Re-Thinking Corporate Governance in the context of COVID-19 and crisis bailouts

Corporate governance is the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationships with all stakeholders (financiers, customers, management, employees, government, and the community.  Corporate governance framework consists of (i) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards; (ii) procedures for reconciling conflicting interest of stakeholders in accordance with their duties, privileges, and roles; and (iii) procedures for proper supervision, control, and information-flows to serve as a system of checks and balances (business dictionary)

The COVID-19 context, a global and painful health and financial re-shift, presents an opportunity for implementing greater incentives towards broader stakeholder engagement. The restructuring of portfolio holdings presents such an opportunity – as financial restructurings take place, corporate governance restructurings are also possible and should be on the table.  Diversification of thought and perspectives makes for better risk mitigation and thereby better financial and non-financial results. The current context presents an opportunity to explore different corporate governance structures including, steward ownership structures.

The response to the 2008 financial crisis was mostly significant-sized bailouts and financial restructurings, and one could argue, not enough of non-financial restructurings.  When corporations emerged from the negative impact of the crisis they indulged/engaged in significant share buybacks. This crisis is showing us that such a strategy has delivered questionable value for stakeholders as we witness market volatility and lower share prices.  We can all agree that big shocks – climate, conflicts, pandemics, and financial, have become more frequent so there will not be as much time between this and our next crisis. The Great Depression was the last major global event before 9/11 caused a seismic dislocation. Since 9/11, however, we have been experiencing global-level shifts with greater frequency. 

Currently, more bailouts are underway, and it is likely that after the crisis is over and profits soar again, we will see more share buybacks.  Is it time for rethinking crisis restructurings away from just financial considerations? Are we well placed to push for consideration around governance frameworks that create the necessary “infrastructure” for informing how entities are run with all stakeholder interests accounted for? As the shocks that require restructurings and “bailouts” become more frequent, should operating frameworks be structured to include inputs from a diverse set of players?  Is it time to ask that any corporation that wants a share of restructuring and bailout funding be required to, over a period of time, transform its ownership/governance structure to one that enables more diverse opinions? In private markets investing, particularly in impact investing, are financial and governance restructurings a minimum response given investor focus on delivering financial and impact returns.

Is it time to implement more ownership structures like steward ownership, as mentioned above, to help protect more diverse stakeholders in normal and pandemic times? Steward-ownership refers to a set of legal structures that instill two core principles into the legal DNA of a business: self-governance and profits serve purpose. These structures ensure that control (voting rights) over the business is held by people inside the organization or very closely connected to its mission. Voting control in steward-ownership forms is not a saleable commodity. Profits in steward-ownership are understood as a tool for pursuing the company’s purpose. After paying back capital providers and sharing economic upside with stakeholders, the majority of profits are reinvested in the business. Steward-ownership forms include an asset-lock, which prevents the proceeds from a sale from being privatized.  This structure aligns decision making power with active stakeholders close to the business, instead of remote investors or shareholders. 

We pose these questions to invite expert thought pieces of examples of structures and case studies from different jurisdictions (see our style guide).

“From now on, it’s in the best interest of our management to put our social mission first, even if that means slowing down our growth. Everyone working in the company is incentivized, first and foremost, to make decisions that benefit not just the owners of the company, but all other stakeholders, the environment, and society at large. After this change, we can finally—confidently— say that our company will always be a force for good in society.”: Juho Makkonen, Sharetribe Co-Founder and CEO