case studies in corporate governance

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Corporate Governance Case Study: Tesla, Twitter, and the Good Weed

Justin Slane, Sharon Makower and Joe Green are editors for the Capital Markets & Corporate Governance Service at Thomson Reuters Practical Law. This post is based on a Practical Law article by Mr. Slane, Ms. Makower and Mr. Green.

Perhaps no company in the world has the perception of its brand being tied to one person more than Tesla Inc. (Tesla) and its CEO and now former chairman of the board, Elon Musk. As at least one journalist phrased it, “ Elon Musk is Tesla. Tesla is Elon Musk .” And Musk is not just the face of Tesla, but a co-founder of PayPal and Solar City, the founder and current CEO of SpaceX and founder of its subsidiary, The Boring Company. He has crafted a “real-life Iron Man” persona, including all the eccentricity, and is undoubtedly one of the most recognizable and polarizing CEOs in the world.

But 2018 has not been the best year for Elon Musk. In what Musk would call negative propaganda pushed by short sellers, Tesla has faced heightened scrutiny and increasingly negative media attention related to a litany of issues, including cash burn , vehicle safety , production capabilities , and a string of employment-related lawsuits and executive exits ( only made worse recently ). Analysts and investors began to publicly cool on Tesla and question its long-term value, which Musk also attributed to short sellers .

In May, citing independence concerns and questioning whether Musk may be stretched too thin, proxy advisory giants Glass, Lewis & Company (Glass Lewis) and Institutional Shareholder Services, Inc. (ISS) opposed the re-election of current Tesla board members and supported splitting Musk’s roles as CEO and chairman.

As the pressure mounted, Musk became increasingly combative, especially on Twitter, lashing out at short sellers and anyone criticizing Tesla or him. Musk’s erratic behavior and obsession with short sellers and critics drew more criticism of his leadership and that of Tesla’s board of directors .

But it all came to a head on August 7, when in the middle of the trading day, without notice or warning to anyone (including other executives and directors at Tesla or contacts at Nasdaq, the exchange on which Tesla’s common stock is listed), Musk tweeted:

Then, for reasons still unknown, nobody took his phone away, and Musk continued tweeting and interacting with shareholders throughout the day:

The public reaction to Musk’s tweets was strong and immediate. Tesla’s stock soared before Nasdaq eventually halted trading for several hours later in the day, and there was instant speculation about whether Musk actually had the funding to take Tesla private (spoiler: he did not).

Musk’s drastic departure from normal public disclosure standards and the subsequent media circus arising from it unsurprisingly captured the attention of the Securities and Exchange Commission (SEC), which ultimately resulted in an enforcement action and settlement with Elon Musk over the tweets. Tesla also settled with the SEC. The end results of the settlements include the following:

• Musk must step down as chairman of the board and be replaced by an independent chairman, but Musk will be allowed to remain as CEO. On November 7, 2018, Tesla appointed an independent chairman.
• Musk and Tesla must each pay $20 million in fines.
• Tesla must add two independent directors and create a formal disclosure committee to oversee communications from Musk.
• Tesla must hire an experienced securities lawyer, subject to approval by the SEC Division of Enforcement (Tesla’s current general counsel was Elon Musk’s divorce attorney and worked primarily in family law before joining Tesla).

This post examines this corporate governance cautionary tale, focusing primarily on the Regulation FD (Reg FD) issues raised by Musk’s tweets and public statements. The full article from which this post is excerpted also examines a host of other issues including disclosure controls and procedures, stock exchange requirements, conflicts of interest, board independence, and more, highlighting for each issue where things went wrong and identifying resources that perhaps could have helped avoid this type of mess. To learn more about these issues, the full article can be accessed here .

Complying with Regulation FD

Much of the initial reporting surrounding Musk’s tweets questioned whether the use of his personal Twitter account violated Reg FD. Reg FD, which took effect in 2000, prohibits selective disclosure by requiring that material nonpublic information disclosed to securityholders or market professionals (including research analysts) must also be disclosed to the public in a broad, non-exclusionary manner. And in fact, in finally answering why he tweeted about taking Tesla private, Musk explained in an August 13 blog post that he wanted to have discussions with key shareholders and he felt it “wouldn’t be right to share information about going private with just [Tesla’s] largest investors.” While Musk’s intentions are noble and in line with the basic principle of nearly 20-year-old federal securities law, the reports were correct that Reg FD generally requires more than tweets.

SEC guidance issued in 2008 and 2013 regarding the use of company websites and social media for disclosure suggests that companies can still satisfy Reg FD requirements if they notify investors of where they can expect material information to be disclosed online, making it a “recognized channel of distribution.” In particular, the 2013 guidance dealt with the Netflix CEO disclosing monthly viewing hours on his personal Facebook page.

The SEC stated that disclosing material nonpublic information on the personal social media site of an individual corporate officer, without advance notice to investors that the site may be used for this purpose, is unlikely to satisfy Regulation FD because it is not likely a method “reasonably designed to provide broad, non-exclusionary distribution of the information to the public” that Reg FD requires. The SEC stated this is true even if “the individual in question has a large number of subscribers, friends or other social media contacts, so that the information is likely to reach a broader audience over time.”

The SEC used its 2013 guidance to highlight the concept that whether a Regulation FD violation occurred will turn on whether the investing public was alerted to the channels of distribution a company will use to disseminate material information. The SEC’s 2008 guidance on the use of company websites outlines the factors that indicate whether a particular channel (whether it be a corporate website or a corporate executive’s social media account) is a recognized channel of distribution for communicating with investors.

