Corporate Eye

Missing Links in Corporate Governance

My recent post on Corporate Governance ratings highlighted a recent study that questioned the relevance of rating agencies scores to corporate performance. Seems that the agencies are missing something.

Some observers feel that ethics may be the most important business leadership issue of this decade.
Alan Lane Ethics The Global Challenge Communication World I November-December 2005

When in December 2006 the Gallup organization asked Americans who they trusted to act honestly and ethically, only 18 percent rated the ethical standards of business executives as “high” or “very high.”
The Board’s Role In Ending Investor Skepticism By Harlan R. Teller JANUARY/FEBRUARY 2008 THE CORPORATE BOARD

Seems that the rating agencies overlook that good corporate governance consists of “hard” quantitative criteria (board structures, compensation, options) which they monitor and “soft” more qualitative criteria (code of ethics, corporate culture of the organisation, and the ethical behavior of employees and senior management) which are sparsely covered.

There is some hard performance evidence on the importance of soft criteria —

Corpedia has identified a basket of stocks whose ethical practices have resulted in a competitive advantage versus their peers. We call it the Ethics Index. Ethics Index companies have outperformed The S&P 500 by more than 370% over the past five years.

Hmmm looks like the soft stuff really matters.

While regulations touch on ethical matters, the problem is that it is a external mandate. Matters of ethics and integrity must be motivated and enforced internally. Ethics must start with the Board and be continuously cultivated, encouraged and enforced through all levels of management. A culture stimulating ethical behavior must be established internally.

As Tom Tierney, former managing partner of Bain Consultancy remarked, “Corporate culture is what determines how people behave when they are not being watched. ”
Narayana N. R. Murthy Chairman of the Board Infosys Technologies Limited

Corporate Governance rating agencies would well to consider looking at the following items that at least give some good indications of internal ethical practices–

  • Integrity hotline available on public website
  • Corporate Values include ethics/integrity
  • Corporate Policy on Corporate Governance available
  • Company has Chief Ethics Officer
  • All documents relating to how ethics are integrated with Corporate Governance are viewable

This is a partial list, but it is an example of what must be done to find those missing links.

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Ed Konczal has an MBA from New York University's Stern School of Business (with distinction). He has spent the last 10 years as an executive consultant focusing on human resources, leadership, market research, and business planning. Ed has over 10 years of top-level experience from AT&T in the areas of new ventures and business planning. He is co-author of the book "Simple Stories for Leadership Insight," published by University Press of America.