Capitalism and market forces have brought us great prosperity and progress. However, our current corporate governance system has compromised the stability and future of our society, explains Prof. Dr. Leen Paape in his speech. Our economy should not just be about profit and shareholder value, but about creating sustainable value, for everyone. According to Paape, it's time to broaden our view and redefine corporate governance. He calls upon society to relinquish the dominant logic and introduce system thinking, to define the long term and look for ways to allow companies to further take their place in society and strive for sustainable value creation.
These are a few of the topics which Prof. Dr. Leen Paape will discuss in his inaugural speech on September 6 2018. The speech is titled "Corporate governance: the horse blinders and the eagle-eye view. Why it is important to see the whole and not just the individual parts". Prof. Dr. Paape will deliver this speech to mark his acceptance of the chair in Corporate Governance at Nyenrode Business Universiteit.
Collateral damage For the last 40 years, companies and their shareholders have been tasked with leading the firm as efficiently as responsibly as possible. In doing so, eternal growth was assumed to be possible, making a profit has become the standard and creating "externalities" is commonplace. Dieselgate with cheating software and the provision of usurious insurance policies are well-known examples of companies focusing not on long-term value creation, but on being the biggest or making more money. Leen Paape: "We have to stop ignoring the externalities like environmental damage, health risks and inequality. We are depleting the earth and we cannot carry on like this, because if we do, there will be no planet left for our grandchildren and the generations thereafter." Paape stresses that it is time to be transparent about this "collateral damage" and factor it into the price of products and services. He argues that in addition to making profit, companies should also commit to social welfare.
Unique approach in the field According to Paape, the current laws and regulations are inadequate. The Dutch Corporate Governance Code also needs to be adjusted. "The way we have structured corporate governance encourages us to engage in short-term thinking." In his speech, Paape calls upon us all to broaden our view and constantly focus on the future. "We cannot anticipate everything, of course. A system is adaptive and has a self-organizing capacity. Still, by constantly focusing on long-term – that is, sustainable – value creation, we can gain better insight into the adjustments which are necessary for a better balance." Paape therefore recommends an approach that consists of a combination of three key elements:
- Applying system thinking in corporate governance, which allows us to keep sight of the greater whole and not just individual parts;
- Defining what we consider long-term. The current prevailing standard of 5-7 years is not suitable;
- Defining long-term value creation, with a primary focus social welfare.
Act of Abjuration
Paape urges us to open our eyes and initiate a change, knowing that – as chaos theory teaches us – a small change in the beginning can lead to major changes in the end. This requires adjustments to the law and codes, more involvement from all stakeholders at companies and a new definition of corporate governance. During his speech, Paape will once again sign the Act of Abjuration: it is a symbolic gesture in which he says goodbye to the tyranny of shareholder value and short-term thinking, and thus seeks to initiate the beginning of that change.
You can read the full transcript of Prof. Dr. Leen Paape's speech here
Leen Paape is chairman of the Nyenrode Corporate Governance Instituut (NCGI). As a multidisciplinary knowledge center, the NCGI conducts research on current issues in the area of good management. This academic knowledge serves as the foundation for our educational programs.