Professor Ludo Van der Heyden shares his insights on the key principles of effective governance, the role of independent directors, and the importance of adhering to the corporate mission

Ahead of the launch of the joint educational program for board members, BOARD'S CLIMATE JOURNEY, by INSEAD Business School and Chapter Zero Kazakhstan, we are publishing an article based on an interview with INSEAD Professor Ludo Van der Heyden.

Professor Ludo Van der Heyden, a leading expert in corporate governance at INSEAD, shares his perspectives on the key principles of effective governance, the role of independent directors, and the importance of upholding a corporate mission. In this interview, he explores how public and private enterprises can enhance their governance practices, effectively manage conflicts of interest, and ensure the board of directors plays a critical role in protecting the interests of the company and its shareholders. Special attention is given to how corporate governance supports companies in adapting to modern challenges, including climate change.

INSEAD is one of the world’s leading business schools, renowned for developing managers with a global mindset. Often referred to as the "United Nations" of business schools, INSEAD attracts students from all corners of the globe. In the face of modern challenges such as climate change, this global perspective is crucial for finding effective solutions.

Climate change is a global issue, but its effects are always felt on a local level. For instance, in Switzerland, farmers are being forced to leave mountain pastures earlier than usual due to summer droughts. This underscores the importance of combining global thinking with local actions—a principle that is deeply embedded in INSEAD's approach.

Countries with unique natural and geopolitical positions, like Kazakhstan, can play a pivotal role in addressing global challenges. With its abundant resources, Kazakhstan holds a strong position not only in the energy sector but also on the international stage. Emerging countries can bring fresh ideas and energy to tackle global issues, whether in energy or geopolitics.

Corporate governance is not just about fulfilling tasks but also about providing effective oversight of processes. Adopting global standards like the OECD Guidelines (Organization for Economic Co-operation and Development) helps improve governance in both public and private companies. However, it is crucial to remember that corporate governance is more than just a set of rules—it is a culture of accountability cultivated within the organization.

Governance challenges often lie at the root of global crises, whether they involve war, climate change, or political conflicts. Companies must not only execute tasks but also create value for society. Therefore, successful corporate governance is the key to solving many of the world's pressing problems.

- What are the key pillars of corporate governance identified by INSEAD?

- The main pillars of corporate governance can be summarized into four key aspects:

The first pillar is legislation. Corporate governance is closely tied to legal compliance. Companies must act as legal entities that respect laws and protect the interests of all stakeholders. This ensures that neither the state nor shareholders can exploit a company solely for their own benefit. Companies must work for the public good, not harm it. For example, ExxonMobil once funded research that distorted information about the impacts of climate change, causing damage to both the environment and society. It is essential for companies to act ethically and abide by the law to maintain societal trust.

The second pillar is creating value for society. Good companies should not operate solely for profit but also to benefit society. They should improve citizens' lives and contribute to public goods. While companies can profit from their actions, they must simultaneously generate value for society. In the context of climate change, large corporations often have the most significant negative impact on the environment. They must aim not to exacerbate the problem but to solve it by creating value for both society and nature.

The third pillar is emotional commitment. Corporate governance cannot succeed if people do not care about the future of their company and the planet. Many individuals focus solely on money, salaries, and bonuses, but without genuine concern for Earth, effective governance and climate action are impossible. We take resources from the planet without giving anything back. Earth will continue to exist, but this might not concern us unless we learn to care for it. We must focus on sustainability and preserving life on the planet, rather than “saving” the planet itself.

The fourth pillar is intelligence. Addressing global issues like climate change requires smart and intellectual leadership. Solutions to climate problems will come through technology, innovation, and thoughtful approaches. For example, in Ancient Greece, only educated citizens could vote because they had a better understanding of societal needs. Today’s challenges require the same: intelligence to understand the needs of society, the planet, and companies. Otherwise, voting in some countries is meaningless when people are starving or living under corruption. Successful corporate governance demands a thoughtful and reasoned approach.