In this case, Tesla and Musk had a few factors in their favor:

• A Form 8-K filed on November 5, 2013 , encourages investors to follow Elon Musk’s personal Twitter account for material information being disclosed to the public. Ideally the notice would be repeated, including in Tesla’s annual reports on Form 10-K or additional Form 8-K reports, but at least some form of notice was provided to shareholders.
• Elon Musk also has nearly 23 million Twitter followers. His original tweet was widely picked up and further broadcast by major news sources within minutes, and within hours, former SEC Chairman Harvey Pitt was on major cable news networks discussing whether Musk committed securities fraud.

While it was far from a safe use of social media for Reg FD purposes, Musk and Tesla appear to have a decent argument that shareholders had notice that information could be disclosed through Musk’s personal Twitter account and his account was reasonably designed to provide broad, non-exclusionary disclosure of the information.

Most public companies typically adopt formal policies regarding compliance with Reg FD (as well as the use of social media by their employees and executives). A strong Reg FD policy should contain:

• A complete outline of the procedures and practices of the company concerning disclosure of information to the public.
• A formal limitation on which company personnel are permitted to communicate with analysts and securityholders on behalf of the company. These people should be well-versed in Reg FD and familiar with the company’s public disclosures. Ideally these people should also understand the concept of materiality and what may constitute securities fraud under Rule 10b-5.
• A restatement of the company’s policy on confidentiality of information.
• A guide to disclosing material information.

Companies should also address the use of social media by their employees and executives, whether in their Reg FD policies or in separate social media guidelines that cover both personal social media use and social media use as an authorized company spokesperson.

While a Tesla Reg FD policy, set of social media guidelines, or other corporate communications policy addressing these concerns does not seem to be publicly available, the Tesla Code of Business Conduct and Ethics (last revised in December 2017) refers to a “Communication Policy … [that covers] Tesla’s social media guidelines, media relations and marketing guidelines, and the circumstances and the extent to which individuals are allowed to speak on Tesla’s behalf.” Musk should have been aware of Tesla’s communications policy, ideally having been reminded frequently through regular training for Tesla officers regarding the company’s policy and their obligations under Regulation FD, and never tweeted to begin with.

Twitter Was Always a Bad Choice

Musk’s tweets are also an extreme, yet useful, example of why casual social media use and disclosure of material nonpublic information should not be mixed. Section 10(b) of the Exchange Act prohibits material misstatements and omissions of fact, and companies must always avoid making disclosures in informal social media posts that lack material information or the context necessary for investors to be fully informed. If a company decides that there is material information that should be disclosed to the public, it must then determine when that information must be disclosed. Information should only be disclosed when it is definitive, accurate, clear, and specific.

Twitter can be an excellent tool for supplementing more formal corporate disclosure, such as linking to SEC filings, the company’s website, or attaching a press release as an image. However, individual Twitter posts as the sole medium of disclosure might be the worst form of social media use for disclosing material nonpublic information. The primary differentiating factor between Twitter and other social media platforms is it limits user posts to just 280 characters. Musk used 61 characters in his original going private tweet (if you pro rate his $20 million SEC fine to the characters in that tweet, Musk spent over $2.6 million on spaces alone). While some may applaud his succinctness, Musk’s August 7 tweets and blog post are textbook examples of public disclosures that lack context and completeness.

What does “funding secured” and “investor support is confirmed” mean? Who is/are the buyer(s)? How was the $420 per share price calculated? Has the board received or approved a proposal? None of these basic questions had answers. We later learned in the SEC’s civil complaint against Musk:

• A Tesla investor texted Musk’s chief of staff “What’s Elon’s tweet about? Can’t make any sense of it….”
• A reporter emailed Musk to ask if his tweet was a 420 joke and whether “an actual explanation” was coming.
• The following investor relations exchange happened in real life seven hours, ten tweets, and one blog post after Musk’s initial “going private” tweet:

“After Tesla’s head of Investor Relations received another inquiry from another investment bank research analyst at approximately 7:20 PM EDT, he asked whether the analyst had read Tesla’s ‘official blog post on this topic.’ The analyst responded, ‘I did. Nothing on funding though?’ The head of Investor Relations replied, ‘The very first tweet simply mentioned ‘Funding secured’ which means there is a firm offer. Elon did not disclose details of who the buyer is.’ The analyst then asked, ‘Firm offer means there is a commitment letter or is this a verbal agreement?’ The head of Investor Relations responded, ‘I actually don’t know, but I would assume that given we went full-on public with this, the offer is as firm as it gets.'” (see SEC Complaint, par. 52 .)

It took six full days before Musk or Tesla provided any clarification about what Musk meant by “funding secured” and the rest of his going private tweets on August 7.

Corporate Disclosure or Personal Statements?

Musk’s claim he was making statements in his personal capacity as a potential buyer of Tesla as opposed to on Tesla’s behalf as CEO and Chairman adds another element to this case illustrating why disclosure of material nonpublic information requires full context. If his personal Twitter account is both a recognized channel for corporate communications and a means for him to make disclosures as a private individual, how are investors supposed to know what is corporate information and what is personal?

Nothing in the August 7 tweets or blog post definitively stated Musk was not speaking on behalf of Tesla as its CEO and Chairman. In fact, in the investor relations exchange mentioned above, Tesla’s head of Investor Relations says “… I would assume that given we went full-on public with this…” (emphasis added), phrasing that certainly implies he thought the statements were made on Tesla’s behalf.

It is generally good corporate governance practice that if a company discovers a Reg FD violation, to minimize risks, it should promptly disclose the information by a Reg FD-compliant method. For example, if an executive officer selectively discloses material nonpublic information, the company can correct the situation by filing a Form 8-K to disclose the information.

Given the potential confusion for investors resulting from Musk’s initial tweets and his claim that he made the statements in his “personal capacity,” Tesla should have immediately filed a Form 8-K (which also happens to allow for more than 280 characters) to correct any potentially selective or misleading disclosure made by Musk and provide any additional context necessary. No Form 8-K was filed though. Again, it was six days before Musk or Tesla provided any clarification or additional explanation for his statements on August 7.

