Corporate Governance 2.5 A New Focus
July 25, 2011
It is time for a new corporate governance editorial focus. Why?
Corporate governance has a long history, perhaps beginning as far back as the 4th century BC, when the Chinese philosopher Mencius argued that it is acceptable to overthrow corrupt or unjust rulers, through the establishment of joint stock companies (perhaps as early as the 13th century, but certainly by the 17th century) and stock exchanges to facilitate the sale of stock, to the US Securities Act of 1933 – the first to regulate the securities markets, particularly with respect to disclosure – and the development of corporate governance codes in the 1990s. In 2002, in the US, the Enron collapse and other corporate scandals led to the Sarbanes-Oxley Act; and in 2009, the UK Walker Report recommendations were published, closely followed in 2010-11 by revisions to the UK corporate governance code, and the development of a stewardship code for institutional investors.
Still, two and half millennia of governance experience, and many regulatory and legal interventions seemed to do little to prevent the catastrophic 2008 world economic collapse. The reaction is dramatic…
“We are in the middle of the biggest revolution in corporate governance since the 1930s…
Richard Cellini, senior VP of business and legal affairs at Integrity Interactive Corp.
“After the Storm”, The Conference Board Review March / April 2009
This broad sweeping commentary is supplemented by others who focus on more specific items:
- Risk Management
“The crisis has also thrown up some massive failures in risk management. Even where companies had mandatory internal controls on reporting for the financial accounts, their executives did not fully grasp or clearly communicate the financial risks of many of the instruments they were betting on.”
Source: Corporate Governance-Lessons from the Financial Crisis OECD - Not Enough Regulation
“With (Brooksley) Born (former head of a regulatory unit who, in the late 1990s, warned about the risks associated with complex financial instruments) out of the way, the last two years of the Clinton administration were a heyday of deregulation. OTC derivatives were off limits. Banks were freed to make riskier investments. Wall Street was largely left to regulate itself.”
Source: The Warning, Public Broadcasting System - Too Much Regulation
“…, the U.S. government and quasi-governmental agencies have developed a near unfathomable maze of corporate performance reporting measures that have clearly helped, but are largely inadequate to safeguard corporations and improve the public trust. The end result is that investors, the public, and even management can’t evaluate the extent of their exposure regardless of the position outlined in much company information.”
Source: Beyond Transparency: Information Overload and a Model for Intelligibility
ROBERT L. LAUDAND DONALD H. SCHEPERS Business and Society Review 114:3 365–391 - Communications
“It’s time for CEOs and boards to understand how powerful customer and employee social interactions truly are, and how they are accelerated and enabled by online communications and cloud technologies. For boards to succeed, nothing less than a shift from traditional closed governance to open and socially aware independent directorship is required.”
Source: Talkin’ ’bouta Revolution. By: LIBERT, BARRY, POTTER, STEVEN, Institutional Investor, 00203580, Apr 2011, Vol. 45, Issue 3
This small sample of key issues in corporate governance is supplemented by many others such as executive compensation, lack of board oversight, ethics, internal controls and more. All point to a need to revisit corporate governance, so we will focus our posts on these topics and others around communicating corporate governance including–
- how to explain what corporate governance is
- discussing the difference between corporate governance and management
- best practices in corporate governance communications on websites
- how to explain relationships between board/senior management on the corporate website
- why leaders need to communicate and be visible
- ideas for explaining the corporate strategy and progress against that strategy.
Well there it is: our new corporate governance focus.
Let us know what you think. Comments Please: readers are encouraged to provide their thoughts on what they believe should be covered in future posts.
The Board’s Role In Strategic Planning Redux
November 18, 2010
On Sept. 23, 2010 the NYSE Euronext (NYX) released the final report (PDF) of the NYSE–sponsored Commission on Corporate Governance.
One of the ten key items is –
Good corporate governance should be integrated with the company’s business strategy and not viewed as simply a compliance obligation. [Almost a year earlier our post The Board's Role In Corporate Strategy suggested a more active Board role in Business Strategy.]
The Commission believes that sound corporate governance should be a core element of a company’s business strategy, as it includes independent and objective oversight of strategy and management by boards; alignment of interests among shareholders, management and the board; accountability of the board to shareholders and accountability of management to the board; compensation programs that incentivize long-term growth; establishment of criteria that are aligned with the company’s business goals; prudent risk management; a culture of integrity; and consideration of the impact of the corporation’s activities on society overall.
This makes a strong case for the Board’s active involvement in the development and continuing review of the company’s business strategy. Too many companies delegate the formation and execution of the business strategy to management. Further, many Boards review the business strategy once a year.
