Corporate Governance: Getting It Right
Without effective corporate governance there cannot be effective compliance. A good maxim to follow and a basic point which makes sense.
The number of articles, books and thought leaders dedicated to corporate governance is overwhelming. But somehow we read every week about some new scandal, and how a corporate board was dysfunctional. Compliance is just one small aspect of corporate governance but a compliance program can succeed or fail based on the board’s performance.
Is it really that hard to get corporate governance right? Why do some boards work and others do not?
The answer is not to focus on compliance with all the rules and regulations and/ to adhere to some list of best practices.
There are a number of practical rules that everyone tries to follow – focus on CEOs and succession, splitting the CEO and Chairman positions, CEO compensation, independence of board members, appropriate committees and the required number of meetings of committees and boards. Everyone is very familiar with the Sarbanes-Oxley rules, the relevant exchange rules and are now becoming more familiar with Dodd-Frank rules.
Board members need to concentrate on making sure they devote sufficient time to the bigger issues. It is easy to spend too much time on a narrow focus on financial performance.
An effective board is not based on effective component committees. The most effective boards are built on a solid working dynamic among the board members. In other words, the group dynamic among the board members must be positive for a board to function properly. This will depend on each board member understanding the importance of the board’s cooperative commitment, sharing of ideas and responsibilities, and dedication to adding value to the company.
A dynamic board thrives only when it obtains access to critical information needed to carry out its responsibilities. Without information, the board will always fail. However, the board needs to make sure it gets the right quantity and quality of information, which is tailored to its important decision-making and oversight responsibilities. The board committees play an important role in making sure the entire board gets the right information and reports from each committee for review by the board.
Assuming these two pre-requisites are met, the board needs to focus on its CEO, CEO succession plans and compensation, monitoring the performance of the company, business planning and strategy and risk/compliance management. These are the issues which the board needs to concentrate on as a value-add focus of its work. Too much time is spent with lawyers devoted to making sure processes are working or adhere to best practices and not enough time is spent on the substance of what the board needs to do. With the right board dynamic and the proper amount of information, a board can dedicate itself to the important issues and enhance the value of the company. Compliance is just one of several issues the board needs to examine, monitor and lead.