The SEC Settlement and Ongoing Fallout

The ultimate fallout from Musk’s brief foray into a possible going private transaction is still ongoing:

• Class action lawsuits are still pending.
• The Department of Justice is still investigating Musk’s tweets.
• Significant investors are engaging with Tesla requesting changes to the board of directors (and other corporate governance practices).

Musk doesn’t seem to be fazed by any of this, and could do something tomorrow that turns this all on its head again. But the SEC settlement with Musk has now been approved by the Southern District of New York, and Tesla has settled separately with the SEC without a formal enforcement action. The terms of the settlements bring us full circle to where the year started, with the recognition that Tesla was facing an increasing battle between responsible corporate governance and Elon Musk’s persona. Tesla lost this round. If the added disclosure controls and expanded board continues losing battles, well, who knows? There is always Teslaquilla (or maybe not )!

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International Cases of Corporate Governance

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• Jean Jinghan Chen 0

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• Explores international legal structures for corporations

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“This book of corporate governance case studies provides a nice complement to existing courses or modules covering the topics of corporate governance, business ethics, and/or corporate social responsibility.  There are several well established corporate governance textbooks in existence that included some cases, but this is one of the first stand-alone case books of which I am aware other than Mallin’s casebook published back in 2006.  Many of us in the field of comparative corporate governance have our own conceptual framework from which we describe and explain corporate governance behavior and outcomes. This book provides the instructor with quite a bit of freedom to frame the issues around their own personal perspective.  Furthermore, in these days of inflated book prices, students should benefit from a text that is fully utilized.  I especially liked the relative recency of these cases – all case studies are less than ten years old.  Given the turmoil within the global economy and deglobalization trends during the past decade, this book is timely.  I also liked that fact that there was a wide range of geographic contexts captured in these cases given the Western bias in previous texts and case studies.  Finally, the range of issues is impressive, ranging from dealing with accounting scandals, to ownership and control rights conflicts, to business ethics and corporate social responsibility challenges.  If you are looking for a timely casebook on comparative corporate governance, this text should serve you well.” (William Q. Judge, E.V. Williams Professor of Strategic Leadership, Old Dominion University, USA)

“The release of Professor Chen’s new book of international corporate governance cases comes at a time when these new challenges are still defining the new business landscape. Companies are now expected to be more transparent and accountable to their stakeholders. This book not only provides us the insight ofhow and why corporate scandals occur, but also provides insight into the recurrence of corporate governance failures, offers practical guidance for remedying options. Practitioners and policy-makers will certainly learn, share and benefit from the critical thinking this book has provided.” (Qin Zou, Vice President, Stanley Black and Decker, USA)

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Book Title : International Cases of Corporate Governance

Authors : Jean Jinghan Chen

DOI : https://doi.org/10.1007/978-981-19-3238-0

Publisher : Palgrave Macmillan Singapore

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Copyright Information : The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2022

Hardcover ISBN : 978-981-19-3237-3 Published: 15 September 2022

Softcover ISBN : 978-981-19-3240-3 Published: 16 September 2023

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Case Studies of Good Corporate Governance

This second fully revised edition of "Case Studies of Good Corporate Governance Practices" presents the experiences of a set of leading companies in Latin America in reforming and improving how their firms are governed, and the results these changes have achieved. Each chapter's contents reflect the views of one company's management and directors of the motivations, challenges, solutions and rewards for devising and putting in place better governance rules and practices.

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Book description

Table of contents.

