Time To Stop The Rot

In the United States alone there are more than two trillion reasons why better corporate governance practices have suddenly leapt to executive top-of-mind awareness.

The billions stolen, not to mention the trillions written off shareholders’ corporate wealth, are focusing the minds of directors and top management on corporate governance issues.

As Sheffield’s managing director Ian Taylor understated it last month when announcing the establishment of his executive placement consultancy’s Academy of Corporate Governance; “this comes at time when the role of director is increasingly under the microscope”. The implications of the Enron collapse and other equally appalling corporate fatalities are “impacting on boardrooms worldwide”, he added.

“The fish rots from the heat,” according to an old Chinese proverb which Taylor offered as “a powerful metaphor for boards and board members to consider”. “You don’t have to look too far these days to see some parts of the corporate world rotting,” he added.

Enron, WorldCom and others have highlighted some of the global issues facing corporate governance and fuelled growing mistrust of business, boards and management, which in turn generated more intense public and media scrutiny. “All this is set against an increasingly challenging business landscape where boards are expected to deliver not only acceptable levels of profit, but also ensure that companies are ‘good corporate citizens’,” said Taylor.

While New Zealand directors face similar issues to board members overseas, some are unique to us. The increase in foreign ownership of our major companies for instance. The diminishing number of new listed public companies and the high proportion of state-owned trading enterprises.

“Directors who can perform in this changing and demanding corporate governance environment are in high demand,” said Taylor. “The development of larger pool of skilled board executives who can create new financial, environmental and social fabric for this country is crucial.”

Boards are increasingly caught up in the tension of conformance versus performance with directors expending energy on compliance rather than strategic issues. Taylor said Sheffield’s new Corporate Governance Academy had been set up to “address this imbalance” and to develop directors.

Former South African Supreme Court judge turned director and corporate governance expert, Mervyn King, told the Auckland audience at the Sheffield Academy launch that New Zealand companies will need to show that they work to “best practice” corporate governance standards if they want to attract foreign capital.

Enron and similar collapses are more about personal greed and lack of “intellectual honesty” said King. “The pillars of good corporate governance are fairness, accountability, responsibility and transparency. But most of all they are about intellectual honesty.”

Corporate governance issues will get another significant airing at Auckland’s Sky City next month at corporate governance conference entitled The Future Board, which will feature speakers including corporate governance heavyweights Joseph Healy, head of ANZ Investment Bank; Dr Jim Farmer QC, former chairman of Air New Zealand; receivership and liquidation specialist Michael Stiassny; Bill Falconer, chairman of the Stock Exchange Surveillance Panel, and Professor Nick van der Walt, chair of international business at Massey University.

The conference, and similar one at the same venue the following day on mergers and acquisitions, is being promoted by LexisNexis and Management magazine.

Boards and how they perform is an increasingly hot topic in the business world. Because directors are at the top of the organisational food chain, how they conduct themselves and how they direct management will set the tone of the legislative environment in which business will have to work in future. And understanding the rules of the game as expressed through corporate governance is as important to large organisations as it is to small companies, according to King.

Boards that get the balance between executive and non-executive directors right and who understand the other, often new, elements of good governance, such as triple bottom line reporting, will do well. “But if [boards] get weighed down on conforming rather than performing they will fail,” King warns.

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