Corporate Governance: Reaping the Rewards of Good Corporate Governance

We live in uncertain times. Aside from the threat of terrorism, the prospects for humanity’s overall economic prosperity seem endangered by series of massive corporate failures in the Western world. While capitalism has apparently triumphed over the perceived evils of socialism and command-driven economies, the parlous state of several major Western domestic and global enterprises, WorldCom being one of the more spectacular, is forcing corporate leaders to reconsider how they conduct business.

Let’s be more specific. American columnist, David Greising, writes: “A short walk around downtown Houston is like tour of corporate miscreants. There’s Enron, of course. And Dynegy, and El Paso Corp across the street. And Reliant Energy Services.” By some estimates, investors have lost trillions in market value in scandal-related stock drops. Loss of livelihood, evaporated pension funds, and regional economic dislocation are just some of the fallout from these high-profile corporate failures.

Ethics and corporate governance have for too long been the preoccupation of small constituency of philosophers, ethicists and the socially minded. I recall London School of Economics professor alluding to this neglect when, tongue-in-cheek, he warned me and other undergraduates not to think that “ethics is an English county!” This proved sound advice, for, as well as the enduring business challenge of managing globalisation, we now have another ‘g’ word to add to the corporate lexicon: greed.

In 1776, Adam Smith recognised this human dimension of greed, or blatant self-interest, when he focused on the ‘agency’ problem. It is still key to understanding managerial fallibility in the 21st century. Ira Millstein, prominent Wall Street lawyer, pointedly comments: “In the last decade, management has faced increased market pressures for short-term stock price performance and corresponding pressures to satisfy market expectations on quarterly basis. This, coupled with increasing grants to senior executives of stock options and other incentives that are focused on short-term stock appreciation, may have created incentives that tipped the balance toward the promotion of self-interest.”

One can argue that high-profile corporate failures such as HIH and Ansett in Australia should not be interpreted as failures of capitalism, but viewed as cause for further adjustments and corrections to our corporate governance system. An example of self-regulating, corrective response to the Enron-Arthur Andersen debacle is the unprecedented step taken by Price-waterhouseCoopers (PwC) to form an independent board to oversee the firm’s audit standards, quality and independence. This PwC Audit Standards Oversight Board will review audit processes, risk management, quality control, policy of partner remuneration and training, and produce publicly available annual report.

But will emergency responses, incremental self-regulation, or new structures really provide the urgently required upgrade of corporate governance processes? In an opinion piece that draws on the Enron-Andersen and Australian fiascos, the CEO of Mt Eliza Business School, and former CEO of PwC Australasia, John Harvey, argues that an emphasis on more regulations and structural reforms would prove inadequate. His contemporary governance fairytale calls for behavioural changes whereby the board not only regularly talks to management and shareholders, but adds value by being proactive in its advice on risk assessment and options analysis. It is up to boards, management and shareholders to restore faith in the investor protection regime – simply by changing their behaviour.

Recognising that this is easier said than done, our just published Corporate Governance special issue of Mt Eliza Business Review suggests practical, and potentially profitable, ways for CEOs, boards and managers to go about it. For example, firms can differentiate themselves by embracing good corporate governance. This is the advice proffered by UK-based Ian Byrne, who elaborates on Standard & Poor’s methodology of assurance – series of internal actions and processes that can be viewed positively by both companies and investors. Continuing in the same pragmatic vein, Geoffrey Kiel and Gavin Nicholson of the University of Queensland present us with Corporate Governance Charter model that can help boards to develop best practice governance techniques appropriate to the mission and size of their organisations. They also offer checklist for directors to determine the extent to which they have considered and established best practice. Graham Hubbard, Professor of Strategic Management, and three of our MBA students, explore the relationship between CEO tenure, CEO-chair duality and organisational performance in Australian companies. They conclude that CEOs need time to bring their policies to fruition, and that having separate people as CEOs and board chairs is essential for good performance.

Other authors focus on vital, yet often underrated, factor in corporate success: the treatment of stakeholders outside the boardroom. Drawing on lessons learned from how US giants Johnson & Johnson and Firestone handled crises, RMIT University associate professor of accounting, Philomena Leung, examines where ethics fits into the framework that supports good governance, and how socially responsible behaviour can benefit the bottom line. The CFO of Orica, Frank Micallef, argues that less-than candid reporting is potentially very damaging to individual companies and markets, while transparent financial reporting is sought after by investors, and consequently beneficial to any company that practises it. Acquisitions and mergers consultant, Paul Takac, argues that for any merger to realise its full potential, more attention should be paid to extending corporate governance ‘downstream’ to internal stakeholders such as employees.

The forces of globalisation have propelled multinational corporations (MNCs) into an international ethical minefield – and the spotlight, via worldwide communications. Australian ethicist, C Ping, urges CEOs to accept that the emerging neocapitalist era demands high, universal levels of corporate transparency and integrity, and that corporation that engenders trust among its own people and the community has the best chance of flourishing in the new millennium. Steven Dellaportas and Philomena Leung of RMIT offer some navigational aids to MNC managers and surmise that even though it may seem to cost more in the short term, applying high ethical standards in host countries represents good corporate governance, and ultimately, good business.

The important relationship between business and politics is also examined. European perspective is offered by Andrew Wilson, of Britain’s Ashridge Centre for Business and Society. He evaluates new paradigm where good corporate behaviour involves companies taking on some of the social responsibilities of national governments, including the provision of welfare. Focusing on the perception that the public has had enough of poor CEO behaviour, financial public relations expert, Leo D’Angelo-Fisher, advises chief executives on how to regain public trust and respect by acting as community leaders and speaking out on major, even controversial
issues. Local government consultant, Kate Nash, applies the lessons learned from corporate failures to improving community-level political and economic activities.

It seems to take crisis to get contemporary business leadership to focus on fundamentals. Today, it should not take rocket scientist to make the case that the exercise of good corporate governance has to be one of the many competencies or skills in business leader’s repertoire. The requisite behavioural changes in the field of corporate governance are going to demand much wisdom, commitment and drive on the part of business leaders. M

Clarence Da Gama Pinto is the editor of Mt Eliza Business Review. This

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