Improving Corporate Governance: A Memo to the Board

John J. Brennan, chairman emeritus of Vanguard, writes in the 5/10/10 WSJ on how to improve corporate governance.   Based on a recent speech he delivered at the Drexel University LeBow College of Business Center for Corporate Governance, he offers both conceptual and concrete recommendations:

1. Know that you are the shareholders’ first line of defense
2. Build value through mutual respect
3. Communicate
4. Measure your success
5. Compensate yourselves in equity
6. Share your metrics
7. Hold yourselves accountable
8. Establish an “owners relations committee”

In the venture world, our long term reward is in equity (#5), and there are far fewer investors, so owners are more “meaningfully engaged” (#8) than in a large public company with diffuse ownership.  The balance of Brennan’s recommendations are also sound, but as we’ve written before, good governance hinges on ‘robust social systems’ – i.e., the members’ informal  modus operandi ensure that all those well-designed systems function properly.  While the “owners” of public companies often get to pick their board members more in theory than in practice, owners of private companies get to pick both their investors and their board members.  If entrepreneurs pick great partners (broadly defined) to fund their business and make sure both financial incentives and long term goals are aligned, they will have achieved “high performance” corporate governance that will contribute substantially to their eventual success.