• Content (1/2)
• Content (2/2)
• APPLE’S CULTURE
• ENVIRONMENTAL RECORD
• LABOR PRACTICES
• CORPORATE GOVERNANCE ISSUES
• PRICE CUT STRATEGY
• ANNA HAZARE’S BACKGROUND
• ANNA HAZARE: THE SECOND GANDHI
• MOVEMENT: “INDIA AGAINST CORRUPTION (IAC)”
• ANNA’S MOVEMENT
• THE DARK SIDE OF INDIA
• IMPACT OF ANNA HAZARE’S MOVEMENT
• WHAT WENT WRONG?
• WE ALL ARE ANNA!!
• EVOLUTION OF APPLE
• EVOLUTION OF SAMSUNG
• INDUSTRY ANALYSIS
• PORTER’S FIVE FORCE MODEL TO ANALYZETHE SMARTPHONE MARKET
• INTELLECTUAL PROPERTY INFRINGEMENT
• IMPACT ON SUPPLIER RELATIONSHIP
• STRATEGIES APPLE MAY ADOPT TO PROTECT ITSELF FROMPATENT INFRINGEMENT
• CORPORATE GOVERNANCE
• CORPORATE GOVERNANCE IN INDIA
• CORPORATE GOVERNANCE AT WIPRO
• MANAGEMENT’S RESPONSIBILITIES
• THE INDIAN SOFTWARE SERVICES INDUSTRY
• HISTORICAL BACKGROUND
• ETHICAL ISSUES AND CHALLENGES
• US ENERGY INDUSTRY ANALYSIS
• ENERGY MARKET DEREGULATION AND ENRON
• BUSINESS DIVERSIFICATION AND GROWTH
• ENRON’S CODE OF CONDUCT
• RISE IN THE STOCK PRICES OF ENRON
• THE ALARM SET OFF BY BETHANY McCLEAN: “IS ENRON OVERPRICED?”
• ISSUES AT ENRON
• QUESTIONABLE PRACTICES
• TOP EXECUTIVES AND THEIR ROLES
• SHERRON WATKINS “THE WHISTLEBLOWER”
• FALL OF ENRON
• ETHICAL DILEMMA
• ITC PVT LTD. (1/2)
• ITC PVT LTD. (2/2)
• ABOUT JOHNSON & JOHNSON
• 1998–2006, TURBULENCE STARTED
• TURBULENCE WORSENS (1/2)
• TURBULENCE WORSENS (2/2)
• INTRODUCTION
• INDUSTRY CHARACTERISTICS
• INTO THE SPOTLIGHT
• ETHICAL ISSUES – WHERE TO DRAW THE LINE? (1/2)
• ETHICAL ISSUES – WHERE TO DRAW THE LINE? (2/2)
• ABOUT ANIL DHIRUBHAI AMBANI GROUP (ADAG)
• CORPORATE GOVERNANCE AT RELIANCE GROUP
• INDIAN OIL INDUSTRY
• BACKGROUND OF COMPANIES
• FUEL BEHIND THE FIRE
• JUDGMENT OF THE APEX COURT
• RIL REACTS SWIFTLY
• COMPANY BACKGROUND
• THE SUBHIKSHA SAGA
• BUSINESS VISION AND MISSION OF SUBHIKSHA
• INDIAN RETAIL INDUSTRY: A STORY OF TRANSITION
• BUSINESS MODEL OF SUBHIKSHA
• OPERATIONS MANAGEMENT AT SUBHIKSHA RETAIL
• FAILURE OF SUBHIKSHA – WHAT ACTUALLY WENT WRONG?
• FINANCIAL HEALTH OF SUBHIKSHA
• ETHICAL ISSUES
• TATA MOTORS COMPANY BACKGROUND
• AUTOMOBILE INDUSTRY CHARACTERISTICS
• TATA NANO LAND ACQUISITION ISSUE
• COSTS OF CONFLICT
• THE TATA GROUP
• ABOUT THE COMPANY – TATA CHEMICALS LIMITED
• VISION, MISSION AND VALUES
• COMPANY’S PHILOSOPHY ON THE CODE OF GOVERNANCE
• CORPORATE SOCIAL RESPONSIBILITY BY TATA CHEMICALSLIMITED
• SOME IMPORTANT CSR INITIATIVES BY TATA AT MITHAPUR
• THE UNION’S TUSSLE AT TATA CHEMICALS LIMITED
• Index (1/2)
• Index (2/2)

Product information

• Title: Case Studies in Business Ethics and Corporate Governance
• Author(s): Sreejesh, Mohapatra
• Release date: January 2012
• Publisher(s): Pearson Education India

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What Corporate Boards Can Learn from Boeing’s Mistakes

• Sandra J. Sucher
• Shalene Gupta

Five lessons from the 737 MAX shareholder lawsuit.

Board members have an incredibly difficult job. On average they spend between 250 to 350 hours a year advising the company, and they must understand the manifold issues management is dealing with, as well as the industry and global context. When they fail at these duties, the consequences, including public outrage, can be immense, as we’re seeing in a shareholder lawsuit against Boeing. The suit offers five main lessons for companies and board members: 1) Hire board members for competence and objectivity; 2) Ensure that the board structure aligns with industry needs; 3) Prepare for the worst case; 4) Manage for truth and realism; and 5) Practice accountability and punish wrongdoing.

In February, Boeing shareholders filed a lawsuit against the company’s board of directors. They argued that the board had neglected their oversight duty, failing to hold Boeing accountable for safety before and after the crashes of two 737 MAX airplanes that killed 346 people in 2018 and 2019. “Safety was no longer a subject of Board discussion, and there was no mechanism within Boeing by which safety concerns respecting the 737 MAX were elevated to the Board or to any Board committee,” they wrote in the 120-page filing .

• Sandra J. Sucher is a professor of management practice at Harvard Business School. She is the coauthor of The Power of Trust: How Companies Build It, Lose It, and Regain It (PublicAffairs 2021).
• Shalene Gupta is a journalist and writer. She is co-author of   The Power of Trust: How Companies Build It, Lose It, and Regain It  (PublicAffairs, 2021), and the author of The Cycle: Confronting the Pain of Periods and PMDD (Flatiron, 2024).

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Corporate Governance Case Studies Volume 11: The Final Volume

Posted by Mak Yuen Teen | Oct 20, 2022 | Articles , Case Studies

By Mak Yuen Teen

Thank you to CPA Australia for honouring me with a formal launch of Volume 11 of the Corporate Governance Case Studies last night at the Singapore Division President’s Dinner, and to the many CPA Australia members who congratulated me.

When I worked on the first volume with CPA Australia, which was published in 2012, I did not expect that we would end up with one volume every year until 2022. This latest volume, Volume 11, will be the final volume in this series.

In all, the 11 volumes contain 237 cases – 84 Singapore, 54 Asia-Pacific (ex-Singapore), and 99 from the rest of the world. In 2020, I also co-edited a special financial services edition with my colleague, Richard Tan, also published by CPA Australia. That special edition contains 22 cases, with 17  cases re-edited and updated, and 5 new cases (2 Asia-Pacific and 3 rest of the world) that did not appear in the regular series. Therefore, in total, there have been 242 different cases.

38 cases have been translated to Chinese for the HK, PRC and Taiwan markets. The first 3 volumes containing 58 cases have been translated to Vietnamese in collaboration with the stock exchanges and other professional bodies there.

The cases were written from public information – except for a small number where the views of company management or institutional investors were sought and included (in which case, they were made clear). They were written to facilitate discussion of issues – not as analyses of a company’s situation.