However there are some companies that are already practicing the NYSE’s recommendations.
One such company is TD Bank Financial Group. In their online Corporate Governance practices they state–
Strategic Planning Process
The board is responsible for overseeing the execution and fulfillment of our strategy and fundamental goals. This responsibility includes adopting a strategic planning process; and continuously considering and approving strategic alternatives and plans that management presents. The board assesses the bank’s major opportunities and risk impact of any strategic decision being contemplated, including considering whether any strategic decision is within the bank’s approved risk appetite established for the bank and its individual business units; oversees the implementation of strategic plans; and monitors performance against such plans.
Continuing Education
…In the past year, the board participated in in-depth sessions (“deep dives”) on particular aspects of our businesses and overall strategy. Each deep dive includes an element of general education as context for the discussions (e.g., the industry; competitors; trends; and risks/opportunities). Directors also have complete access to management to understand and keep up to date with our businesses and for any other purposes that may help them fulfill their responsibilities.
This discussion seems to be very much in line withe the NYSE recommendation. The problem is these items are somewhat buried within a lengthy document. TD would do well to highlight their Board actions regarding business strategy, perhaps discussing this in their Leadership Views in the Media Room.
Another example comes from Hill-Rom a medical products company.
The Board’s role in Business Strategy is described in a concise discussion on the (Board) Role and Functioning section within Corporate Governance
In summary:
The Board’s Role In Strategic Planning
The Board of Directors has the legal responsibility for overseeing the affairs of the Company and, thus, an obligation to keep informed about the Company’s business and strategies. This involvement enables the Board to provide guidance to management in formulating and developing plans [...] Acting as a full Board and through the Board’s three standing committees, the Board is actively involved in the Company’s strategic planning process.
Each year, typically in the spring, summer and fall, senior management sets aside specific periods to develop, discuss and refine the Company’s long-range operating plan and overall corporate strategy. Specific operating priorities are developed to effectuate the Company’s long-range plan. [...] These meetings are focused on corporate strategy and involve both management presentations and input from the Board regarding the assumptions, priorities and objectives that will form the basis for management’s strategies and operating plans [...]
At most Board meetings, the Board substantively reviews the Company’s progress against its strategic plans and exercises oversight and decision-making authority regarding strategic areas of importance and associated funding authorizations.
In addition, Board meetings held throughout the year target specific strategies and critical areas for extended, focused Board input and discussion.
The Board’s role is inextricably linked to the development and review of the Company’s strategic plan.
From this one can see that the Board is actively involved. The Board does not simply delegate the plan to management. Nor do they let a year elapse before they receive well orchestrated presentations for management. They appear to be following a process suggested by John Rehfeld in his article The Company Director’s Role In Company Growth –
| Goals | Develop | Approve | Execute | Review/Changes | |
| Board | Primary | Actively Participate | Primary | Stay informed | Primary |
| Management | Provide input | Primary | Primary | Provide input |
Adapted from The Director’s Role In Company Growth
While the NYSE’s recommendations are relatively new, these companies provide examples for other companies to follow.
Li and Fung — Corporate Governance On One Page
November 16, 2010
During my online journeys I’ve visited some interesting Corporate Governance sites. I found that too often I make quick judgments and that I need to take more time to assess the attributes of a visited site.
This was put in play when I observed the Corporate Governance page of Li & Fung Ltd an export trading company that manages supply chains. My immediate reaction was somewhat negative since the design wasn’t glitzy –
Also, as indicated in this visual, I found that the topline navigation was the beginning of a very long page.
However, then I looked further and found out just how much information was available. First, just look at the menu–
- The Board
- Board Committees
- Remuneration Policy for Executive Directors
- Remuneration Policy for Non-Executive Directors
- Internal Control and Risk Management
- Code of Conduct and Business Ethics
- Market Recognition
- Directors’ and Relevant Employees’ Securities Transactions
- Directors’ and Senior Management Interests
- Directors’ Responsibility for Accounts and Auditor’s Responsibility
- Compliance with the Code on Corporate Governance Practices
- Investor Relations and Communications
- Shareholders’ Rights
- Corporate Social Responsibility and Sustainability
- Corporate Communications
- People and Community
- Information Technology
This is one of the most comprehensive list of Corporate Governance topics I have seen. It is a good indicator of the company’s transparency. Some observations…
An effective use of visuals to explain Board composition, Risk Management and Board meetings
An outline of internal communications
Senior executives also travel frequently to different country offices to reinforce staff commitment to Li & Fung’s business culture and the Group’s established corporate initiatives. Under the supervision of our Group Chief Compliance Officer, members of the Corporate Compliance Group conduct regular interactive forums with staff members in Hong Kong and overseas to ensure that good corporate governance and company practices are reinforced and embedded in the Group’s operations.
