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Strong Foundations for Corporate Governance

  May 31, 2013
 

By Dr. George Njenga – Deputy Vice Chancellor, Strathmore University and Dean, Strathmore Business School

Corporations have been a resource and asset for great nations and communities. There are nevertheless some corporations that have caused great havoc to communities. There comes to mind the failure of banks across countries that have been the bane of many people poor and rich, men and women alike. The failure of companies like Lehmann Brothers, Trade Bank, Kenya Finance Bank, Enron have caused great financial losses for communities. The global financial crises, before and after 2008, made nations like Iceland almost go bankrupt. In the United States of America, President Obama presided over the rescue of more than five banks that cost the citizens of that country several billion dollars. Billions of taxpayer dollars were paid to rescue AIG. This company and their ilk are a symbol the decline of a number of nations. AIG destroyed itself pursuing phantasms. It speculated away the “nation’s estate” at a time we all thought of the unthinkable; the waning days of the American Empire.

It sounds calamitous and one need not go that way. Just as there have been bad men and women in society, causing it greater or lesser harm, companies alike have caused greater or lesser disaster. Likewise if illustrious men and women like George Washington, Franklin D. Roosevelt, Gandhi, Winston Churchill, Nelson Mandela, Buddha, General de Gaulle, built great nations, there were men who built great companies. Darwin Smith became CEO of Kimberly-Clark in 1971. Wall Street analysts and the business media derided his decision; they were certain it would fail. Smith, like Socrates, did not consult the mob for its opinion. He built an enduring company. In June 1940, utterly alone and in exile in England, General de Gaulle gave the world a powerful lesson in hope. “I seemed to myself, alone as I was and deprived of everything, like a man on the shore of an ocean, proposing to swim across” (The Complete War Memoirs of Charles de Gaulle). Nevertheless, he responded to the call of destiny, never doubting his ability to rally the French nation to resistance and lead it to victory.

Corporations are a necessity of human life and society. We corporate or we die or destroy ourselves. Positively speaking, we need corporations that build the common good of society. Greed is esteemed as a great asset by some but history tells us of the disasters awaiting those who follow it. These great men and women who have left us a credible evidence of the resilience of man against the stark difficulties of their nemesis, that is, evil men and women; they leave us no doubt that corporations need to be made of the same resilience. They may be the likes of Hitler or those who brought Enron down destroying so many lives in their wake. Corporate governance is not just about building the wealth of capitalists. It is also about the common good of nations and the earth.

Governance of corporations demands greatness in the agency of executives who run companies on behalf of their principals. But there are other factors that need consultation and analysis because they enhance of destroy governance of corporations. Primary among them is the virtue of the men and women who make up corporations. If these are rotten apples and full of greed in themselves and for their principals then the corporation will always be destroyed in the long run. In the short run it can make money. In the long run debt is left to those who come after; their children suffer in the long run. This applies to nations, communities, corporations or individuals alike.

Succession is also a fundamental issue in addition to corporate governance. If a founder or entrepreneur does not leave a great legacy and succession to go with it, then the company will fall into the hands of the wolf men. That is, those men and women who know nothing of the sacrifice that goes with building a nation or a company. All they want is money and more money and have nothing to do with building society. That is why much more than legislating corporations ad infinitum is not a solution. The solution lies in the men and women we educate for our future. Bad education and instruction cannot produce great returns. 1000 laws to incarcerate and organize a weak person is much like adding more and more fertilizer and phosphates of all kinds to dead soil and poor plants. Their productivity will only be superficial and not resilient in the long run.

Therefore, I hail those great men and women of law who like their predecessors in the past think that the greatest leader is the one who makes the good law. Good laws are necessary. The Capital Markets Authority, the Company’s Act, the Securities Exchange Commissions, the Corporate Governance Centers and so on are important for organizing corporations and ensuring governance. But they didn’t stop the likes of Enron or the financial crisis, both born of the same stuff; greed. Neither will they stop the wilting companies that fall on the hands of lesser men and women who succeed great entrepreneurs.

Like my friend Alexander Havard says, we need magnanimity and we need to educate and instruct in magnanimity. Magnanimity is a longing for greatness—a burning desire, a sacred quest, an aspiration. Magnanimitas, the Latin word coined by Cicero in 44 B.C. to render the Greek megalopsychia, is equivalent to magnitudo animi, observes Aquinas, and animus implies irascible power, the instinct for combat and conquest. Magnanimity is the virtue of aggressiveness; it is ever prepared to attack, to conquer, to act with the impetuosity of a lion. However, Magnanimity is the conquest of greatness. It is not content to initiate; it achieves. It is not content to aspire to greatness, but to attain it. It is like jet fuel: it is the propulsive virtue par excellence. Magnanimity is the virtue of action; there is more energy in it than in mere audacity. The magnanimous person achieves self-fulfillment in and through action. He gives himself over to it with passion and enthusiasm. Roosevelt wrote The Soldier of Freedom, a book that won both the Pulitzer Prize and the National Book Award. As a political scientist he co-authored (with Tom Cronin and Jack W. Peltason) what became the most widely used text in American government, Government by the People. But he wrote too with the sweat of his brow and the work of his hands.

On the other hand, although few crises seem inevitable, this is so only in retrospect: over-optimism in inferring the future from good times will surely recur. Moreover, all solutions carry costs, and one must proceed in the anticipation that for every regulation there will be an innovation; says the International Monetary Fund (IMF). And they add that the perimeter of regulation and supervision should be extended to ensure that all activities that pose economy-wide risks are covered and known to a systemic stability regulator with wide powers.

With regard to compensation for those who take on the powers of prosperous companies let us be reminded by the IMF that the widespread practice of rewarding employees based on the generation of annual profits had pro-cyclical effects. There were large payouts to traders and managers who found high yields in leverage and riskier activities in the upswing, but did not face the losses still to appear in the downturn in the long run. Top management were insulated from the consequences of bankruptcy, reflecting the limited liability of corporations. In other words, if people do wrong things then they should pay for it. We cannot relax this rule to allow men and women who break societies and communities go without punishment. But we must reward those who build society and corporations.



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