The gyroscope of corporate governance

Corporate governance depends on checks and balances among four institutions — Board, Management, Stakeholders and Regulators — just as political governance depends on the four estates of Legislature, Executive, Judiciary and Media.

In both cases, governance thrives on the gyroscope principle that excessive swings along some axes can be balanced by effective institutions. The gyroscope maintains freedom of rotation in many directions while its rotor maintains the spin axis and orientation. Gyroscope design and functioning are key in engineering applications like the mounting of the Hubble space telescope.

American elections have generated disbelief and shock. However, they have also demonstrated the resilience of democratic institutions. A deranged leadership and fawning myrmidons — Tharoor-ism for bhakts — tried to wreck a two centuries old system. Over the last four years, US media has reported on the five messages drilled into people—(i) stop appeasing “not-like-us others” (ii) wrest influence away from experts (iii) ally with global leaders of similar thinking (iv) pursue nationalistic self-reliance (v) wish for the glorious past. The messages were packaged in a self-eulogy about the “unparalleled and never-before-in-history accomplishments” in recent times, thus creating an image of invincibility of the leader. Such dangerous leadership panache is also visible in nations other than the US.

Lessons from political governance are instructive even for corporations. Leadership failures continue to occur, according to UC, Berkeley Professor Dacher Keltner, because “power damages the leader’s brain”. Power diminishes the very emotional capacity of empathy that helped the leader to rise in the first place. It was the subject of my 2019 book titled Crash.

Checks and balances generally work. Recall how the Indian electorate rejected the Emergency in 1977 and voted out a smug government in 2004. In both cases, a credible alternative was not in sight, yet voters acted. As one Thai politician has pertinently observed, like wet diapers, politicians need to be periodically discarded even if a fresh diaper is not in hand. Otherwise the baby does not stop crying. Of course, sometimes the gyroscope fails. Corporate examples follow about the balance among board-management-stakeholders-regulators.

The first is about a 1932 start-up airline, which became world-class by the 1950s. Then, in a first blow, the company was nationalised. JRD Tata wrote at that time, “Even more than the decision itself, I was upset by the manner in which nationalization was introduced through the back door without any consultation.” The second blow came in 1978 when JRD Tata was unceremoniously removed as chairman of Air India. The corporate gyroscope creaked for years while the organisation was decimated by succeeding governments. There was little governance because board, management, stakeholder and regulator, all coalesced into one.

The second is the rise and decline of General Electric (GE) as commented upon by Thomas Gryta in Lights Out: Pride, Delusion, and the Fall of General Electric. Jeff Immelt, successor to the legendary Jack Welch, selected Beth Comstock, a media relations executive, to be his chief marketing officer in 2003. GE instructed its leaders to have a story behind every initiative with Beth Comstock arguing, “story is strategy.” Sound strategy is enhanced by a good story, but a good story cannot substitute sound strategy! The directors watched the share prices slip, year after year for 15 years, before making important CEO changes. The current leadership now faces an uphill task.

The third example is the emergence of Nestle India from the tangle of Maggi noodles. After early missteps, a determined management and a strong board overcame a crisis of consumer confidence, arising from a regulatory intervention. At one stage, it appeared catastrophic but checks and balances worked.

The last example is from war-preoccupied America in 1944. It concerns an arrogant CEO and a powerful American company, Montgomery Ward. Chairman Sewell Avery blustered and stormed while evading questions. His company supplied several war-time essentials, but supplies had been disrupted due to labour union disputes. At president Franklin Roosevelt’s nudge, the War Labour Board intervened. Sewell Avery was incensed enough to state, “War Labour Board must be destroyed, and this is no way to build a successful country”. Astonishingly, president Roosevelt ordered the army to take over the company, but Sewell Avery did not relent. As captured in a memorable photograph by TIME magazine, the army physically carried the suited-booted chairman out of his own office.

With acquisition of power, megalomania and brain impairment can reach extraordinary levels.

The writer is an author and corporate advisor. He is distinguished professor of IIT Kharagpur. He was director of Tata Sons and vice chairman of Hindustan Unilever