Do the events of last year and even more extraordinary events of 2002 constitute tipping point in the practice of governance? What should directors be doing about it to reduce their liability, and increase their capability to exercise good governance by protecting as well as enhancing shareholder value? Here are five drivers that should be carefully considered.
* There is no hiding the failure of governance to protect shareholder value in the high profile scandals of Enron, MCom, and AOL Time Warner. The headlines have focused on fraud and corruption driven by chief executive stock option schemes and assisted by the failure of auditing integrity that overlaps with consulting advice. The loss in investor trust is enormous. The regulatory response in the United States is to bring personal guarantees into director liability.
* Second, and even more disturbing, are the figures which show the huge loss of shareholder value that follows mergers and acquisitions which were, apparently, based on thorough due diligence and conceived in order to increase value. The process is amply demonstrated by the enormous shareholder loss in major corporations in New Zealand and Australia. Does this call into question board competence? Or is it perhaps lack of effectiveness in the boardroom process of debate and analysis?
* Thirdly, other critics of governance practice have made their voices heard. They include the fringe anti-globalism activists and more mainstream advocates of the corporate responsibility movement. Policy frameworks linked to the concepts of sustainable development and the triple bottom line are driven by some boards, but these are most notably in the ‘licence to operate’ sectors such as oil, mining, chemicals, and energy. In the mainstream of business the shareholder value enhancement case is still in its infancy
* And then there are the trends in the international marketplace. What new credentials will companies require in the future to gain access to lucrative markets? I’m reminded of New Zealand in the late 1980s and the total quality movement. Surprisingly few companies understood that the rules of access to markets had changed and that the ISO credentials of quality processes were required, not just in the company but in the value chain. The boards and CEOs who saw it first subsequently reaped the benefits.
* Fifthly, the so-called ‘capital flight to principle’ – the flight of capital and investors to companies and investment funds that only include stocks that pass ‘sustainable value’ rating. The best known of these is the Dow Jones Sustainable Group Fund, and its equivalent in Europe the STOXX Fund. These are tending to outperform in value growth the mainstream funds and in an age of loss of investor trust may be the most significant driver of change around the board table.
What does all this mean for directors? Perhaps it means upgrading our understanding of these trends and of their capacity to damage an organisation’s value. Some senior executives even support rethink of the value profession’s notion of what constitutes capital value. We should address risk and opportunity management and become, perhaps, more involved in the creation of the core thinking about the future of our sector which is the best insurance to protect value when key decisions are made.
Perhaps this is tipping point in governance and directors should seize the opportunity to raise their game for the simple reason that the game has changed. Directors need to increase their capability by getting access to the emerging new knowledge and market intelligence and so reduce the risk of being part of value-eroding governance rather than value-enhancing governance. M
Nick Marsh is consultant, academic, director and author of leading edge business topics.
Email: [email protected]
Website: www.nickmarsh.com