These four pillars—law, value creation, emotions, and intelligence—form the foundation of effective corporate governance. If a company neglects corporate governance, its management will not succeed. Without a positive spirit, governance will fail. If a company does not understand the law, it will violate corporate governance principles. Finally, corporate governance must serve the benefit of both society and the company.

Additionally, corporate governance is critical for attracting investments and capital. When a company needs assets, it turns to shareholders or investors. For instance, if I, as an investor, invest a million dollars in a company, I want assurance that I will get my money back and earn a profit. Corporate governance ensures the fulfillment of these commitments. If a company fails to meet its obligations, investors should have the ability to protect their investments through legal mechanisms. This brings us back to the first pillar—law. Corporate governance must guarantee contract enforcement and compliance with all obligations.

It is also important to remember that corporate governance exists within the context of national culture. In some countries, governance culture may be flawed, with companies focusing solely on task completion while neglecting responsibility and oversight. Kazakhstan has the potential to stand out as an example of a country with effective corporate governance, bringing benefits to the environment, investments, and its citizens. When corporate structures act responsibly, they become valuable to both society and the economy.

- What are the features, opportunities, and limitations of corporate governance in state and quasi-state structures?

- Corporate governance in state and quasi-state companies, such as Naftogaz, Ukraine's largest state enterprise, has its unique characteristics. These companies often face political influence on their operations, as the government, being a shareholder, may make decisions in the interest of the population rather than the company. For example, Naftogaz pays substantial dividends to the state and supplies gas to the population at low prices. This is a political decision made by the government.

One of the key governance challenges in such companies is deciding on the approach: managing resources through ministries and agencies or through joint-stock companies. The advantage of joint-stock companies is that they are less susceptible to political influence. Once a company becomes a joint-stock company, its governance is transferred to the board of directors, which is responsible for the company's operations rather than the state or shareholders. The board of directors makes decisions on the company's strategy and appoints and evaluates the performance of the CEO.

The significance of the board of directors lies in its independence from shareholder influence, including that of the state. This prevents situations where individuals are appointed to leadership positions for political reasons rather than based on professional qualifications. The CEO is one of the key figures in the company, and their competencies directly impact the company's success. If the CEO fails to fulfill their duties, the board of directors must have the ability to replace them to ensure the company's development.

Corporate governance in joint-stock companies is based on the interaction of three key groups: shareholders, who may be state entities; the board of directors, responsible for the company's management; and all stakeholders, including employees and executives. The quality of the CEO's management is one of the board's primary responsibilities. This governance should be based on professionalism rather than personal connections or preferences.

- How should one act in cases where board members are appointed by the government, and how can the issue of conflict of interest be resolved?

- This situation is referred to as a conflict of interest or dual loyalty, where an individual is simultaneously accountable to their employer (the state) and obligated to act in the company's best interests. When appointed through ministries, the individual’s role is to implement government decisions. However, as a board member, their primary duty is to protect the corporation's interests.

A conflict of interest arises, for example, when the Minister of Energy demands the appointment of a CEO at a company like Naftogaz. Such cases risk the appointment of friends or political allies to key positions, which does not always serve the company’s interests. It is crucial to understand that, despite political pressure, the appointment of a CEO should rest with the board of directors, not the government. The board must act in the company’s interest, selecting the most competent leader capable of driving its success.

These types of conflicts of interest can occur not only in Kazakhstan or Ukraine but also in other countries, including France and even the United States. The issue of politically driven appointments of friends and allies to leadership positions is a global challenge, and it does not always align with the principles of effective corporate governance. It is essential to recognize that the purpose of corporate governance is not to cater to government demands but to ensure optimal conditions for the company’s development. This is precisely why independent boards of directors exist.

- How do climate goals impact corporate governance, and what is the trend?

