Boards, Corporate Governance and Company
Valuation
The conventional view of company valuation is
that it is determined by a complex amalgam of product, market and
management. How does the board impact company valuation?
If there were a linkage, this would have an
enormous impact on board selection. This in turn would have an
impact on corporate governance, since, if it could be shown that
selection of the wrong board members lowered returns to
shareholders, corporate governance would require that there be a
formal process for their selection.
The emerging consensus is that boards need to
be designed from the ground up so as to achieve the particular
objectives of the company, in a strategic sense. A good example is
the recent interview with Jay Lorsch, Professor of Human Relations
at Harvard
Business
School, and a recognized
expert in corporate governance. (Allio, R., “What’s the board’s role
in strategy development? Why you need to redesign your board of
directors.” Strategy and Leadership. Vol. 32, no. 5, pp.
34-37. www.emeraldinsight.com/sl.htm).
But this emerging consensus has been based partly on a
negative approach – avoiding the scandals that have plagued so many
companies over the past few years. The positive reasons for so dong
have been less aired.
Board members are frequently selected since
they are known to the CEO, they are major shareholders, or they have
trophy value. What happens if they have personal capabilities that
are not congruent with the need to maximize the valuation of the
company over the longer-haul?
Under Sarbanes-Oxley, board members have
become more important. They have a role that is independent of the
CEO. Their legal liability in the case that they do not fulfill
their obligations as a director has skyrocketed. Their role in
making strategy has increased. They have thus been elevated in
stature relative to the CEO. Does it therefore not make sense to
ensure that their selection involves factors other than those
traditionally used in selecting directors? And, possibly, that their
selection requires the same sort of formality that is involved in
selecting the CEO?
Our research links the personal profile and
the financial signature™ of company leaders to the outcome and the
valuation of an organization. The board member is an increasingly
important member of the top leadership team of companies. The
personal profiles and financial signatures™ of these directors is
increasingly a key driver of company outcome and
valuation.
Increasingly the redesign of boards must
include assessment of the capabilities and financial signatures™ of
board members, as well as top executives, to see how and to what
extent, they can contribute to the long-term improvement of the
value of the company.
To the extent that it can be shown that a
company ignored such considerations, to the detriment of shareholder
value, this would constitute a failure in corporate
governance.
The conventional view is that the aim of
corporate governance is to ensure transparency of internal processes
so as to improve them and thus company value. The implication of our
research is that transparency in human resources, including
leadership resources, is just as, if not more important than,
transparency in financial and other internal process.
If transparency in human resources does not
exist, shareholders cannot really assess the capabilities of the top
leadership. In this case, they can not render an objective and fair
judgment as to how the top leadership of a company, including its
board, will impact its future value. Lack of transparency in human
resources ultimately means that shareholders do not have a level
playing field.
Recommendations
-
Know your board members - preferably
through formal assessments such as those from the Perth Leadership
Institute.
-
Understand how board
composition will add to company value, or otherwise.
-
Design your board so
as to bring about the maximum valuation impact.
-
The same thing goes
for your top management
team.
