Karl Moore: This is Karl Moore of the Desautels Faculty of Management at McGill University, Talking Management for The Globe and Mail. Today I am delighted to speak to Northwestern University's Ed Zajac.
Good afternoon, Ed.
Ed Zajac: Good afternoon, Karl.
KM: Ed, one of the things that has really been a big issue, particularly since the recession and the financial issues, is what is a good form of corporate governance? I know you have studied it for a number of years, what do you see as what we should be doing in corporate governance these days?
EZ: The area of corporate governance is a very broad one and so there are a lot of people studying different pieces of that. I am interested in corporate governance issues as they relate to CEO and board power relationships internally but also the role of the board, which I would describe it as an entity that would be valuable in enhancing the brand of the organization. People talk a lot about the branding of products but I would argue that the purpose of the brand is to signify trust, confidence and integrity in a company's product and I think, more and more, that the board of directors role is to inspire the same type of trust, confidence and belief in the integrity of the corporation in terms of how it behaves.
KM: So you are saying that the board can help build the brand of the organization – how do they do that?
EZ: Some of my research looks at how boards can influence the share price of a company. If you look at what investors are interested in – it's not just the historical financial performance of the company, more and more their expectations are around the company's performance, in a prospective fashion, is around their belief about the integrity of the financial statements, the behaviour and culture of the organization, and the board can set an important tone in that regard.
As a matter of fact, I was recently an expert witness in a case where the major question in the U.S. legal battle between a company and some disgruntled shareholders was the "tone at the top." The tone at the top is not a typical legal term but is one that is being used more and it really relates more to the culture of an organization and how the board functions, how it interacts with top management, how top management interacts with the investment community or stakeholders, all of that is a related bundle and in my mind sets people's expectations to what they think the corporation is able to achieve going forward.
KM: So Ed, what should the board do to communicate a positive brand image for the organization? What kinds of actions should they do to set the right tone?
EZ: You know the obvious action that boards take is to, obviously, maintain independence and avoid conflicts of interest. In the post Sarbanes-Oxley world, as we say in the U.S., that question of board independence is huge, but board independence itself, from some of my research and the research of some of my students, is itself a double-edged sword because you don't want to create a situation in which the board is so distant from management that they are only seen as evaluators and judgers of what a company is doing. You also would like them to be a source of advice.
Some research shows that CEOs don't want to seek advice from boards if they feel that boards are too distant from them. Getting the right balance from being a supporter of the organization - providing advice, counsel, guidance, etc. – but also providing oversight: that is a fine balance and I think that the good boards are able to achieve that balance of the two.