Christina Meinberg, CRB Associate Director, interviews Haas lecturer and Chief Investment Officer at Nelson Capital, Lloyd Kurtz, regarding his plans to teach a new MBA course this term, in governance (MBA 292T-1).
[CM] We are excited to have you present the expanded corporate governance course at Haas this spring. Tell us briefly, what will your course cover, and what will it NOT cover?
[LS] So much goes into corporate governance. We’ll spend a lot of time on case studies, and will look at examples of takeover battles, CEO pay negotiations, corporate fraud, regulatory capture, and crisis management. We’ll also discuss how to deal with shareholder activists, and have a speaker in to tell us how to be one. Along the way, we’ll also talk about what economic and financial theory have to say about corporate governance.
We will not cover laws or regulations in great detail, as there could be a whole course could be devoted Sarbanes-Oxley or Dodd-Frank alone. The focus instead will be on the principles of governance, management incentives, regulatory dynamics, and other forces shape this ongoing negotiation between shareholders, managers, and the boards that are supposed to be overseeing things.
[CM] You’ve said you’d like to see business schools put more emphasis on corporate governance. What’s the difference between this and business ethics?
[LS] There are many reasons to have a robust governance course. Let me offer just three:
- First, governance is fundamental – so many big questions are tied up with it. Why did we have a financial crisis? Why have we seen so many large-scale corporate frauds over the past 15 years? Are CEOs overpaid? To whom are corporations accountable? It seems like we are seeing problems with incentives and oversight everywhere we look. Large institutional investors are noticing this. They are becoming much more active in governance, through both shareholder engagement and investment in activist hedge funds. Several guest speakers will come to talk about these trends.
- Governance is an indicator of management quality. If management is not dealing fairly with shareholders, they are very likely to be mishandling other aspects of the business as well. The tough thing, of course, is deciding what is fair in a particular situation. That’s why we’re going to focus on a lot of real-life examples.
- Finally, and to your point on ethics, may people believe corporate governance is in need of repair, but there is hardly any consensus on how to repair it. I hope that the course will help students think clearly about their choices as they progress in their careers, and negotiate for fairer and better governance arrangements wherever they may go.
[CM] Institutional investors are using the term “ESG” for Environmental, Social, and Governance factors, which combines three areas together. What does governance have to do with sustainability and corporate social responsibility?
[LS] You’re right, for many years these were treated separately. But I think investors have noticed that bad governance tends to have a corrosive effect on the firm’s other activities. An expropriative or myopic management team is usually bad for the business, and bad for the communities it operates in.
These types of managers can often do great harm in the name of corporate social responsibility, opting for greenwashing instead of substantive programs, or using the firm’s charitable donations to promote their own reputations.
From a sustainability perspective, we want to know if a company is doing the right things – but we depend heavily on their own disclosures to make those judgments. This is especially true in emerging markets, where regulation is less-developed.
The problems are very widespread – In any case, if we can’t trust the financial statements, how can we trust the CSR report?
[CM] I understand you will discuss the book “Barbarians at the Gate,” in your course. Why have you selected this for your students?
[LS] Barbarians at the Gate describes private equity firm KKR’s takeover of RJR/Nabisco in the late 80s, and it’s a great example of market forces coming into play because of a governance problem. Prior to the deal, mismanagement and self-dealing by CEO Ross Johnson was costing shareholders billions in shareholder value. He tried to buy the company for himself, leading to a bidding contest that culminated in the largest leveraged buyout in history up to that time. The authors did extensive interviews with all the key players, so it’s all well documented.
Over the years the book has been used to teach everything from negotiation to investment banking, but from a corporate governance perspective it’s practically Shakespeare.
[CM] Lastly, tell us one thing that may surprise students, to know about your course!
[LS] As I prepared for the course I was surprised at how many situations that appeared nonsensical from a high-level perspective, yet made much more sense once I understood the context in which the decisions were made. This is particularly true in Silicon Valley, where governance decisions can have huge implications for firm value, and boards have to work very hard (and sometimes fail) to strike the right balance between management control and shareholder interest.
[CM] Thanks for your words of wisdom and the passion and experience you continue to bring to Haas, Lloyd. Students who are interested… sign up to see Lloyd in class this January!