Roots of good governance

Where do good governance and sustainability practices come from?

One surprisingly common assumption is that they incrementally appear over time as a business grows and matures, with a particular catalyst being the transition from private to public markets. This neat story of public market virtue is often married to the belief that long-term oversight is best achieved via widely held public ownership and equal voting rights.


However, to the careful observer there appears to be scant evidence that today’s veteran public companies represent the ‘gold standard’ for governance, environmental or social practices. Many of the worst business failures and scandals of the last few decades have occurred at public corporations such as Enron, Lehman Brothers and Volkswagen. These firms invariably had compelling corporate values statements, respected independent directors and often textbook corporate governance – and yet, below the veneer of responsibility lay a flawed business culture.


Conversely, a number of the world’s most sustainability-minded businesses are resolutely private, from Patagonia to Ikea. It seems by now to be patently clear that ownership by many can sometimes equate to oversight by none; and that widespread shareholding by short time horizon investors usually leads to short-term executive decision making. We should be more honest about the fact that the perhaps ideal scenario of a public company being primarily held by thoughtful, engaged and long-term holders is often a long way from the reality of high portfolio turnover in much of the asset management industry.


Many of the current principles of corporate governance were developed to try and counteract the ‘agency problems’ produced by having public corporations run by hired executive teams with minimal stock ownership. Conflicts of interest, director entrenchment and misaligned incentives are all real challenges that companies must address as their founding management transitions out – and yet the current “one size fits all” traditional corporate governance formula is clearly not without its own flaws.


In recent months, we have had several discussions in this regard with our private companies, many of which are now thinking about the ‘right’ way of going public. Consistently, we have found a very high degree of thoughtfulness and interest in ‘ESG’ issues from committed long-term founders. They defy the convention that interest in good governance is something that only grows over time and in public markets under pressure from shareholders.


One particular area of interest to our private holdings relates to multi-class share structures. Opinions on differentiated voting rights can quickly become heated, but it is important that we don’t conflate political democracy and business oversight. Investors who buy non- or reduced-voting right stock surely can’t feign outrage years later about the dual-class structure. The question for companies seeking to transition to public markets with such a structure is in understanding the trade-offs in perception and control that come with it and in thinking long-term about the implications for succession planning.


With dual-class share structures becoming more common in different parts of the world, we have had a number of great discussions with private companies about why they might consider IPOing under this structure. Is it to protect the unique culture and purpose of the business, or is it ‘just for control’?


Given that our private companies typically have a range of options about where to list, we encourage them to think through the range of governance measures that they can put into place from the outset to build confidence with minority holders. This includes sunset provisions, high levels of director independence, best practice impact reporting and, perhaps most importantly, a commitment to recuse themselves from voting on matters where there is even a perception of conflict of interest, such as around executive remuneration.


With the daunting challenges of persistent social inequalities and the low carbon transition ahead of us, we need radical, innovative and long-term corporate leadership more than ever. We should therefore be open-minded about the best way that balanced, effective and enduring governance can be achieved by our next generation of world-changing companies.

Andrew Cave

Head of governance and sustainability

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