Commitment to Ethics
The Group’s reputation capital is built on its long-established standards of ethics in conducting business. Guidelines of the Group’s core business ethical practices as endorsed by the Board are set out in the Company’s Code of Conduct and Business Ethics for all Directors and staff. All the newly-joined staff are briefed and requested to acknowledge the understanding of the Code. For ease of reference and as a constant reminder, a copy of the latest guidelines is posted in the Company’s internal electronic portal for reference by all staff.
A visual outlining awards won in various categories such as Corporate Governance, Best Managed and Top Companies
All of Corporate Governance on one page, yes, but a page packed with information depicting corporate transparency.
Shell’s Scenarios and Risk Management
October 18, 2010
In a recent post I reviewed Black Swans and mentioned that I would have a posting about Shell Oil’s use of scenarios to identify future risks and opportunities.
First, what are scenarios?
Scenarios are pictures of possible futures facing an organization. They are developed via an amalgam of perceived trends and intelligence on possible actions of stakeholders. External factors such as economics, competition and market conditions are considered. Quantitative and qualitative tools such as econometrics/ statistical forecasts, Delphi technique, and surveys may be used. The results of all analyses are organized into comprehensive pictures of a number of possible futures. Shell pioneered this technique in the early 1970s and they still use it.
The Scenario page is nestled in the About Us/Strategy section. The main page offers much useful information — definitions, videos and a link to current scenarios — and great use of visuals and a slide-out menu of links to related information.
Access to scenarios in future decades is viewed by simply clicking on the year. In the upper right, see Blueprints: clicking on the + icons provides additional information about the scenario.
Deloitte (PDF) offer some useful advice on Scenarios and Corporate Governance –
Why do scenario planning?
The Risk Intelligent Enterprise utilizes risk information to influence strategic planning in three key ways:
- Risks are identified and analyzed when considering strategic alternatives and developing business/organizational strategy
- Risks of the strategy
- Risk appetite serves as a guidepost in setting strategy and allocating resources.
- Once business/organizational strategy has been selected, risks that might affect the organization’s ability to implement key strategies are identified and managed
- Risks to the strategy
Common risk management challenges include:
- Failure of modern risk management
- Information filtering
- Mental models
Desired results may include:
Better understanding of risk
- to the strategy
- of the strategy
Shared commitment and approach to:
- manage key risks to within risk appetite
- exploit risks where the organization has a strategic advantage
Want to know more? Here are some additional worthy resources–
The use and abuse of scenarios McKinsey Consultants
Why Scenarios? Global Business Network
Social Media And Corporate Governance
September 15, 2010
Social media started with young people connecting with others. Now it is sweeping through corporations like wildfire, locusts… add your own metaphor.
Well, what does this mean for Corporate Governance? Similar to the Chinese symbol Zhuan ji, it means opportunity and danger.
The opportunities include the ability to:
- connect with stakeholders like never before
- build trust and reputation
- get input from stakeholders
- communicate with existing and potential employees.
But the risks include:
- loss of intellectual property
- disparaging the company or co-workers
- posting embarrassing (to the company) content
- possible legal liabilities
- violations of the Code of Ethics
Such social media risks are a matter for Corporate Governance. Social media has progressed faster than companies’ ability to craft risk management schemes.
Forbes magazine published an interesting article addressing these risks , “A Corporate Guide For Social Media“, in which they state–
…here is a set of guidelines for corporations considering how to integrate social media in the workplace. If you are an executive, keep in mind two points as you gear up your social media strategy:
First, social technologies including blogs, social networks and Twitter are communication tools. That means a company’s social media approach must integrate with its existing communications channels and goals.
Second, if you think these guidelines don’t apply to you, you are probably already on the endangered species list.
Some companies already heed this advice.
For example, Intel Social Media guidelines for posting content by employees and contractors are available to the public, using an effective minimalist design that displays its social media guidelines and includes links to relevant resources.
Interestingly, Estee Lauder have included social media as a risk factor in their annual report (spotted by Footnoted.com).
And finally, here are some useful related resources that can help to design your Social Media guidelines:
- Socialmediagovernance.com offer a list of many examples of social media guidelines
- Social Media In The Workplace: Managing The Risks from law firm Jackson Lewis
- Social Media Policy Template from Bottomline Legal
- Social Media What Directors Need To Know PriceWaterhouseCoopers Podcast.
Image from Living Chinese Symbols
Get our updates
 |