The four board dilemmas
7. Variety of options
One consequence of the numerous changes, and especially of past–future asymmetry, is the variety of options open to both institutions and individuals. The spectrum of possible futures prompts a diverse range of responses. But with the gain in choice comes the pain of indecision: fields of action are increasingly marked by ambivalence and ambiguity, so that flexible behaviour and variable reactions to the continuously changing context of decision making are called for. The disappearance of all certainties gives rise to individual anxieties and collective extremisms: even more so as opportunities and risks are unevenly distributed in a global, boundary-eroded society. For highly qualified people there is a much higher probability that the diverse opportunities will work to their advantage than for unqualified people.
For the board this poses a new dilemma, because they still work in national legal and cultural contexts. The country of incorpora- tion requires that companies meet the legal obligations of different approaches to incorporation. In Europe this is often a legal person with organs versus the US approach of an association of stockholders.
Also, there are often contradicting specific requirements. For example, in the US, the CEO and CFO now have to personally certify the accounts, whereas in the European context it is the legal obligation of the full board. Also, Germany and some other European countries require employee representation on the board, but employees are not counted as ‘independent’, such that a German supervisory board can never have a majority of independent directors. The more specific
corporate governance law has recently become, the more frequently these provisions clash (see Chapter 4).
But beyond the trickier legal compliance, the more fundamental dimen- sion is economic. Swissair was not the only example where a cash drain of unknown or underestimated risk in foreign countries brought a company nearly to its knees. Just think of Gerling Insurance (its US reinsurance business), ABB (US-asbestos liabilities) or Texas Utility TXU (losses in Europe’s deregulated markets) as recent examples. If you don’t lose cash, you might lose your reputation (and the CEO and chairman might lose their jobs) as with Dutch retailer Ahold, when massive cooking of the books was discovered in the US.
In all cases, the question is raised: why didn’t the board properly assess the risk and ensure protective measures?
With a more benign attitude one might ask the question: could the board see the risks ahead of time or are such failures the price of global operation?
Certain risks are obviously not on the radar screen of certain cultures: the ruthlessness of US lawyers, that a whole local management team would cheat in collusion, the possibility of contracts not being legally enforceable, etc. The answer is never black and white. Whereas in the Swissair case it could be argued that the board could have made a more detailed and sober review of the detectable risks (and eventually led to consequences for the acquisitions), the ABB board in the early 1990s could probably not have sensed that the asbestos liability would exceed the provisions made during the due diligence process by more than an order of magnitude (and also hit ABB at a time when it was highly vulnerable).
Dilemma 4: Drive for shareholder value in global markets versus societal expectations of the corporate licence to operate
Big companies are regarded as public institutions. Despite the rhetoric about the footloose enterprise in a global world, if it invests physical assets, a company has many links to its business environment. The nature of the relationship varies according to the issues, the stage of economic develop- ment, the culture and political system. Globalization and deregulation have weakened certain links, often the direct, heavy-handed approach, but not the informal, indirect influences. Examples abound: in South Africa, phar- maceutical companies voluntarily agreed to deliver AIDS medicine for much lower prices than in developed countries; in Korea, the car industry agreed to limit its worker lay-offs; in Germany, industry voluntarily agreed to reduce greenhouse gas emissions. Even the incarnation of global entrepreneurship is not free of the emotional links to its home country: GE donated $20 million to the victims of September 11, but not for the victims of the civil war in Congo. In all of these situations, the companies had good reason to behave as they did – because of the risk of more severe consequences or damage to an image or brand.
At the same time, global capital markets press for ever-increasing returns and do not tolerate actions without a defined business focus. Share prices of pharmaceutical companies declined when the companies ‘gave in’ to the pressure in South Africa and reduced prices of drugs to treat HIV. Not firing people for overall employment reasons would probably damage the share price of a company twice as much as it gained from laying off workers.
Companies have to balance these demands and it is the board that finally decides where to strike the balance.
In the Swissair case the question is, did the board strike the right balance?
There was never any open debate with regard to whether a small country like Switzerland (7.3 million inhabitants) needed an international airline and, if so, who should shoulder the price tag in case it could not do so under compet- itive conditions. In 1993, after its failed attempt to merge with Scandinavian Airlines, Austrian Airlines and Dutch KLM, one member of the Swiss govern- ment noted: ‘Replacing the Wilhelm Tell (the medieval Swiss freedom hero) statue with a statue of the Dalai Lama would give rise to the same political feelings as if Swissair merged with a foreign airline.’ That Swissair should stay independent became an unquestioned basic assumption in its strategy, cul- minating in the Hunter Strategy, which turned out to be a clear overstretch.
While in other cases such crucial political assumptions did not shape the strategy as with Swissair, it is far from being the only example. Monsanto gambled that the US government would ensure market access in Europe for genetically modified organisms, as did Chiquita with bananas (both were wrong). ABB would not have invested so heavily in Eastern Europe and Russia without the encouragement of the Swedish Government – just to name some recent examples.
But even when politics exerts only a small influence, it is a constraint the board has to deal with and at least create transparency about the options – and the costs and benefits in commercial terms.