre (2012) has expressed growing concern about human rights abuses by corporations such as Pepsi in Honduras and Shell in Nigeria. These are only two examples of a long list of cases. Analysts have also closely linked corporations such as Halliburton, Chevron and Lockheed Martin to politicians such as Dick Cheney and Condoleezza Rice. In consideration, we note that the dominant ideologies of the 20th century have been capital- ism and communism (Marr, 2012) whilst at the same time, the largest exporters within the global arms business in 2009 were America (31%) and Russia (20%) (Singh et al., 2011). Thus far, throughout economic cyclical changes (Schumpeter, 1934) and societal impacting geo-political shifts, corporations seem to emerge ever stronger. As of 2000, 51% of the largest global economies were cor- porations (Anderson and Cavanagh, 2000). One of the major events in the early 21st century was the 2008 GFC. Legislative reform beyond the financial crisis emerged in the form of the Dodd-Frank Act (Obama, 2009/2010b), which in the United States included the Volcker Rule (Obama, 2010a). This Act has brought significant changes to financial regulation in America where the Volker Rule specifically aims to mini- mise conflict of interest between banks and their clients. In the UK, this has translated in the ring-fencing of retail banks from investment banking (Vickers, 2011). Ring-fencing occurs when a company finan- cially separates a portion of its assets without necessarily operating as a separate entity. This could occur for regulatory reasons, for creating asset protection schemes with respect to financing arrangements or seg- regating separate income streams for taxation purposes. 18 Nadeem Khan and Nada K. Kakabadse

In this respect, interestingly, from the late 19th century until the 1970s, bank assets as a percentage of GDP in the UK remained steady at around 50%. However, by 2006, this had climbed to over 500% of GDP (Prieg, 2011). Therefore, UK financial sector assets in relation to GDP were and are higher than most other countries. Further, in 2009, the UK pledged 101% of GDP in support of the banking sector, which is the dominant service sector fiscal contributor, whereas other nations such as the United States (42%), Germany (27%) and Japan (21%) contrib- uted less. Simultaneously, over 50% of donations to the Conservative Party during 2009 and 2010 came from the City (Watt et al., 2011). Irrespective of financial restructuring in Anglo-American capitalistic environments (Hall and Soskice, 2001), corporations have extended their dominance whereby 95 out of the top 150 economies (63%) are corporations (Butler, 2005) and the question arises, ‘Are corporations more powerful than countries’ (Faroohar, 2012)? More worryingly, it seems as though corporate scandals such as Enron (2000) and News Corp (2011) are more a costly media justification of unaccounted events, whereas politicians seem to be embroiled in the web themselves (Expenses scandal; Watt and Newall, 2012), which is extending to new money markets (Bo Xilai scandal, 2012). In this regard, the corporate elites’ or business aristocracies’ interlocked networks are passing to the next generation (Useem, 1980). Thus, in 2012, the language of corporations is transitioning into renewed notions of sustainability (IMD, 2012), the green agenda (United Nations, 2012) and globalisation (Hopkins, 2011) as the Davos dilemma of whether nations can bridge the divide of the world’s political and economic forces unfolds (Khan et al., 2012). In this respect, the current geo-political forces (World Economic Forum, 2012) have emerged in the so-called democratisation of Iraq (Selim, 2012), Egypt (Harvey, 2012) and Libya (Van Genugten, 2011), which was encapsulated within the Arab Spring (Peters, 2012). As the conflict of Afghanistan is in demise (Pierce, 2011), an increasingly intensified conflict is unfolding and escalating within Syria (Brown, 2012; Ryan, 2012). Within Europe, a forced integration of countries, as a result of the Eurozone, is seeking to protect the Euro from collapsing (Moravcsik and Sangiovanni, 2003; Ryvkin, 2012) as disorientated societies such as Greece remain frustrated (Krugman, 2011). Further, the divide between the richest (Qatar) and poorest (Democratic Republic of Congo) nations on earth remains high (Pasquali and Aridas, 2012). Simultaneously, ecological natural phe- nomena continue to impact larger pockets of humanity. Most recently we have seen the 2011 Tohuku earthquake and tsunami in Japan, the Exposing the 20th Century Corporation 19

2010 Canterbury earthquake in England and the 2012 Hurricane Sandy, which hit the United States’ East coast with significant destruction in New York and New Jersey.