I put in place a very thorough process to ensure that they are accurate, objective and well-written. The cases may cite comments reported in public sources which reflect the views of certain individuals or organisations but it is for the reader to make their own assessment of the situations described in the cases. After students in my course have submitted the cases as part of their coursework, I selected the best or most interesting cases. Students whose cases were selected are acknowledged as the original authors of these cases.  An editorial assistant would check, rewrite, add content and update for recent developments, often with the help of other student assistants. I reviewed and approved every case, often doing more rewriting and adding more content.  They were then sent to CPA Australia and I personally went through the proofs for the entire volume before its publication. It was a time-consuming exercise that took up a considerable amount of my time during the break between the two semesters from May to August each year. As recent cases have become more in-depth, I have also been spending an increasing amount of time on them. It is really my passion for corporate governance that has kept this going for so long.

All the cases are available online for free use. Over the years, many professors, universities and organisations have asked for permission to use many of the cases. I have used them in my own courses and in  professional development programs for directors, senior executives and regulators that I conduct, and some of my colleagues have also used some cases for their courses. Many individuals have written to me or commented on social media about how much they like the cases and look forward to them.

I appreciate the partnership with CPA Australia. However, it is time for me to move on.

Corporate governance cases often raise issues that are controversial or sensitive. Those who follow my work know that I speak and write about corporate governance issues without fear or favour. I believe the final decision as to whether a case study should be published should rest with me, but this may not always be possible under the current arrangement.

Many have told me that they will miss the case studies. I hope that the series can be rebooted fairly quickly under a different arrangement. It may be that a new series will include more cases that deal with the “E” and “S” issues in ESG, as some of the cases already do.  However, corporate governance will continue to provide the foundation for future cases, including cases covering broader sustainability issues.

I have also been talking to some stakeholders in the region about the possibility of partnering to write more cases of companies in other ASEAN markets – possibly including about companies which have been substantively improving their ESG practices.

In the meantime, I have some unedited and unpublished cases which I hope to edit and publish in due course.

As a Marvel fan, I think of this as just the end of Phase 1. Some may wonder why end at volume 11 and not volume 12. It’s a bit like asking why there are 23 and not 24 movies in Marvel Phase 1. Marvel Phase 1 started in 2008 with Ironman and ended in 2018 with Avengers: Endgame. Mine ran from 2012 to 2022 so the gap is the same.

More seriously, thank you to everyone who have given me support and encouragement for this series of corporate governance case studies over the years. For ease of access, I have also included the earlier volumes, including the financial services edition, for download below.

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About The Author

Mak Yuen Teen

This is a personal website of Mak Yuen Teen intended to convey his personal views on current developments in corporate governance and to share thought leadership publications. He sees himself as a corporate governance advocate, taking an independent and objective view of corporate governance situations with the goal of improving corporate governance for the public interest. Yuen Teen has been involved in many key corporate governance developments in Singapore and the region. He was the founder of the first corporate governance centre in Singapore and developed the first corporate governance index in Singapore; has served on various corporate governance committees set up by the Singapore authorities; has served on boards and committees in various not-for-profit and international organisations; regularly conducts training for directors, regulators and other professionals; edits an annual collection of case studies published by CPA Australia; and has been recognised by both investor and director bodies with awards and citations for his contributions to corporate governance.

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In 2007, corporate governance became a well-discussed topic in the business press. Newspapers produced detailed accounts of corporate fraud, accounting scandals, excessive compensation, and other perceived organizational failures—many of which culminated in lawsuits, resignations, and bankruptcy. Central to these stories was the assumption that somehow corporate governance was to blame. That is, there was a functional failure in the system of checks and balances established to prevent abuse by executives. This case explores the various corporate governance systems that have been adopted in the United States and in various countries in Europe and Asia. The issues of control, director independence, auditor independence, dual-board versus unitary-board structure, comply-or-explain, and legislative versus market-driven solutions are explored. Readers are asked to evaluate what governance systems or elements they consider to be most effective. Plentiful examples—including Johnson & Johnson, BMW Group, Michelin, Heineken, Toyota, Samsung, Posco, PetroChina, Infosys, and many others—are used throughout as illustration.

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Trends shaping corporate governance in 2023 – Four areas to watch

04 January, 2023

Looking back on 2022

2022 saw upheaval with rising inflation, the war in Ukraine, energy price disruptions, and continued supply chain problems. There was action on the legislative and regulatory fronts too. Billed as the largest climate legislation in US history, President Biden signed into law the Inflation Reduction Act that includes tax credits and incentives to help companies tackle climate change. The pace of regulations from the SEC increased, and the EU finalized regulation of ESG topics that will impact US and other non-EU companies and their EU subsidiaries.

After the midterm elections, the new Congress returns to a divided government. Divided government is often viewed by businesses as a positive development as they believe it makes it difficult for comprehensive legislation favored by only one political party to become law. According to PwC’s latest Pulse Survey , 52% of respondents view a flip of the House of Representatives to Republican control as a positive change for business, compared to only 8% who believe it will have a negative impact and 34% who believe it will have no impact. But traditional policy paradigms have shifted in recent years, creating unlikely bedfellows on issues that have historically been favored by one political party or the other. So, businesses will need to remain vigilant.

Here are the four trends I’m watching for in 2023:

Trend 1: responding to macroeconomic uncertainty.

We face an unusual and uncertain economic situation—the potential for a recession with an odd confluence of factors—rising inflation, higher interest rates, low unemployment, and, for the moment, growth and high consumer spending. I see this uncertainty intensifying in 2023. It has been a decade since the last major recession. Given the potential risks, companies should leverage their longer-tenured directors while maintaining a balanced approach to board refreshment.

Last year, some companies began to focus on their enterprise risk management (ERM) process to identify priority areas and risks and developed strategies to respond. This year, when considering changes in strategy in response to the downturn, companies are more focused on long-term strategic initiatives necessary for growth. According to a recent PwC survey , despite the macroeconomic uncertainty, 83% of executives are focusing business strategy on growth as they confront today’s economic challenges. I agree—employing efforts focused on cost-cutting measures, like hiring freezes, for example, may have unintended consequences. Opportunistic competitors could attract great talent as others temporarily stop hiring or make reductions to their headcount.

