Illustration of Wanda Lopuch
TRANSCRIPT
Matt
Welcome back to Sound-Up Governance. My name is Matt Fullbrook. And this episode features Wanda Lopuch. Wanda's journey brought her from Poland to Milwaukee where she finished her PhD. She then spent a few years in a pharmaceutical market research company in Phoenix, at which point she recognized an opportunity to offer similar services to global pharma companies with operations in Central and Eastern Europe in the post-Berlin Wall economy. So, she started a successful venture operating pharmaceutical databases in seven countries. After that company was bought by a US-based public issuer, Wanda stuck around to run their office for Central and Eastern Europe, including Russia, where she oversaw the implementation of Sarbanes-Oxley.
This is where Wanda really caught the corporate governance bug, having seen governance through the lens of a privately owned company and a listed company. She then started a not for profit in New York City called global sourcing Council in partnership with the UN, which promoted an exchange of ideas among businesses, associations, government, not for profits and academia around responsible supply chain management. Now Wanda’s a corporate director, while also working with organizations on governance and ESG frameworks. I’ve already talked a lot more than usual to kick off this episode, because I want to emphasize that Wanda is super cool, doing amazing stuff, and really cares a lot about good governance. Which brings me to how we met, Wanda reached out to me a couple of weeks ago after having listened to me as a guest on a webinar, and explained to me that, to her, my definition of good governance as actively creating conditions that are likely to lead to effective decisions didn't, quote, pass her humble smell test. After a bit of back and forth, I invited her to join me on Sound-Up Governance to share her perspectives, which are awesome. Let's start by hearing what corporate governance means to Wanda in the first place.
Wanda
Frequently, when I introduce myself as a governance professional, governance expert, people ask me "what government?" So the concept of governance is not a well known concept. For me, "governance" means a set of policies, procedures, protocols, that govern the decision making process within organizations, within certain legal framework, and with an ethical guiding light. And I'm an optimist! I have, we have ethics in business. It's not to say that the ethics prevail, but we have to have that Northern Light, that guiding light. And that's what governance means to me.
Matt
Here's where my vocabulary and Wanda's diverge a bit. Forgetting good governance for a second, I think of corporate governance as the way that decisions get made in an incorporated entity, full stop. To Wanda, it's something different. It includes or maybe is exclusively the external constraints- laws and regulations - as long as we're navigating them ethically. I asked her, if corporate governance can be mainly defined by its rules, kind of like a game. how do we know if we're playing the game well?
Wanda
In the business world, that's simple! That's financial results. What game are we playing, first of all? Are we paying playing a short game? Or are we playing a long game? The US market until very recently, has been preoccupied preoccupied with the short game: quarterly results. So if you want to judge companies by the short game, of course you work on short quarterly results. And there's enough wiggle room within the law that you can present the quarterly results in a certain light, according even to GAAP. But there's enough wiggle room within the GAAP system. Now, if you play a short game, and I play a long game, I need to prepare my field for the game for a long game: investments. Which may, with you playing the short game, you don't care that much about that because that, you know, that capital goes on your balance sheet. So you win if we are judged by the rules of the short game. For the investors who are looking into the long game - building the company value - they need to use different optics. So how do we know how we play that game? Again, it's relative. The financial matrix is only one of the scores that will determine how do we play the game.
Matt
First off, I really liked that Wanda play it along with my silly game metaphor. Second, I started wondering how this perspective on governance might work in a multi-stakeholder lens. The long versus short perspective is tricky enough when you're just thinking about financial performance. But what about everyone who's affected by a corporation, regardless of its financial performance?
Wanda
I don't think... Again, if we think about governance as a set of policies and procedures that are transparent, at the end of the day, the Delaware Court believes that it's about the process. So if the decision is not optimal, from the perspective of certain shareholders, or stakeholders, in the law of Delaware court, the board members fulfilled their fiduciary responsibilities. So the interests of various stakeholders were discussed, taken into consideration, and this is the final decision. It's not about the outcome.
Matt
It was at this point that I started realizing that Wanda and I might actually agree with each other, if not 100%, then at least 80%. Probably the most important 80%, really. We both think that good governance ultimately happens only when organizations take the diverse and perhaps divergent interests of a potentially huge number of stakeholders into account while making decisions. And you can't judge a decision by its outcome. I mean, if you knew what the result of a decision would be, there'd be no need to make a decision. Right? So Wanda emphasized ethics, how does she see ethics fitting into her rules-based framework of corporate governance?
