Value-Focused Corporate Governance

Corporate governance—the system by which a company’s board of directors and management executives align themselves with shareholders’ interests in order to make strategic decisions—can be a catalyst (or constraint) to value creation. Value creation is a product of business fundamentals (what the company actually does and how it performs) and investor perceptions (how the market prices the company’s expected future performance). Effective corporate governance enhances these two elements, primarily through greater transparency and more effective decision making, and thus generates more value for shareholders.

Today, well-functioning boards of directors play an increasingly important part in shaping corporate performance and investor perception. In addition to their checks-and-balances roles, boards’ strategic guidance, oversight, and effective decision making can provide invaluable direction and support to companies as they grapple with the challenges of globalization, enhanced business volatility, and intensifying levels of competition.

Yet these are not the roles that typically come to mind when one thinks about best practices for board governance. Instead, people tend to focus on standard guidelines for everything from directors’ roles and responsibilities to information disclosure. However, we’ve observed that following these best practices, as traditionally defined, does not ensure success. Among companies that do achieve best-practice corporate governance, outcomes in performance and quality vary widely. In other words, there is more to governance best practices than most people think. Consider the following example from a client of The Boston Consulting Group, a major Brazilian company and one of BCG’s Global Challengers. (The Global Challengers are BCG’s list of 100 fast-growing companies from rapidly developing economies. See the report The 2011 BCG Global Challengers: Companies on the Move.)

The company’s CEO shared with us his concerns about the difficulty he was having getting all of his board members involved in board discussions. At the same time, some board members confided to us that they felt in many ways shut out; for instance, they felt that the information that management was giving them was inadequate. As a result, decision making was often suboptimal and slow. Ultimately, these difficulties prevented the board from addressing the company’s most pressing concern: the dramatic global slowdown that threatened demand and required urgent action.

We reviewed the board’s corporate-governance practices. The board was doing everything right—in theory, at least. It was adhering to required practices and had adopted the major recommendations prescribed by leading governance institutions. So what was the problem?