Corporate governance and sustainable peace: an insider's view.

• Author: Whitman, Marina

ABSTRACT

The Author brings her 30 years of experience as a member of numerous corporate boards of directors to bear on the relationship between corporate governance and sustainable peace. In the Author's experience, over the last three decades corporate boards have become more diverse not only in terms of race and gender, but also through a greater focus on international participation. This diversity has led to concern for a broader set of stakeholders and, in many cases, these boards are presently conducting the affairs of their corporations in a more socially-responsible fashion. Despite these gains, however, the Author concedes that recent corporate scandals should trigger another round of self-evaluation by corporate boards. The Author remains hopeful that through this process it is at least possible for responsible corporate governance to contribute to sustainable peace.

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In my comments, I take as given the connection between corporate governance, democracy, and world peace that was the focus of discussion during last year's Conference and in several of the papers presented this year. Rather, I will take a closer look at the four types of corporate contribution to this linkage cited in the Article by Timothy Fort and Cindy Schipani. (1)

First, companies can assist with economic development, and help raise income and living standards. (2) Second, by displaying incorruptibility, transparency, and the rule of law in their own behavior, companies can transmit these concepts to the countries in which they operate. (3) Third, corporations can create genuine communities--both internal communities that give employees a voice, and external communities that invest in the people of the host countries where companies operate. (4) Finally, time permitting, I will talk about what Tim Fort and Cindy Schipani call "track-two diplomacy," that is, the role of private firms in mediating between governments in a crisis. (5)

I will focus on these issues, not from the academic point of view, but from a personal perspective; one that grows out of roughly three decades of serving as an outside or independent director of several major multinational companies. I joined the board of what was then the Manufacturers Hanover Bank in 1973. Between that beginning and my retirement from the Board in the Spring of 2002, I was a director successively of the Chemical Bank, the Chase Manhattan Bank, and JP Morgan Chase. I never moved, but the Bank changed its name three times as a result of three successive mergers.

As I discuss the contribution that corporations can make, I will be speaking from my experience with the companies with which I have been personally associated, not the companies that have recently received so much attention in the press. Whether this was perspicacity on my part or just good luck, or some combination of the two, I would like to think that I made some wise choices as to which boards I did and did not join.

As background, let me say something first about the evolution of corporate boards in general. As large institutional shareholders began to hold more and more of the stock of public corporations during the 1970s, 1980s, and 1990s, they began to exercise "voice" as well as "exit." (6) It used to be said that if a shareholder did not like what a company was doing, the only recourse was to sell the stock. (7) Because "exit" was unsatisfactory to many institutional shareholders, they began to voice opinions on how companies were managed. (8)

In general, their direct focus was not on corporate management, but on the boards of directors--especially outside, independent directors--because institutional shareholders saw these boards as primarily responsible for resolving what, in the academic literature, is called the principal-agent problem, (9) That is, how does one get professional managers, who probably do not own much of the company, to act in the interest of the shareholders? This responsibility was placed squarely on corporate boards of directors, (10) As these boards became increasingly visible, and their performance increasingly held up to public scrutiny, board members also became increasingly conscious of their fiduciary responsibilities. (11) In fact, this trend spawned a cottage industry to grade the corporate governance of corporations' boards of directors, (12) All of this has led to significant changes in the selection and function of corporate boards. I will describe only a few of the most significant developments here.

The first major development is a change in the makeup of the board. When I first joined several corporate boards in the 1970s, I was always the first woman that had ever sat at the board table. My colleagues were, almost without exception, white males, either friends or business associates of the chief executive, and they had been effectively selected by the chief executive. These were conscientious boards of responsible corporations, but CEOs still wanted board members they could trust. They wanted people who had experience with the same kind of problems CEOs were facing in their own businesses.

Today, at least in the companies I am most closely acquainted with, the boards look quite different. Functioning chief executives still constitute the majority of most Fortune 500 boards. It is also still generally true that a candidate will not be elected to a board without first being interviewed in person by the chief executive. But at the same time, that nominee will have been vetted not simply by the chief executive, but also by the nominating committee of the board. Although that committee is not likely to force a nominee on the CEO against his will, the nominating committee does have a great deal to say about who is chosen. When that committee, the CEO, and ultimately the full board discuss potential new directors, they consider a number of characteristics that were not part of the calculus 30 years ago.

One example is diversity. I mean not only diversity of gender and race (though I am no longer the only woman on any of my boards), but also diversity of occupation and age. Diversity of age is particularly difficult to obtain, however, because it often takes decades for a nominee to acquire a sufficient portfolio of skills...