Potential blind spots:

• Focusing on short-term uncertainty at the expense of long-term sustainability; balance is important
• Instituting a hiring freeze or headcount reduction without accounting for existing shortages in key business areas

Trend 2: Enhanced transparency in light of increasing responsibilities and pressures

Shareholders and regulators have shown increasing interest in understanding how boards execute their oversight responsibilities. In 2023, I expect boards to continue responding with increased transparency. 

In preparation, boards are looking to collectively elevate their knowledge. Board education programs that focus on discrete topics, like cybersecurity and climate, will support this goal. But the most effective boards will use a multi-faceted approach, leveraging internal and external resources tailored for their needs, as well as continuing education. 

Boards will also need to re-evaluate the allocation of responsibilities to maximize their effectiveness. The allocation matrix and reporting structure between management, committees, and the full board should be clear. This is especially true if the SEC’s final climate and cybersecurity rules include detailed governance disclosures as written in the initial proposals.

Boards are under pressure to identify directors with varied expertise (e.g., DEI, cyber). Before looking externally, they should consider whether (1) directors have the credentials and (2) existing disclosures effectively document their existing credentials and processes. Providing visibility into how directors meet their responsibilities—while holding themselves publicly accountable—is paramount in creating trust with all stakeholders.

• Not evaluating if the board’s competencies align with how the business has evolved and oversight of new areas, like cybersecurity
• Relying on a point in time program or certificate to establish expertise in a topical area that is evolving quickly; it can lead to overestimating abilities
• Identifying a single board member as the expert in a topical area instead of collectively elevating the knowledge of all directors
• Limiting the audit committee’s oversight to financial disclosures when their process and controls expertise can be leveraged for disclosures being made in other documents, like the proxy statement and corporate sustainability report

Trend 3: Strain on talent

Companies are overhauling how and where work gets done at the same time that there is a generational shift in who is doing the work. As younger generations advance in the workforce, I see the best boards expanding their human capital oversight deeper into the organization to understand and address this shift. In addition, C-suite succession planning may need an overhaul to identify young leaders ready to succeed. Even against economic headwinds, companies should identify gaps in their talent and have upskilling plans to fill in the gaps. A talent pool that is diverse in many respects addresses this and other needs for different ways of thinking. 

Companies can look outside the C-suite for gaps in talent. I have seen a shortage of talent in areas like legal, finance, and internal audit. This poses risks for companies, for example, in ensuring appropriate internal controls are in place. Companies may have to outsource responsibilities in response, but this comes with a price tag. Our paper, A deeper dive into talent management: the new board imperative , outlines how critical it is for boards to provide greater oversight of talent management at multiple levels of the organization and what directors can do.

• Failing to align talent discussions with the ERM process—this could mean companies do not have the right talent for the risks identified
• Misunderstanding what motivates the next generation—flexibility, culture, well-being, reputation, and impact are key decision points for the next set of outperformers

Trend 4: Plain English reporting to the board

It’s clear that the scope of board oversight has expanded. When I meet with clients, I am consistently asked how the board can be confident that they are receiving the right information and asking the right questions. This is a difficult question to answer. Ultimately, it comes down to having a strong relationship and good dialogue with management. That starts with making sure that board materials are clear and designed to support their oversight responsibilities.

ESG is a great example. It would be impossible for the board to oversee every risk and topic that could be attached to the moniker. Further, processes to compile the information to produce a coherent narrative and supporting metrics for the company as a whole are just emerging. Seeking discipline in what information the board receives and its link to strategy will prepare the company to answer questions from a diverse set of stakeholders. 

Another example is cybersecurity, where boards tell us they want better information. Less than half of board members (46%) who responded to our survey of corporate directors say they’re receiving consistent, decision-useful chief information security officer reporting to understand progress on key cyber risks. That information is mission critical in preparing for a cyber breach.

Our paper, Get boardroom ready: five ways to improve executive interactions with the board , focuses on preparing best-in-class board materials, knowing your audience, and presenting a clean message.

• Not leaning into the board evaluation process to ensure efficient and effective practices
• Failing to establish a clear process for prioritizing ESG issues and spreading responsibility around the board and committees
• Relying on the SEC as the sole ESG disclosure authority, as our recent survey of corporate directors showed more than half of directors (54%) are either unsure or don’t understand if their company needs to comply with the EU’s Corporate Sustainability Reporting Directive 

Finally, I’ll also be watching these emerging trends to see how they develop:

• Technological transformation (e.g., implementing new technologies, such as blockchain)
• Executing against climate commitments, such as net zero
• Investors’ focus on natural capital (i.e., the need to better manage and value natural resources like water, timber, and fisheries)

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PREDICTING THE INCREASE OF COMPANY VALUE BASED ON PROFIT AND DEBT GOVERNANCE POLICIES: A Case Study on Indonesian Automotive Companies

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Artificial intelligence in strategy

Can machines automate strategy development? The short answer is no. However, there are numerous aspects of strategists’ work where AI and advanced analytics tools can already bring enormous value. Yuval Atsmon is a senior partner who leads the new McKinsey Center for Strategy Innovation, which studies ways new technologies can augment the timeless principles of strategy. In this episode of the Inside the Strategy Room podcast, he explains how artificial intelligence is already transforming strategy and what’s on the horizon. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, follow the series on your preferred podcast platform .

Joanna Pachner: What does artificial intelligence mean in the context of strategy?

