Governance: The Platonic Ideal(s)

When we say a corporation’s governance is good or bad, what exactly do we mean by that?

I get the sense that a lot of us have in mind a Platonic ideal form of corporate governance against which we measure individual companies, sorting those deviating the least from the ideal into the “good” category and those deviating the most into the “bad” category.

But is there one Platonic ideal form of governance for all companies?

I think most would agree that the ideal governance for private companies is not the same as the ideal governance for public companies. That one’s easy.

Many would agree that the ideal governance at a distressed or failing company differs from other companies, as distressed and failing companies are usually being run for the benefit of, and/or under contractual restrictions imposed by, their creditors.

I expect that most would agree that the ideal governance for a public company controlled by a large shareholder differs from the ideal governance for a company with more widely dispersed voting power, if for no other reason than the ownership/management agency problem is less acute (or, if you prefer, different) at a controlled company.

Many companies are run for the long-term, but not all. Those that are being run for a quick sale, such as PE- or VC-backed portfolio companies, probably have a different ideal governance.

I would suggest that the ideal governance at companies in mature industries differs from the ideal governance at companies in immature industries, if for no other reason than management entrenchment is most likely to be a concern when the company itself is entrenched.

Similarly, I have a sense that slow-and-steady companies with strong economics may be better served by a democratic style of governance while volatile companies with high risk/reward opportunities may be better served by an autocratic dictatorship style of governance. In the latter case we may need the strong leadership of a visionary CEO to lead us into the promised land, while in the former case we’ve already arrived and just want to be sure the CEO doesn’t screw it up. The Great Man/Great Ham divide, if you prefer.

So, when we say a company’s governance is good or bad, we should also have to say which of the many Platonic ideal forms of governance we are measuring the company against.