On “Meeting the Governance Challenges of the 21st Century” by Jay Lorsch

Meeting the governance challenges of the 21st century

I was pleased to learn that Prof. Lorsch had written a new book on the challenges that faceboards in this century. Years ago I attended a course at Harvard for which Prof. Lorsch was one of the lecturer’s. I was impressed by Prof. Lorsch’s ability to inspire and challenge the group. So I was keen to learn what his views on the governance challenges for this century would be. After reading the article ‘The Future of Boards: Meeting the governance challenges of the 21st century” http://bit.ly/MUqFKn , which is based on his forthcoming book, I was disappointed. To me it appears that this article could have been written in the 1980’s. Phrases like “whether the progress made is sufficient to meet the challenges facing companies in the ‘remaining’ decades of the twenty-first century” leave me with the impression as if we only have one or two decades left in this century. If we would be unable to meet the challenges than we better brace ourselves for new corporate scandals.Furthermore I was surprised to read that the “few significant challenges that will face even the best boards in the future“, would be amongst others:

– the growing complexity of companies that require governance

– the already present trend for so many companies to become global

I will readily admit that these issues are genuine. However, these challenges were already present in the 20th century and I sincerely hope that by now, boards will have found ways to cope with these issues. Complexity is no new phenomena, if directors fail to understand ‘the facts about a company with complicated products‘ they should not serve on the board. It is not a recent requirement for a director to be able to understand the products or services that his company is delivering. A lot of the failures in oversight are not the result of the complexity of the products on offer but are due to the failure of directors to keep asking the right questions until they do understand. If you can’t stand the heat, get out of the kitchen!
The globalization is also not something which started only recently. Companies are already for decades operating in ‘many countries around the world with different economic conditions, law and cultures‘. I fail to see that that would be something which will create ‘added complexity‘ for boards , the complexity is here and it has been here for a long time.

The Real Challenge: Restoring Confidence
It’s my opinion that the real challenge for directors in the coming decades of the 21st century is to restore the confidence in boards. The confidence that has been eroded during the financial crisis by incompetent boards and by incompetent directors who failed to understand the business they were governing due to their complexity. Trust needs to be restored. That can only be achieved when a culture of accountability in the boardroom is created. Such a culture can be achieved when discussion amongst board members is challenging, open and leaves room for genuine debate. So that the director can pose the necessary questions until he really understands the issues. The challenge lies therefore in the ability of the board to create such a culture. When board members can trust each other this will ultimately result in increased board-effectiveness. Through this increased board-effectiveness the trust of the public can be restored. That’s the real challenge!