The purpose of the corporation

The global challenges in the second decade of the 21st century include rebalancing the corporate firm within society (McKelvey, 1997) where we ask, ‘What really is the corporation’s purpose within our society?’ At a global level, current unemployment has reached 200 million (International Labour Organisation, 2012), of which 75 million are youth (under 24). The International Labour Organisation forecasts the necessity of 600 million jobs in the next decade. The risk is that each corporate giant employs hundreds of thousands of people. The global retailer, Walmart, employs 2 million in the United States alone, whilst the largest employers in the world are currently the US Department of Defence with 3.2 million employees and the Chinese Army with 2.3 million. Seven out of the top ten employers are state companies and half of them are from China. There are also one in three workers who live on less than $2 a day (International Labour Organisation, 2012), in comparison with the six-figure salaries that board executives of cor- porations enjoy (FTSE 100; Dow Jones 30). The deeper concern here is that this is not restricted to developing / developed nations as 1.5 mil- lion American families with 2.8 million children are among the $2 a day bracket (Luhby, 2012). In contrast, the largest corporate salary in 2011 was $137 million for the CEO of Simon Property Group (Business Insider, 2012b). Looking through a wider lens further indicates that resources such as water will become scarce in parts of the world if we do not urgently take action (Scheffran and Battaglini, 2011). Our destruc- tion of the planet has reduced tropical rainforests by 50% and increas- ingly urbanised cities are consuming 75% of global energy and 80% of CO2 emissions, which we can attribute to just 19 countries (Earth Observation Handbook, 2012). Presently, only 2 billion people have access to adequate energy and 1.3 billion have no electricity (Schnieder Electric, 2012). Scholars cite the 1920s depression in an attempt to explain the phe- nomena of dwindling resources and financial collapses (Thirwell, 2010; Skidelsky, 2011). Whilst the Gates Foundation points to population con- trol (MacAskill, 2012), other organisations and bodies focus on envi- ronmental costing such as carbon taxes or competitive indices, such as the Yale based Environmental Performance Index (EPI), American 20 Nadeem Khan and Nada K. Kakabadse

DowJones sustainability index or UK FTSE4Good index, to rebalance human life on planet Earth. However, systemic failure is apparent, as most recently the techno-giant Apple paid less than 2% taxes on its profits outside the United States despite an earnings surge of 50% to $37 billion in 2012 (BBC News, 2012). Thus, the current fiscal structure oddly continues to favour corporation against society. Therefore, the fundamental question for us is, ‘What is the corporate firm’s purpose?’ To achieve a more holistic understanding of the social phenomena which we call the corporation in the 21st century (McKelvey, 1997), we propose an alternative and innovative lens through which we should view it. This must include all global societies where we reverse the pyra- mid and give the base priority. In this way, our planet’s weakest socie- ties benefit from the most investment. Second, we need to understand the corporation substantively (Kakabadse and Steane, 2010), whereby rationality includes ethics (MacIntyre, 1981; Dsouli et al., 2012) and the corporation is a work entity that consists of humans (Heidegger, 1927). In this respect human communities have a responsibility to other human societies and to the well-being of the planet itself. Therefore, people conducting business activities have virtuous purpose (Malloch, 2008) in supporting ecological and human flourishing (Karn, 2011). Third, history is situational (Irwin and Winterton, 2011) and offers insight into understanding experiences as social phenomena (qualitative) in a predictive capacity whereby developing history will be the judge of actions. Pivotal to this is the notion of public trust within relational exchange environments (between corporations and society), which has deteriorated to low levels globally (Bolton et al., 2009; Edelman Trust Barometer, 2012). This is a timely opportunity for societies to renew their charters and trust with corporations with respect to the practice and the conduct of business. In Figure 1.1, the left side represents tangible physical and economic forms which we can attribute to the corporation. The right side rep- resents intangible values such as morals, ethics and well-being. The board has responsibility to the development of the firm along with a wider commitment to societal obligations. In this respect, the board of directors of the eco-corporation must provide sustainable solutions for which they are accountable to society. There also is opportunity to reconstruct how corporations create boards’ incentives based on a com- bination of performance measuring factors which will drive eco-com- petition. Societal corporate governance may foster better transparency and planning of the renewal process where the existing corporation may fulfil its purpose as a cash cow for innovation. The benefit for