The Fallout Lingers On

Last year when we established Sheffield’s Academy of Corporate Governance, the collapse of enterprises like Enron was breaking news and the criticism explosive. Time may have softened the rhetoric but the memory and the fallout lingers on. New legislation in the United States with the Sarbanes-Oxley Act and the reforming Higgs Report in the United Kingdom are examples. At home the New Zealand Stock Exchange is set to push through significant changes to public company reporting and governance rules.

The legacy of Enron and others is an increasingly widespread criticism of business, growing mistrust of boards and management and more intense level of public scrutiny. This has led to more rules and regulations which, wittingly or otherwise, make ‘best practice governance’ difficult for the majority of companies whose intentions are honourable.

The reality, of course, is that the board has become more accountable for the overall performance of the organisation as we move from the era of the professional manager to professional director. In acknowledging this transition, we need to fix the implementation, rather than the substance of our director/board model.

Our challenging business landscape is, at the best of times, difficult to navigate. We expect boards to deliver acceptable levels of profit and, increasingly, to ensure that their companies are ‘good corporate citizens’. This involves meeting the requirements of broad group of stakeholders with triple bottom line measures in place, incorporating social, environmental and financial dimensions.

Among the prevailing concerns which boards must grapple with are:
* The need to provide sufficient remuneration to attract talented directors from what is, in New Zealand, small pool.
* The need to be more resolute about rewarding failure – being less willing to provide unreasonable compensation for departing CEOs who fail to deliver.
* More effective reporting structures. The chief legal officers of some companies report to the chief financial officer or line management rather than directly to the CEO.
* Striking the right relationship balance between boards and management and the right balance of independent and executive directors. The NZSE is already trying to impose its interpretation of needs here.
* Corporate codes which prescribe ethical and behavioural expectations for boards.
* Performance standards which ensure boards meet their obligation to deliver shareholder value.

As part of worldwide trend, New Zealand boards are caught up in the tension of conformance versus performance with many directors expending more energy on compliance rather than strategic issues. One purpose of our governance work is to address this imbalance through the development of directors who are excited by the challenge of turning vision into reality.

While the challenges are immense, high standards of corporate governance must be maintained and enhanced in New Zealand to ensure the prosperity of the organisation, the community and the nation at large.

Ian Taylor is managing director of human capital consulting firm Sheffield Limited.

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