Wanda
That is either very short, or very long answer. How to quantify values? Because that's ethics, right? So when the values are codified in the laws is one thing. The code of corporate behavior is another thing. And unspoken culture within the company, which I think sets up a tone for certain governance policies and procedures. So we may have two companies with two different cultures, and they will have... both of them will have good governance procedures that may be very different.
Matt
It probably shouldn't surprise us at this point that even this conversation about corporate governance as policies, procedures and protocols within a legal framework would boil down to intangible human stuff. Different cultures and behavior will lead to hugely different results even within the same set of rules. I asked Wanda an impossible question: If there were a decision where as a board you had to choose between making a decision in the best interests of shareholders or doing what is ethically sound or even morally right, what's the board supposed to do? Instead of answering that question, she answered a way better one.
Wanda
There are different shareholders, right? We have opportunistic shareholders, and we have shareholders that are looking to grow the company. I can use the example of Paul Polman, who was the head of Unilever. He introduced, he got rid of the quarterly calls with Wall Street. That was unthinkable in the US, but one of the side effects of this decision was such that the structure of shareholders changed. So about six to 8% of opportunistic shareholders divested of the shares, hich was exactly what Unilever was aiming to do. Because their whole vision of building a sustainable global organization required investments upfront, right? Which those opportunistic shareholders didn't like because the dividends were not that high. So going back to your question, what's my ultimate responsibility? My ultimate responsibility is in the best interest of shareholders to build the value of the company. So if I will not satisfy, you know, those who want quick dividends, I can sleep well if that means that the investment is made in the area that will build the value.
Matt
I love this Unilever example, there was even a study done a few years ago that found companies that report on an annual basis have higher sales as a percentage of assets, higher sales growth, higher ROA, and more. Why? Because quarterly reporting forces managers and boards into a short term decision-making perspective. But I'd never thought about it the way Wanda put it: It also changes your stakeholders, or at least shareholders in this case. How cool is that? Change your behavior, so it's less appealing to opportunistic shareholders and they just go away? Before we wrap up this episode, I was curious to know if Wanda believes there's such a thing as best practice in governance or in other words, a set of rules, policies, processes that should work well, in all cases.
Wanda
I give you the quick answer. We need standards, but every situation is unique. And in the complexity of our world, there has to be a reference point. Berkshire, the most valuable company, arguably. They don't have, or their governance processes are by the standards of good governance... are non existent. So investors need baselines to compare. Investors need to have information to compare. And there are companies that are offering the best practices that offer that baseline for comparison. But you also need to have that insight that, you know, the deviation from best practices is not necessarily the bad thing. Like Berkshire, who consistently delivers the best results, and they are a deviation from best practices. They have their own best practices, but not that many companies can follow that in governance. You cannot codify everything, you cannot have laws and rules for everything. So in the lack of clear guidelines, which is more prevalent for private companies than for public companies, my Northern Light is "when in doubt, make it transparent." Make sure that people who need to be involved and parties who need to be involved in the conversations are involved in the conversation. And that, in my opinion, strengthens the governance process.
Matt
Wanda Lopuch emphasizes rules, policies, regulations, laws and transparency when she talks about corporate governance. It's no mystery then why she was put off by my definition of good governance as actively creating conditions that are likely to lead to effective decisions. Not only do I not acknowledge the fact that we have no control over some of those conditions, like the law, for example. But I also don't explicitly talk about the ethical implications or moral imperatives behind corporate governance. Ultimately, Wanda and I agree entirely on one thing: rules or no rules, good governance looks different for different organizations, and that unconventional approaches can sometimes have the best results. It's too soon to say if Wanda or I changed each other's minds at all, but I learned a lot and I hope you did too. Thanks again for tuning into Sound-Up Governance. If you have any comments, ideas or suggestions for guests you'd like to hear featured send an email or voice memo to soundup@groundupgovernance.com. See you next time.
Sound-Up Governance (Ep6) - Have I got corporate governance all wrong? feat. Wanda Lopuch