“Wits University, in Johannesburg, invited student representation onto the University Board. Meetings that used to take four hours now take two days,” says Judge Mervyn King, Chair of the Global Reporting Initiative and the King Commission on Corporate Governance.

“The student board members are meant to consider the best interests of the University but they were instructed, by students, to vote in specific ways on certain issues,” continues King. In other words, student representatives, by not acting in the best interests of the university are not fulfilling their mandate as board-members. They are committing fraud.

Cape Town, over the past week, has hosted the International Corporate Governance Network (ICGN) conference. 300 regulators, fund managers, private equity groups and lobbyists got together to discuss the difficulties of managing a modern company.

Mervyn King may not have invented the idea of non-financial corporate disclosure but he certainly helped formalise the debate. His original King Commission developed a methodology for what is known as the Triple Bottom Line, or – in the US – as Environment, Social and Governance (ESG) issues. This was picked up and formalised internationally as a voluntary set of reporting standards under the United Nations Global Compact (UNGC) and the Global Reporting Initiative. All called G3, for short.

With this number of heavy hitters behind it you’d think there’d be some uniformity about how to go about setting up a representative board. Far from it.

To try and make a complex issue less likely to make you rip off your own foot and beat yourself to death with it …

When the people who own are not in charge

A listed corporation is a large beast. The company itself can make anything from computer software to ball bearings to soft drinks. Its products are usually sold throughout the world and its owners can be scattered.

But maybe that’s getting ahead too.

When the original entrepreneur either retires, decides to cash in his investment, or needs to raise a tremendous amount of capital for further expansion, then the company can be broken up into little bits and sold. The little bits are the shares and a stock exchange is a simple forum where people can buy and sell these shares.

Thing is a company can have millions of listed shares and thousands of shareholders. These are the actual owners. The shares can return value in a few ways but the main ones are through dividends (a division of the profits in proportion to shareholding each year) or capital gains from the appreciation of the value of the individual shares (only realised when the shares are sold).

The original issues of corporate governance were simply about aligning the interests of the shareholders with the interests of the employed managers and executives who run the show.

Globalisation makes things even more complicated.

“If a South African firm forms an alliance with a Portuguese firm to build a bridge in Bangladesh and a dispute arises it only takes 14 years to get on the court roll in Bangladesh,” says King. “You want a proper dispute resolution system as part of your corporate governance.”

Corporate Governance is about more than just reporting on the profits and making sure that executives don’t defraud the shareholders.

Climate Change and Union Representation

Governments have an ambivalent attitude to companies. In the US the government exercises minimal interference. The EU interferes on an epic scale.

Germany is a perfect example. Corporate Boards in Germany must have representatives of workers. This results in very large boards and a system of co-determination.

“Co-determination is a very bad system but it still works,” says Helmut Sihler, retired chairman of the Porsche AG supervisory board.

Corporate governance disappears as informal components of the board meet to make decisions; only once that decision is made does the board formally meet. This is done to exclude representatives who are not going to represent the company’s interests. The fear is that worker’s representatives will not maintain confidentiality. The erosion of records of decision-making leads to disregard for the interests of shareholders.

Yet companies are more than the sum of their parts. They do have tremendous impacts on the communities in which they operate and on the environment. A decision to shut down a plant and move it to another country can affect hundreds of workers as well as hundreds of other businesses who depend on the expenditure of those workers.

Shouldn’t workers be represented on boards in some way?

“No,” says Janice Hester-Amey, portfolio manager at the California State Teachers’ Retirement System in the US. It’s a surprising response from a union pension fund but she has a refreshing and startling take on many sacred cows. Hester-Amey is convinced that board-members should have exposure to risk; “some skin in the game,” as she says.

She is determined that boards must allow minority shareholders to raise issues and place queries onto the agenda at meetings. It is this which she feels is most likely to get companies orientated.

Daniel Pedrotty, director of the AFL-CIO Office of Investment, another US union pension fund agrees, “It is about equal access to the proxy.”

“If you are going to offer board representation to every special interest group how far do you go?” asks Mervyn King. One country can decide employees need representation, another that the community, another that environmental groups.

What King demands is disclosure. Boards should report. And then investors can decide.

Convergence and Investment

The difficulty is that there is no universal system of governance. In the US CEOs and Chairman of the Board are frequently rolled into one. This removes the idea of a robust external oversight board. The result has been controversial pay to executives as well as Enron-style corporate frauds.

Yet Europe is far from having a better system. The cushy relationships between union, government and executive interests, as well as the opaque decision-making, means that investors have virtually no say over the companies they supposedly own.

“We have to remember that businesses are about profits first,” says Patrick Dunne, group communications director of 3i, a UK private equity firm.

Private equity has certainly shown the way that companies can be run effectively. They rapidly change executives who fail to deliver. They exercise the control that only an individual owner can. Private Equity has seen major corporations delisting and being run astonishingly effectively.

“Why can’t we do this?” asked Michele Hooper, non-executive director of AstraZeneca in the US. “It’s because we don’t have proper governance and are afraid to make difficult decisions.”

“Overcomplexity leads to ruin,” says Dunne. “We concentrate on three things: the purpose of the company, the processes by which they operate, and the people who perform.”

He summarises his strategy so: “The right strategy, the right resources, and keep out of jail.”

As for executives receiving shares as part of their pay? “If they want shares they can buy them,” he says.

With an increasingly globalised pool of investors, convergence is all the rage. Keeping track of different reporting standards and different legal systems is hard. Countries are doing their best to converge.

Companies are not governments but they do need governance

Companies are there, first and foremost, to make profits. What they do with their profits is another matter, but there must be profits first. Governments are elected to serve the interests of their people; government by the people%