Five Steps to Improve Corporate Governance
Maybe Sarbanes-Oxley did not address the real problem. Corporate scandals occur when corporate governance fails to properly supervise corporate operations. Senior management may try to keep corporate boards in the dark but that can only occur when a corporate board is not following basic governance principles.
For example, at the heart of the Enron scandal was the failure of the Enron board to follow basic governance rules. Enron was allowed to engage in risky accounting principles, conflict of interest transactions, undisclosed off-the-book activities, and excessive executive compensation.
Companies need to improve corporate governance. in the absence of effective governance, companies will suffer financial, legal and reputational harm. From the risk perspective, there is no greater risk to a company than poor governance.
To improve, governance, here are five basic steps:
1. Increase Diversity
Corporate boards suffer from a serious lack of diversity. In 2008, the board composition of Fortune 100 companies was approximately 71 percent white men and 29 percent women and minorities. Women make up only 16 percent of the directors of the Fortune 500 companies. This lack of diversity has been pervasive even though there are many studies which show that diversity in the boardroom improves company performance.
A recent study issued by Credit-Suisse which examined companies around the globe concluded that greater gender diversity results in improved financial performance. Companies with one or more women on the board outperformed companies with no women by 4 percent in net income growth. United States companies lead the world in having one or two women or minority board members. European companies lead the world in having three or more women or minority members.
Diversity is a bottom line issue. The SEC requires companies to disclose their diversity policies and such disclosures should lead to increased emphasis on diversity.
2. Appoint Competent Board Members
The Nominating Committee should devote adequate time to identify board members who have the skills and industry knowledge to assist the board. That does not mean that there is only one type of board member who would qualify. There should be a balance between those board members who know the organization, those board members who have a helpful expertise and those that offer a fresh perspective. What is important for a board is that it has a good understanding of what skills it has and those skills it requires. A board candidate should also be evaluated on his or her interpersonal skills since board interactions and relationships will be important to overall board performance.
3. Ensure Timely Information
Timely information results in better decision-making. Senior management has to provide timely information to ensure proper board supervision and direction. Board members, however, should not be overwhelmed with information. There is a balance which needs to be achieved between necessary information and irrelevant information. Interactions between senior managers and the board are critical to ensuring that adequate information is provided to the board. If a board member requests information, senior managers must respond promptly to the request.
4. Prioritize Risk Management
Every board should establish an effective system for risk oversight and management. “Risk” is not confined to compliance risks. It is a broader term which incorporates all of the risks to the company – e.g. financial risks, global warming, cyber-security, and other risks outside the compliance with law and policy requirements. Effective risk management leads to better decision-making and accurate cost-benefit or risk-reward decisions.
5. Evaluate Board Performance
Boards must be willing to examine their own strengths and weaknesses. On a regular basis, the board should conduct a self-evaluation process, including the performance of individual directors. The evaluation process should be used to identify weaknesses in board performance, and adopt reforms needed to improve board performance. The evaluation should be broad, cut across all issues and personnel and include senior management interactions with board members.