- One corporation alone cannot solve the problem of climate change. It requires collective efforts at an industry-wide level. All oil companies within a country or across the globe need to come together and discuss how they can address the challenges of climate change. If climate policy is determined solely by politicians, their decisions may be overly emotional, often categorizing oil as "good" or "bad," when in reality, its impact depends on how it is used. It’s essential to understand that air was once considered a free resource, allowing companies to pollute without consequences—yet it was people and local communities who suffered as a result.

Corporate governance must ensure that companies do not harm the environment. A notable example is the ban on leaded gasoline. While Kazakhstan has likely already prohibited its use, it’s important to remember that lead in fuel was extremely harmful, particularly to children’s health. The solution to the lead issue was achieved through industry-wide bans, and a similar approach is applicable to climate change—addressing the issue on an industry level, not just through individual companies.

When companies compete with one another, there’s always the temptation to break the rules for short-term gains. This is akin to doping in sports: using prohibited substances to win competitions despite the unfairness. The same logic applies to business. Corporate governance must therefore ensure that companies engage in fair competition while adhering to established environmental and ethical standards.

In this context, initiatives like Chapter Zero must avoid placing the burden solely on individual companies in Kazakhstan. These efforts should encompass the entire energy sector in the country, fostering collective responsibility. This approach ensures competition occurs without "doping"—without rule-breaking or bypassing standards. This transcends corporate governance and extends into industry-level governance.

Governance exists in various forms: corporate, sectoral, climate-related, global, and geopolitical. Corporate governance is just one aspect, and it’s important to remember that climate change is not solely a matter of corporate governance but also of industry-wide, legislative, and national regulation.

Legislation plays a pivotal role in this system. Governments must establish rules and regulate corporate activities. Without clear environmental laws and standards, companies will seek loopholes to gain competitive advantages, worsening the situation. Therefore, the government’s role should not be to directly manage companies but to regulate them, creating conditions for fair competition and sustainable development.

- What could be the algorithm for implementing corporate governance in an organization?

- The process of implementing corporate governance in a company begins with the development of a corporate charter. A charter is not only a legal requirement in Kazakhstan but also the company's internal constitution. It defines the organization’s mission, values—including its commitment to the environment and society—and the rules of corporate governance. It is crucial for the charter to clearly outline how the company will operate and what commitments it assumes under the framework of corporate governance.

The next step is putting the charter into practice. It’s not enough to create rules; it’s essential to ensure that the company’s employees follow them. For instance, Naftogaz has strict safety rules, yet accidents, including fatal ones, still occur because people fail to adhere to established standards. Corporate governance works similarly: if its rules are not followed, the company could face crises, including bankruptcy.

Beyond drafting the charter and enforcing rules, education is a key component. Employees must clearly understand their responsibilities within the corporate governance framework. For example, shareholders, board members, and managers need to know their respective duties. Education helps all participants in corporate governance understand their roles and responsibilities.

Educational initiatives in corporate governance have become especially relevant since the financial crisis. For example, INSEAD began actively training top managers, board members, and shareholders on corporate governance principles. This training helps not only to grasp the concept of corporate governance but also to apply it effectively to build more sustainable companies. One could say that corporate governance is like vitamin C for a company. The more "vitamin" it gets, the healthier it will be, the longer it will thrive, and the less likely it is to face bankruptcy or other serious issues.

While many executives argue that corporate governance is necessary simply because the law demands it, it is more important to understand its real value. Good corporate governance increases the likelihood of effective company management, making the organization more sustainable and reliable as a partner for clients and investors. It also reduces the chances of employees being dismissed unfairly.

Thus, corporate governance provides a balance where all participants benefit fairly. It prevents one side from excessively dominating the others. A counterexample of poor governance can be seen in Sicily, where the mafia controls the region for its own benefit. The result is poverty, a lack of investment, and unemployment. This may be an example of effective enforcement (or coercion), but it is not good corporate governance. The ultimate outcome is harm to people.

The webinar on YouTube:

https://www.youtube.com/watch?v=Tcmljg74mHw