Yuval Atsmon: When people talk about artificial intelligence, they include everything to do with analytics, automation, and data analysis. Marvin Minsky, the pioneer of artificial intelligence research in the 1960s, talked about AI as a “suitcase word”—a term into which you can stuff whatever you want—and that still seems to be the case. We are comfortable with that because we think companies should use all the capabilities of more traditional analysis while increasing automation in strategy that can free up management or analyst time and, gradually, introducing tools that can augment human thinking.

Joanna Pachner: AI has been embraced by many business functions, but strategy seems to be largely immune to its charms. Why do you think that is?

Subscribe to the Inside the Strategy Room podcast

Yuval Atsmon: You’re right about the limited adoption. Only 7 percent of respondents to our survey about the use of AI say they use it in strategy or even financial planning, whereas in areas like marketing, supply chain, and service operations, it’s 25 or 30 percent. One reason adoption is lagging is that strategy is one of the most integrative conceptual practices. When executives think about strategy automation, many are looking too far ahead—at AI capabilities that would decide, in place of the business leader, what the right strategy is. They are missing opportunities to use AI in the building blocks of strategy that could significantly improve outcomes.

I like to use the analogy to virtual assistants. Many of us use Alexa or Siri but very few people use these tools to do more than dictate a text message or shut off the lights. We don’t feel comfortable with the technology’s ability to understand the context in more sophisticated applications. AI in strategy is similar: it’s hard for AI to know everything an executive knows, but it can help executives with certain tasks.

When executives think about strategy automation, many are looking too far ahead—at AI deciding the right strategy. They are missing opportunities to use AI in the building blocks of strategy.

Joanna Pachner: What kind of tasks can AI help strategists execute today?

Yuval Atsmon: We talk about six stages of AI development. The earliest is simple analytics, which we refer to as descriptive intelligence. Companies use dashboards for competitive analysis or to study performance in different parts of the business that are automatically updated. Some have interactive capabilities for refinement and testing.

The second level is diagnostic intelligence, which is the ability to look backward at the business and understand root causes and drivers of performance. The level after that is predictive intelligence: being able to anticipate certain scenarios or options and the value of things in the future based on momentum from the past as well as signals picked in the market. Both diagnostics and prediction are areas that AI can greatly improve today. The tools can augment executives’ analysis and become areas where you develop capabilities. For example, on diagnostic intelligence, you can organize your portfolio into segments to understand granularly where performance is coming from and do it in a much more continuous way than analysts could. You can try 20 different ways in an hour versus deploying one hundred analysts to tackle the problem.

Predictive AI is both more difficult and more risky. Executives shouldn’t fully rely on predictive AI, but it provides another systematic viewpoint in the room. Because strategic decisions have significant consequences, a key consideration is to use AI transparently in the sense of understanding why it is making a certain prediction and what extrapolations it is making from which information. You can then assess if you trust the prediction or not. You can even use AI to track the evolution of the assumptions for that prediction.

Those are the levels available today. The next three levels will take time to develop. There are some early examples of AI advising actions for executives’ consideration that would be value-creating based on the analysis. From there, you go to delegating certain decision authority to AI, with constraints and supervision. Eventually, there is the point where fully autonomous AI analyzes and decides with no human interaction.

Because strategic decisions have significant consequences, you need to understand why AI is making a certain prediction and what extrapolations it’s making from which information.

Joanna Pachner: What kind of businesses or industries could gain the greatest benefits from embracing AI at its current level of sophistication?

Yuval Atsmon: Every business probably has some opportunity to use AI more than it does today. The first thing to look at is the availability of data. Do you have performance data that can be organized in a systematic way? Companies that have deep data on their portfolios down to business line, SKU, inventory, and raw ingredients have the biggest opportunities to use machines to gain granular insights that humans could not.

Companies whose strategies rely on a few big decisions with limited data would get less from AI. Likewise, those facing a lot of volatility and vulnerability to external events would benefit less than companies with controlled and systematic portfolios, although they could deploy AI to better predict those external events and identify what they can and cannot control.

Third, the velocity of decisions matters. Most companies develop strategies every three to five years, which then become annual budgets. If you think about strategy in that way, the role of AI is relatively limited other than potentially accelerating analyses that are inputs into the strategy. However, some companies regularly revisit big decisions they made based on assumptions about the world that may have since changed, affecting the projected ROI of initiatives. Such shifts would affect how you deploy talent and executive time, how you spend money and focus sales efforts, and AI can be valuable in guiding that. The value of AI is even bigger when you can make decisions close to the time of deploying resources, because AI can signal that your previous assumptions have changed from when you made your plan.

Joanna Pachner: Can you provide any examples of companies employing AI to address specific strategic challenges?

Yuval Atsmon: Some of the most innovative users of AI, not coincidentally, are AI- and digital-native companies. Some of these companies have seen massive benefits from AI and have increased its usage in other areas of the business. One mobility player adjusts its financial planning based on pricing patterns it observes in the market. Its business has relatively high flexibility to demand but less so to supply, so the company uses AI to continuously signal back when pricing dynamics are trending in a way that would affect profitability or where demand is rising. This allows the company to quickly react to create more capacity because its profitability is highly sensitive to keeping demand and supply in equilibrium.

Joanna Pachner: Given how quickly things change today, doesn’t AI seem to be more a tactical than a strategic tool, providing time-sensitive input on isolated elements of strategy?

Yuval Atsmon: It’s interesting that you make the distinction between strategic and tactical. Of course, every decision can be broken down into smaller ones, and where AI can be affordably used in strategy today is for building blocks of the strategy. It might feel tactical, but it can make a massive difference. One of the world’s leading investment firms, for example, has started to use AI to scan for certain patterns rather than scanning individual companies directly. AI looks for consumer mobile usage that suggests a company’s technology is catching on quickly, giving the firm an opportunity to invest in that company before others do. That created a significant strategic edge for them, even though the tool itself may be relatively tactical.

