Corporate governance designed for yesterday and facing today’s challenges

If corporate governance is struggling to respond to today’s challenges, it is neither an accident nor the fault of those supposed to make it work. It is in fact the product of a historical, cultural, and economic construct that has shaped ways of thinking, operating, and reacting that are often ill-suited to today’s world.

This article could have been called “Governance from the dinosaurs to the present day”, but I decided to be serious and not follow the advice of a friend, which was not very helpful. The aim here is to understand how we got to this pointand why governance is changing so little, failing to adapt, and why, ultimately, its limitations are structural rather than cyclical.

In short:

• Current corporate governance is the result of a historical legacy designed to secure capital, which limits its ability to adapt to contemporary challenges.
• Despite rhetoric that values stakeholders, the dominant logic remains focused on shareholders and profitability, often at the expense of other priorities.
• Successive crises have revealed governance flaws, but the responses have been limited to regulatory additions without structural transformation of the system.
• Governance mechanisms resist change because of their design, the training of their members, and a culture of compliance that discourages experimentation and openness.
• Faced with today’s complexity (time gaps, information overload, digitalization), governance is showing its limitations by lacking agility, shared meaning, and collective interpretation skills.

Governance historically designed to secure capital

Modern governance dates back to the 20th century and stems from the need to establish a peaceful relationship between shareholders and managers. The aim was to put in place control mechanisms to ensure that the latter served the interests of the former.

Nothing could be more normal up to that point.

But that was when the worm was let into the apple: governance took the form of a system of monitoring and auditing accounts, with supervisory boards (aptly named), boards of directors, various committees, audits, and reporting. Everyone monitors everyone else, and the goal is not to work together for the good of the company but, of course, to protect the capital invested by ensuring that it is used in the best possible way. This often means taking the least risk.

This logic remains at the heart of many governance structures today, even in modern companies that claim to be open, responsible, or “mission-driven.”

You might say that the problem lies more with investors than with managers, but the fact remains that it exists: we focus first on securing profitability and then add social or environmental considerations as long as they do not disrupt the model.

Far be it from me to say that the objective is not healthy; I am the first to worship St. EBITDA. But I haven’t forgotten Goodhart’s law, which tells us that “when a measure ceases to be a goal, it ceases to be a good measure“. In other words, without sufficient profitability, you can no longer grow or even meet your needs, and you will die. But if profitability is your primary goal, you paradoxically risk never achieving it.

The smokescreen of “stakeholder capitalism”

Since the 2000s, a new discourse has emerged against a backdrop of broader corporate responsibility: employees, customers, suppliers, local communities, and the environment are now all referred to as stakeholders.

But in reality, so-called stakeholder capitalism has mostly been symbolic, even if a few significant counterexamples exist.

So even though there is a lot of talk about stakeholders, it is always the shareholders who have the final say.

Little questioning despite the crises

The last few decades have seen the emergence of several crises at a pace and on a scale that reflect the world around us. Each time, governance failures have been highlighted, and it would be wrong to believe that the crisis created the flaws: it merely revealed them.

Examples include the accounting scandals of the early 2000s (Enron), the banking crisis of 2008, the Covid-19 pandemic, and today’s climate and geopolitical tensions.

Each crisis has its own response, but the response is always the same: we strengthen obligations, pile on standards, and add layers of reporting, but without ever reviewing the nature of the system.

Governance evolves by adding layers without fundamental transformation. It becomes a reassuring mille-feuille, but one that adds complexity while hindering understanding and responsiveness.

Reassuring, but not very relevant.

Structural resistance to change

Changing governance may seem easy to say, but it is not a question of individual will, but of structure.

Those in positions of governance have mostly been trained to manage organizations in a stable world, or a world that we wanted to see as stable, where good financial indicators and serious risk management guaranteed economic performance.

They have not been equipped to evolve  in complexity, interdependence, and permanent uncertainty, or have never wanted to see that it was necessary, let alone orchestrate collective intelligence, and even less so under constraint.

The dominant rule therefore remains that of conformity. Governance bodies are expected to validate, supervise, and reassure, but not to explore, question, or experiment.

And when, by some miracle, we talk about governance evolution, we often confuse transformation with the creation of a committee, a charter, or a new rule.

Governance still too closed in on itself

Despite talk of transparency and openness, governance remains a closed space. Decision-making processes are often obscure, and politically incorrect questions are not allowed to enter the meeting room. Those who express dissenting views are asked to remain silent or to speak only informally outside of these moments when everything has been validated in advance, every exchange noted in a report, and only decisions made beforehand in the corridors of power are acknowledged.

Form takes precedence over substance. Presentation rituals and smooth speeches take precedence over the debate that should inform deliberation. Governance struggles to listen to and take into account “non-aligned” points of view, and even more so to allow itself to be transformed from within.

A withdrawal into oneself, conceived as an immune mechanism, is very reassuring in the short term but, in addition to its obvious flaws, ultimately fuels a certain mistrust.

Governance in a bubble, or even in a bunker, however perfectly structured, ultimately loses its legitimacy in a world and in companies that, on the contrary, need trust and benchmarks.

The weight of heritage in the face of modern challenges

The gap between what we might call the legacy of the past and the reality of the present is therefore widening every day.

Nothing illustrates this phenomenon better than the comments I recently heard on the subject from Olivier Réaud.

First and foremost, companies are facing what might be described as a deep divide between different time frames.

Urgent transitions (environment, climate, social model) are long-term processes, while economic, regulatory and, today, geopolitical uncertainty make any projections extremely difficult, even in the medium term. At the same time, turbulence requires adjustments on an almost daily basis.

Added to this is an overabundance of information, which ultimately drowns meaning in data.

It is not data or even analysis that is lacking, but the ability to collectively interpret what is happening.

All this is taking place within an overburdened legal framework that is a source of complexity or, to be more precise, complication.

Contradictory injunctions, changing standards, and regulations that vary from country to country and are liable to change overnight. It is difficult, if not impossible, to distinguish between what is permitted, what is relevant, and what is fair, knowing that today’s truth will not be tomorrow’s.

Finally, digital technology, which is present in all management systems, is automating an increasing part of governance.

Of course, it facilitates access to information and speeds up decision-making, but by relying on interfaces and dashboards, we deprive information of the context necessary for its interpretation and reduce the role of humans and even common sense in decision-making.

Ultimately, we are increasingly making decisions based on what the machine tells us rather than on what the situation requires.

Conclusion

We are not talking here about the limits of technology or the inability of those in charge to make governance work properly, but simply about a system designed for a world that no longer exists and which is colliding head-on with a reality for which it has neither the codes, the reference points nor the flexibility.

It is not a standard, a committee, a charter or an additional title on the board of directors that will solve the problem. On the contrary, we need to re-examine the purpose of governance.

How can we structure collective action and debate, and turn tensions into levers rather than masking them?

In the next article, we will look at the most common solutions, which are mainly characterized by their ability to give the illusion of modern governance without changing anything fundamentally.

In this series:

Corporate governance: the word is trendy, but the reality is much less so

Why corporate governance fails despite good intentions

Corporate governance designed for yesterday and facing today’s challenges

Corporate governance: modernity as a fig leaf

Augmented governance: AI as a lever for collective lucidity

Image credit: Image generated by artificial intelligence via ChatGPT (OpenAI)