How corporate governance is changing today

Dear Gabe

I would like to thank you for the opportunity to have you here and to learn more about your views on how corporate governance is changing today.

Bruno Mascello: What is the biggest change that in your view has taken place in recent years in corporate governance?

Gabe Shawn Varges: Corporate governance has become a more dynamic, tangible …. and business-relevant topic. Just ten years ago when one heard the words “corporate governance” one tended to imagine a bespectacled corporate secretary and dusty legal-looking organizational rules! Today more people are gaining the appreciation that corporate governance is really about fundamental choices each company makes about itself – such as choices about by whom and with which inputs important enterprise decisions are to be made.

What kind of decisions do you have in mind?

Strategically vital decisions and decisions about critical risk taking, such as on how close to the company’s risk capacity to come. Or on what to do — and who should decide — when a goal that is essential for the company’s financial success collides with an ethical or compliance obligation. Or on what type of behaviors to reward through the company’s compensation scheme.

But aren’t the competences of corporate organs long set out in the underlying laws, like in the Swiss Code of Obligations?

The basic principles about corporate organs and their areas of competence as set out in the main legal codes have not changed materially in recent times. These are generally solid principles and the right starting point. What has changed significantly is how those who occupy these organs deal with these principles in the real-life business environment. For example, Boards of Directors are well aware that they don’t have operational responsibilities. These lie with Management. At the same time more Boards are asking themselves: “If we are responsible for oversight of the company and of Management, what information about how the company is operating and the risks it is taking do we need? And how do we know that we are getting the most critical information?“

How does this manifest itself?

It leads to basic choices. Some Boards of Directors will leave it to Management to provide them the information that Management thinks is relevant. Other Boards of Directors, and I believe increasingly more, are proactively requesting information they feel would help them most to do their job better. It may not necessarily be more quantity of information but more relevant, focused or timely information. Or more information from functions that are independent from Management.

Do you mean, like the internal auditor?

Yes but not only. In light of the growing complexity of the risks companies face today and the speed with which these change, Boards of Directors are increasingly realizing that periodic audit reports are not enough. They are seeing thus benefit in getting information and opinions directly — and sometimes in real time — also from the company’s Risk Management and Compliance functions which functions they are expecting to be more autonomous and vibrant. What’s interesting is that these are not functions that you find listed in the Swiss Code of Obligations or the corporate law of most jurisdictions. But they are a budding reality and will likely deeply affect long-term the checks-and-balances within companies … and ultimately how we think about corporate governance.

Where does the legal function fit within all this?

The legal function, as has long been the case, is a critical player for the success of a company. Its role in closely following legal developments and wisely counselling Management and the Board of Directors on their obligations cannot be carried out by any other function. Moreover it carries out the indispensable role of “shepherding” key business activities and transactions to protect the company’s legal interests. And as part of the emerging corporate governance practices, the legal function now has an additional responsibility: to work closely with the control functions, such as Risk Management, the Internal Controls Managers, and, of course, Compliance.

You use the word “corporate governance”, but aren’t some people today talking about “risk governance”?

 “Risk governance” is a very useful recent term. It focuses on how a company organizes itself for risk — such as in reference to a Risk Committee or to the Chief Risk Officer and the whole Risk Management function. It also helps bring discipline to how risk escalation and reporting take place, for example. But “risk governance” is not, either in doctrine or practice, a replacement for corporate governance. It is a subset of the larger corporate governance umbrella, an umbrella which is far more expansive and fundamental.

Where do you see corporate governance heading? And what implications will this have for members of Boards of Directors?

The trends that I describe are international, not jurisdiction specific. I think corporate governance will become even more transnational. For those who are or wish to become Board of Director members the trends mean their job description will become more challenging … but also more rewarding. It will probably mean taking on fewer mandates and having to more deeply comprehend the risk landscape of each company where they serve. But in return, the service on a Board should be far more satisfying, with each Board member being able to make more informed decisions and contribute more meaningfully to the toughest choices a company makes on major risks … and opportunities.

On a personal level, how do you recharge your batteries after work?

In many and unpredictable ways.  I intentionally do not put any “governance” around my free time! But my children, music and outdoor activities are a big part.

Gabe, I would like to thank you very much for the time and insights you kindly shared with us.

05/2013