The Right Corporate Governance (ePub)

right approaches and what wrong ones are, what is feasible and what is not. From an outsider's point of view, it is impossible to make a reasonable judgment of the professionalism and effectiveness of such panels; much less is it possible to form an accurate opinion based on the numbers in published accounts. External ratings are therefore presumptuous. But even supposedly scientific surveys, though they may be based on interviews with experienced individuals, do not permit an objective, fact-based judgment. It is my contention that, in the absence of any personal experience, it is impossible to acquire a sound knowledge of how top management bodies and corporate governance function and that, consequently, it is just as impossible to judge them or make workable suggestions for improvement. The information required in order to do so - not to mention the necessary theoretical knowledge - can only be gained in many years of active participation in such bodies in a responsible function, preferably not only in good times but also in periods of crisis. I have repeatedly experienced such crises, and there have even been cases where the problems were beyond solution because earlier mistakes and failures had done too much damage. It is only in situations like those that one will truly experience the reality of corporate governance, and that the true nature of those in charge, their skills, character traits and personalities will be revealed. This is where courage and cowardice, competence and failure come to light - and where it is made very clear what true leadership is, as opposed to the naïve and deluded theories that have become fashionable; for it takes a crisis to prove true leadership. It will become evident what works and what doesn't when there is maximum complexity, dynamics, and risk. In circumstances like these, people learn to appreciate the value of knowing the laws of science, which reliably help us to master complexity and to find solutions even where others have long given up trying. With existing corporate governance and the constraints it imposes on management bodies, it is possible neither to master a crisis nor to take advantage of entrepreneurial opportunities - which is just as important. This book was written at the time when the general corporate governance debate was beginning to intensify. Back then I already had plenty of hands-on top manage­ment experience, which I had gained by closely working with companies and corporate leaders, actively participating in top-level management boards, and pursuing my own entrepreneurial activities. Its substance is still valid today. Some of my key suggestions have been taken up by practitioners, for instance with regard to the size and composition, workings, and management of supervisory boards. Another thing that has largely been implemented is the much-needed two-tier structure of corporate governance, which has been fully established in the UK but not in the United States. In other crucial points, such as the substance of right and good management, current corporate governance practice is still off the track or has not found the courage to formulate clear statements. I have added a new introduction to this book in chapter 1. It should help readers to get an overview of the major developments that have taken place since the book was first published, and what developments have been missed. Apart from this book's practical relevance, the reason it remains valid and relevant is that the issues it deals with differ greatly from those generally addressed in the general corporate governance debate. The central question here is: what is right and good corporate governance? In other words, this book is about what top managers need to do to ensure proper corporate governance. That is in stark contrast to the prevalent view of governance, which chiefly focuses on legal and financial aspects. My aim is not to remind readers of the formal rules of the Stock Corporation Act; rather, I am getting deep into the question of how companies, and thus the business world as a whole, can function properly in a society and a world that are increasingly complex. Needless to say, good corporate governance will always occur within the boundaries of the relevant legal framework, and will always have to involve financial considerations. Both, however, must be derived from a concept of right governance, not the other way round. After all, the success of corporations is a result of their standing the test of the world market - with globalized business, science, and technology changing at an unprecedented pace, combined with the realities of a radically transforming society. Business success is never a result of a company's abiding by the law, the basic principles of which (despite numerous amendments) go back to as far as the early 20th and even the 19th century. In other words: the provisions of the law and the corporate governance codes will have to be adapted to the functional principles of institutions that form parts of highly complex global systems, not vice versa. The functional principles of mastering complexity are governed by the laws of nature, just like the functional principles of technology. And the laws of nature cannot be changed with legal provisions and codes. Wherever this simple fact is not accepted, there will soon be no business sector at all, nor a functioning society, because other countries are able to shape their rules with a view to the future and to align their institutions with the complex circumstances of the 21st century, not with the past. This book, and my entire work for right and good management, have been influenced by my day-to-day work with practitioners - top managers, entrepreneurs, and those working with them most closely - as well as by my own activities as an entrepreneur and as the owner of the largest and leading Swiss firm in the field of top management consulting and education. In over 30 years I have probably met more executives than most other people ever will, working with them, giving them advice, and training them in all matters of corporate general management, corporate policy and strategy, structural and organizational issues, corporate culture, and in building top management teams as well as functioning governance bodies. The positions I espouse in this book have proven their worth in hundreds of cases, having been applied in cooperation with managers and entrepreneurs. As for the scientific basis for these views, I provided them in my 1976 professorial thesis entitled Strategie des Managements komplexer Systeme ("Strategy of the Management of Complex Systems"). In the same thesis, I also explained and provided my reasoning for why cybernetics, as a science of control, regulation and steering, is the only valid foundation for functioning management and why the economic sciences fail to provide that foundation. Ever since then, building on the foundations laid in my thesis, I have developed and tested a comprehensive, universal, and modular general management system, published it in several books, and created the organization required for its implementation, with the world's largest staff of general management experts operating from an international office network. The rapidly increasing complexity of all societal systems calls for professionalism in the management profession, applying technical and conceptual standards of the kind that has long been known for all sophisticated professions. There should be no room for wrong theories, for fashions, and for rotten compromises. Functioning reliably under the conditions of high and increasing complexity should be the maxim for the 21st century: this is how we can prevent evolution from being destroyed by stagnation or revolution. June 2008, Fredmund Malik

171 2. Designing the Supervisory Body 176 Tasks of the Supervisory Body 177 Size and Internal Organization of the Supervisory Body 183 Composition 187 Compensation of the Supervisory Body and the Principal Agent Theory 198 Management of the Supervisory Body 200 Evaluation of the Supervisory Body 209 Management Audit 210 The Chairman of the Supervisory Body 212 3. Design of the Executive Body 218 Tasks of the Executive Body 219 Effectiveness of the Executive Body 227 Term of Office 230 The Executive Body as a Team 233 Executive Pay 239 Pseudo-Justification by the Market 240 A New Beginning for Managerial Income 241 4. Management or Leadership 245 Errors and Misconceptions 245 Mystification by Attributing Characteristics 249 From Manager to Leader 251 Charisma 260 5. Power, Responsibility, and Liability 262 Duty of Care Is Not Enough 263 The Issue of Liability in an Employee Organization 265 Groundbreaking Examples for Liability Regulation 266 6. Selecting Candidates and Filling Top Positions 269 Four Risks in Top-Level Personnel Decisions 269 Seven Principles for Good Personnel Decisions 272 Methodology of Personnel Selection 275 Succession Decisions at the Top 281 Personnel Decision Outside the Executive Body 283 Recruitment From Inside or Outside? 284 Epilog 287 Appendix: Appearance and Reality 289 Appendix 2008: Germany - Healthier than People Think 301 Bibliography 315 Index 317