Moving Corporate Governance “Forward”
Corporations should take note from the recent election – the American people expect companies to act ethically and conform to the law. The election results reflected a continuing frustration with financial fraud, corruption, and business misconduct.
Of course, the economy and jobs dominated the campaign but the Obama campaign pressed its desire to have “everyone playing by the same rules,” and enforcement of Dodd-Frank. The American people expect the Administration to continue its aggressive enforcement program, and all signs are that this will continue.
Companies have to move “forward.” The first place to focus is corporate governance. The risks include not only aggressive enforcement, but increased shareholder activism and demands for greater transparency and reform. Companies better take note or they will face unfortunate consequences.
It is hard to bring companies to focus on corporate governance. Many companies believe they have adequate governance principles and controls in place. But more is needed to improve corporate leadership and management.
Here are some top issues which need to be addressed:
1. Board Member Qualifications – A board is only as good as its members. The Nominating Committee has to devote itself to finding candidates who can contribute to the board’s performance. This is not a minor responsibility. It is a make or break function for every board.
2. Independent Directors – Companies have to devote special attention to its independent directors. In sensitive situations where conflicts may exist, companies have to turn to their independent directors.
3. Information Flow – Companies need to develop information controls and procedures to ensure that the board has adequate information to carry out its responsibilities. Most companies need to increase the amount and quality of information for review. It is a delicate balance to make sure that the board has sufficient information but not too much information.
4. Breaking the Umbilical Chord – Chief Executive Officers should not serve in the dual role as a Chairperson of the Board. Almost 60 percent of all companies have combined the roles of CEO and Chairperson. This may sound like corporate heresy but it is important to have a board that is not under the leadership of the CEO. Companies that allow the CEO to serve as the Chairperson are basically betting “all in” on the CEO/Chairperson’s performance. Responsible corporate governance requires a separation of these two functions into two individuals.
5. Increasing Female and Minority Board Members – Corporate board rooms have been slow to reflect the changing population. Women and minorities need to play a more significant role in corporate boards. Recent studies have shown that corporate boards with higher numbers of women perform better than other boards.
6. Risk Management – With increasing risks and enforcement, boards need to develop risk management models and priorities. Risk management does not mean creating more bureaucracy or fancy titles such as Enterprise Risk Managers, it means paying more attention to risk analysis, information and priorities. A robust compliance program led by a Chief Compliance Officer is more than capable of fulfilling this function. No fancy titles, no fancy positions are warranted.