Joanna Pachner: McKinsey has written a lot about cognitive biases  and social dynamics that can skew decision making. Can AI help with these challenges?

Yuval Atsmon: When we talk to executives about using AI in strategy development, the first reaction we get is, “Those are really big decisions; what if AI gets them wrong?” The first answer is that humans also get them wrong—a lot. [Amos] Tversky, [Daniel] Kahneman, and others have proven that some of those errors are systemic, observable, and predictable. The first thing AI can do is spot situations likely to give rise to biases. For example, imagine that AI is listening in on a strategy session where the CEO proposes something and everyone says “Aye” without debate and discussion. AI could inform the room, “We might have a sunflower bias here,” which could trigger more conversation and remind the CEO that it’s in their own interest to encourage some devil’s advocacy.

We also often see confirmation bias, where people focus their analysis on proving the wisdom of what they already want to do, as opposed to looking for a fact-based reality. Just having AI perform a default analysis that doesn’t aim to satisfy the boss is useful, and the team can then try to understand why that is different than the management hypothesis, triggering a much richer debate.

In terms of social dynamics, agency problems can create conflicts of interest. Every business unit [BU] leader thinks that their BU should get the most resources and will deliver the most value, or at least they feel they should advocate for their business. AI provides a neutral way based on systematic data to manage those debates. It’s also useful for executives with decision authority, since we all know that short-term pressures and the need to make the quarterly and annual numbers lead people to make different decisions on the 31st of December than they do on January 1st or October 1st. Like the story of Ulysses and the sirens, you can use AI to remind you that you wanted something different three months earlier. The CEO still decides; AI can just provide that extra nudge.

Joanna Pachner: It’s like you have Spock next to you, who is dispassionate and purely analytical.

Yuval Atsmon: That is not a bad analogy—for Star Trek fans anyway.

Joanna Pachner: Do you have a favorite application of AI in strategy?

Yuval Atsmon: I have worked a lot on resource allocation, and one of the challenges, which we call the hockey stick phenomenon, is that executives are always overly optimistic about what will happen. They know that resource allocation will inevitably be defined by what you believe about the future, not necessarily by past performance. AI can provide an objective prediction of performance starting from a default momentum case: based on everything that happened in the past and some indicators about the future, what is the forecast of performance if we do nothing? This is before we say, “But I will hire these people and develop this new product and improve my marketing”— things that every executive thinks will help them overdeliver relative to the past. The neutral momentum case, which AI can calculate in a cold, Spock-like manner, can change the dynamics of the resource allocation discussion. It’s a form of predictive intelligence accessible today and while it’s not meant to be definitive, it provides a basis for better decisions.

Joanna Pachner: Do you see access to technology talent as one of the obstacles to the adoption of AI in strategy, especially at large companies?

Yuval Atsmon: I would make a distinction. If you mean machine-learning and data science talent or software engineers who build the digital tools, they are definitely not easy to get. However, companies can increasingly use platforms that provide access to AI tools and require less from individual companies. Also, this domain of strategy is exciting—it’s cutting-edge, so it’s probably easier to get technology talent for that than it might be for manufacturing work.

The bigger challenge, ironically, is finding strategists or people with business expertise to contribute to the effort. You will not solve strategy problems with AI without the involvement of people who understand the customer experience and what you are trying to achieve. Those who know best, like senior executives, don’t have time to be product managers for the AI team. An even bigger constraint is that, in some cases, you are asking people to get involved in an initiative that may make their jobs less important. There could be plenty of opportunities for incorpo­rating AI into existing jobs, but it’s something companies need to reflect on. The best approach may be to create a digital factory where a different team tests and builds AI applications, with oversight from senior stakeholders.

The big challenge is finding strategists to contribute to the AI effort. You are asking people to get involved in an initiative that may make their jobs less important.

Joanna Pachner: Do you think this worry about job security and the potential that AI will automate strategy is realistic?

Yuval Atsmon: The question of whether AI will replace human judgment and put humanity out of its job is a big one that I would leave for other experts.

The pertinent question is shorter-term automation. Because of its complexity, strategy would be one of the later domains to be affected by automation, but we are seeing it in many other domains. However, the trend for more than two hundred years has been that automation creates new jobs, although ones requiring different skills. That doesn’t take away the fear some people have of a machine exposing their mistakes or doing their job better than they do it.

Joanna Pachner: We recently published an article about strategic courage in an age of volatility  that talked about three types of edge business leaders need to develop. One of them is an edge in insights. Do you think AI has a role to play in furnishing a proprietary insight edge?

Yuval Atsmon: One of the challenges most strategists face is the overwhelming complexity of the world we operate in—the number of unknowns, the information overload. At one level, it may seem that AI will provide another layer of complexity. In reality, it can be a sharp knife that cuts through some of the clutter. The question to ask is, Can AI simplify my life by giving me sharper, more timely insights more easily?

Joanna Pachner: You have been working in strategy for a long time. What sparked your interest in exploring this intersection of strategy and new technology?

Yuval Atsmon: I have always been intrigued by things at the boundaries of what seems possible. Science fiction writer Arthur C. Clarke’s second law is that to discover the limits of the possible, you have to venture a little past them into the impossible, and I find that particularly alluring in this arena.

AI in strategy is in very nascent stages but could be very consequential for companies and for the profession. For a top executive, strategic decisions are the biggest way to influence the business, other than maybe building the top team, and it is amazing how little technology is leveraged in that process today. It’s conceivable that competitive advantage will increasingly rest in having executives who know how to apply AI well. In some domains, like investment, that is already happening, and the difference in returns can be staggering. I find helping companies be part of that evolution very exciting.

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