Practical analysis for investment professionals
06 September 2019

Book Review: Governance Reimagined

Governance Reimagined: Organizational Design, Risk, and Value Creation. 2018. David R. Koenig. First published 2012 by John Wiley & Sons. Self-published 2018.

Many authors write about corporate governance, but none have reimagined it like David R. Koenig. Koenig, who has undergraduate and graduate degrees in economics and mathematics, respectively, draws on an unusually broad reservoir of relevant experience. He has served as chief investment officer of an investment firm, CEO of a governance consulting firm, chair of the Professional Risk Managers’ International Association, a volunteer member of several not-for-profit boards, and an elected official. What makes his book so unusual and valuable is that he seeks to answer governance questions not posed in most books on the subject. More specifically, he focuses on the “why” and “how” of governance rather than the “what” that is delivered by other guidebooks.

For example, the concept of fiduciary duty is central to governance, but the term is referenced only in this book’s glossary and nowhere in the main text. Instead, the author uses a sequence of adaptable building blocks over three sections. First, he explains why institutions organize in the first place, how they become parts of networks and systems, and how those systems can become unstable with hidden risks. Next, he examines the dynamics within complex organizational structures and networks — a topic that includes the influence of various stakeholders, how such behavioral characteristics as risk aversion affect decisions, the dynamics of trust in a complex system, the role of incentives in distorting outcomes, and how nodes of weakness develop. It is only in the third section that Koenig is specific about governance roles, including directors’ primary job of fostering and advancing innovation within their organizations, thereby enhancing their success and resilience in the face of failure.

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Summarizing the central theme of the book in an early chapter, Koenig writes, “What makes some systems fail from just one problem, while others endure, reshaping themselves and perhaps even thriving more vigorously after dealing with adversity? Knowing this increases your potential to deliver value. Do you have the right defense in place?” For CFA charterholders who analyze and for directors and executives who execute governance in corporations, this passage offers far more insight than an explanation of fiduciary duty and an exhortation to ask questions and challenge the status quo.

The book provides governance professionals with a conceptual framework that is adaptable to different circumstances and analysts with a tool that is far more useful than the box-ticking exercise that so often passes for a corporate governance review these days. For example, analysts are increasingly integrating non-financial environmental, social, and governance (ESG) issues into their calculations. Their ESG data are often derived from one of three sources: standalone corporate social responsibility reports, companies’ integrated reporting, and third-party research that summarizes a company’s sustainability and governance practices. The reporting may cover specific governance issues, such as board diversity, whistleblower protection, independence of audit committee chairs, and separation of board chair and CEO. Although this input is important, time saving, and helpful, it is often a static or historical snapshot — a checklist of metrics. Koenig’s book provides a broader framework for considering board dynamics in the assessment of a firm’s long-term business strategy. Even for short-term, event-driven analysis, the framework will help investors evaluate a company’s resilience in the face of adversity, something for which current ESG reporting is ill-suited.

The same ESG issues that analysts consider are also the subject of boardroom discussion. Koenig’s reimagined governance framework helps directors integrate ESG issues into their company’s strategy for the future. Whether directors are grappling with the demands of stakeholders for innovative ways to address their company’s environmental and social externalities or the need to foster a corporate culture of innovation for new products and services, they will be well served by Governance Reimagined.

The book is not without flaws. First, the references are somewhat dated: Daniel Pink’s book Drive is cited, but Pink’s two books published since then are not. Political references, such as Michael Dukakis, will send younger readers scurrying for context. The dated references are easily explained by the book’s limited circulation in its initial run (published by John Wiley & Sons) but much wider distribution now as a self-published paperback. While they are curious, they do not detract from the book’s strong content.

Second, the early chapters assume too little background in the subject, which might cause some readers to put the book down and miss the unique perspectives that follow. For example, the simplicity of the first chapter in its explanation of discounted cash flows is incongruous in the context of later chapters that so insightfully incorporate the work of such groundbreaking academics and writers as Herbert Simon, Amos Tversky, Mark Granovetter, Nassim Taleb, and Stephen Jay Gould, as well as more esoteric ones like Eric von Hippel and Luca Celati.

A third weakness is the book’s scant attention to environmental and social factors as sources of risk — an area that is at the forefront of concerns for many in governance roles today (See, for example, “Governance Challenges 2017: Board Oversight of ESG” or The Directors’ E&S Guidebook). Fortunately, the book reimagines governance in conceptual rather than prescriptive terms, which allows these issues to be considered nonetheless. Still, it would have been helpful to have had more specific references or examples in the book. Koenig is strongest in his middle and later chapters, where he leads readers through the nature of the firm, the concept of risk, and theories of innovation and competition. In this, he has more in common with W. Chan Kim and Renée Mauborgne’s Blue Ocean Strategy or even Andrew Lo’s Adaptive Markets than with traditional governance books. New directors are best advised to start with the traditional books that outline “what to do,” but experienced directors and analysts seeking to understand “why” and “how” governance helps companies thrive could do no better than to read Governance Reimagined.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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About the Author(s)
Ian Robertson, CFA

Ian Robertson, CFA, is a portfolio manager at Odlum Brown Limited and a DPhil candidate (part time) at the Smith School of Enterprise and the Environment at the University of Oxford.

1 thought on “Book Review: Governance Reimagined”

  1. Thank you, Ian, for your very thoughtful review! Such is always appreciated and cannot be achieved without a lot of work being put into the product. I am very appreciative.

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