The Importance of Proactive Governance: A Case Study of Kodak

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By Michael Armstrong (FCA) [ICAEW Regional Director for the Middle East, Africa and South Asia]

With a few Kenyan companies over the recent past experiencing considerable losses or completely folding, the well-known narrative of Kodak’s downfall provides more than just a snapshot of why effective corporate governance is not simply about avoiding slip-ups, but about taking a proactive, innovative approach even when the picture seems full of colour.

In 1997, Kodak was amongst the most successful firms in the world. It was worth an astounding $31bn due to its profitable camera and film-processing business, and a strong brand. However, just 15 years later, on 19 January 2012, Kodak was forced to file for bankruptcy. Its shares ended that day at $0.36 when they’d been worth over $90 in 1997.

Yet even nowadays, Kodak isn’t seen as a corporate governance failure. Bad corporate governance, several believe, arises when executives split the pie in favour of themselves or investors, at the expense of stakeholders. For instance, high chief executive pay or a share buyback is frequently met by outrage, owing to claims that this money could have been otherwise invested. Those actions are known as “errors of commission” – taking bad actions. Kodak didn’t make any such errors. No one lined their pockets at the expense of anyone else. Even when it went bankrupt, Kodak’s executives didn’t suffer the media backlash regularly reserved for well-paid executives.

Indeed, whereas many alleged “fat cats” are notorious, few people know the names of the executives liable for Kodak’s collapse and the loss of 145,000 jobs. Instead, Kodak is often viewed as the innocent victim of changes in technology. But Kodak provides a great case study of poor corporate governance. Poor corporate governance isn’t just about CEOs taking slices of the pie from other stakeholders, but shrinking the pie through complacency and ruinous decisions. Shareholders and executives suffered alongside the 145,000 workers who lost their jobs. Kodak wasn’t an innocent victim of technology. It may well have taken action – considering the fact that it filed the first ever patent for a digital camera back in 1975.

Six years later, Sony developed the world’s first electronic camera, the Mavica. Kodak – then the unmistakable market leader in film – did some market research and what it found ought to have sent shockwaves around the company. Its head of market intelligence, Vincent Barabba, predicted that digital would replace film within 10 years. But Kodak didn’t do anything about it, because 10 years was a long time – far beyond executives’ horizons. The cash was still rolling in from film – sales had just passed $10bn in 1981 – and if it embraced digital, that might cannibalize its money-spinning film business.

As Barabba said, “The company just never got around to developing the technology because the money to be made from its traditional business of old-fashioned photographic film was so much bigger.” But we know how this film ended – in Kodak’s bankruptcy. What lessons can Kenyan firms learn from this? Poor corporate governance isn’t just about “errors of commission” (taking bad actions) but also “errors of omission” (failing to take smart actions).

An executive’s goal is not just about avoiding media backlashes, but aggressively creating value for society – taking risks to innovate new products that transform customers’ lives for the better, working practices that enhance employees’ lives, and production procedures that preserve the environment. If a company fails to take such actions, substantial opportunities to grow the pie – for both shareholders and stakeholders alike – are lost. Companies need to make innovation a deliberate priority.

All boards have risk and audit committees to decrease downside risk. But good corporate governance is also about upside value creation. One action could be to create an innovation committee on the board. This steps back from day-to-day firefighting and ensures that companies invest enough financial and human resources into long-term projects. Equally important is to create a culture that encourages ideas from staff at all levels, embraces risk-taking and tolerates failure – a shift from the micromanagement and hierarchy that typifies large corporations. What about policymakers? Corporate governance reforms must not only prevent failures through complacency, such as Kodak, but also promote innovation.

We should be comfortable that failures through experimentation are a statistical inevitability of a governance regime that embraces risk-taking, given how many companies there are. This involves ensuring that new laws aren’t a knee-jerk response to one or two high-profile failures, which may stifle hundreds of other companies that are acting responsibly and seeking to create long-term value for all of society.

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