3 - Corporate governance and leadership in a globalizing equity market

Summary

The increasing globalization of capital markets and rising importance of institutional investors are leading to increased attention to governance and leadership. As a small number of institutional investors with a rising percentage of ownership seek to protect their large global investments they are defining new standards for governance and these standards are being exported around the world. The author discusses these trends and their implications for governance. He shows how research and practice are indicating that leadership at all levels is more significant to corporate performance, particularly in environments of rising uncertainty and in organizations with more diffused authority. In the wake of significant failures of leadership such as Enron's bankruptcy, investors are looking for ways to ensure that company leaders make good and timely decisions. These reforms have focused on changes in board composition and policies, establishing norms that are spreading globally. He concludes that the forces of institutionalization and internationalization are driving the world toward convergent standards of governance and leadership.

The bankruptcy of Enron on December 2, 2001 starkly reconfirmed the importance of effective corporate governance and leadership. While its failure demonstrated the role that active shareholders and government regulators must play in calling company leaders to take responsibility for their actions – and the consequences of their failure to do so – it also shows how difficult it is for investors and regulators to monitor company executives and their directors.

The governing board of Enron had appeared to meet most contemporary investor standards of good governance.