104. Compliance is not the same as good governance

Thinking of compliance as good governance is probably the most common, and distracting, false equivalency in corporate governance.

Background music is Of the Stars by KC Roberts & the Live Revolution

SCRIPT

I spent nearly 20 years running a project at the University of Toronto’s Rotman School of Management that resulted in a couple of different sets of what we called “board ratings.” Fundamentally, these board ratings were just sets of rules against which we would score the governance disclosure of big listed companies. If a company’s disclosure was in line with the rules, they would get a favourable board rating. Even just describing it out loud makes it seem kinda silly, doesn’t it? Applying generic rules to 250 different companies in different industries with different models, structures, sizes, and people. The implication being that somehow I – as the manager of the project – had come up with the single answer to what an effective board is, and thought I could measure it through public disclosure. Well, as absurd as that sounds, it’s basically the same as most of the rules, regulations, and laws that apply to corporate governance. And lots of corporations OBSESS over complying with all of them – even the optional ones like the board ratings I managed. It helps them to signal to the world that they have good governance. But when it comes to our definition of good governance, compliance is virtually meaningless. There isn’t a single regulation or law that sets corporations or boards up to make good decisions. That doesn’t mean compliance is bad or useless – in fact it’s probably pretty valuable for a lot of reasons. But good governance isn’t one of them.