MARKET FOCUS: Staying above board

"Corporate governance" seems a simple and self-defining term, yet the bad-guy executives who inadvertently turned it into a buzz phrase either did not understand it or chose to ignore its basic tenets.

"Corporate governance" seems a simple and self-defining term, yet the bad-guy executives who inadvertently turned it into a buzz phrase either did not understand it or chose to ignore its basic tenets.

As sound bite overuse threatens to muddle its definition, PR professionals scramble to figure out what corporate governance means in their worlds, or at least how to grab pieces of a hot business trend. "We're in an era of corporate accountability, which is something we haven't seen in more than 100 years, since Teddy Roosevelt took on the companies of his time," observes Hank Boerner, a New York managing director of Interpublic-owned Rowan & Blewitt. Swashbuckling mergers in the '70s and '80s, the rise of boardroom activism, and the backlash against celebrity CEOs all might have contributed to today's scrutiny, along with the obvious corporate scandals and dot-com failures. "Today we're back to the fundamental question of business strategy - getting all of the audiences to understand the choices, then proving that the company has delivered the results," says Peter Verrengia, Fleishman-Hillard's New York regional president and head of its corporate credibility advisory practice. Defining corporate governance While PR execs express some variance in their own definitions of corporate governance, they generally agree the term refers to policies and standards that apply to corporate boards and top management, with new government regulations extending accountability further down the corporate ladder. "It's really how the company behaves and responds to shareholders," says Judi Mackey, SVP and director of Hill & Knowlton's corporate practice in New York. "It has broadened because so many people have been impacted by bad behavior." Boards might catch flak for not catching management mistakes, but Burson-Marsteller MD Michael Claes in New York says those who blame the boards don't understand their function. "The board doesn't run the company," Claes clarifies. "The role of the board is to provide oversight and management of what the company is doing." Thus PR professionals yearning to ascend to top management now realize they must not only understand the C-suite, but the boardroom, as well. Key corporate governance issues include things like codes of conduct, financial transparency, shareholder voting rights, audit practices, and ownership structure, as well as board composition, independence, and selection policies. "Executive compensation will remain a big issue this year for annual meetings," predicts Verrengia, touching on an emotional topic that he says can be difficult to communicate in a logical way. Corporate governance comprises a broad range of issues, so communicating about them calls for melding IR, employee communications, crisis counseling, and other PR disciplines. "At this point, PR has really spilled over into what you'd call management consulting, but we come from a different model," explains Merrie Spaeth, president of Spaeth Communications of Dallas. How much influence PR should wield with management or in the boardroom remains a matter of debate, however, even within the PR profession. Tom Martin, Arthur W. Page Society president and ITT's Industries corporate relations SVP, and former Enron communications leader Mark Palmer are among those pressing for more high-level PR involvement. "I think in today's climate it's more essential than ever that the chief communications officer has a place at the table when executive decisions are made," Martin says. "Once the damage has been done, it's really too late to call in the PR person." Spaeth thinks that maybe part of the problem is the reticence of some PR people to give it to management straight. "PR requires that we deliver a lot of really unpleasant messages," she says. "It's part of the job, but too many people are failing at that." "PR people should be absolutely at the forefront," asserts Kurt Stocker, a member of the New York Stock Exchange board of executives and former head of the graduate PR program in the Medill School of Journalism. "We have been traditionally the keepers of the corporate reputation, and that's all this is." A company's communications leader belongs in top-level meetings as long as he or she has something useful to say, Verrengia says. One important topic they should be raising, for example, is whether, how, and to what degree companies should boost the visibility of their lead outside directors, or their highest-ranking non-employee board members, Verrengia adds. Mackey says she adheres to the common view that, most importantly, PR provides a sounding board and offers outside perspectives. She also suggests that close involvement in operations or management can dilute vital objectivity. "PR should not be shaping the policies of the companies," she says. "The policies should be coming from the board of directors, senior management, and consultants who are specialists in corporate governance. I think PR people need to be careful not to position ourselves as specialists in corporate governance." Many large PR firms, however, see things differently. Some have developed corporate governance practices, while others bring together teams of IR, crisis communication, public affairs, employee relations, and media relations practitioners to address high-level policy issues. Burson's corporate practice, for example, provides corporate governance check lists, as well as board education programs blessed by Institutional Shareholder Services (see sidebar). In some cases, board committees seek outside financial, legal, and communications advice independently from corporate management, Claes notes. Upholding standards On a more tactical level, the function of PR is to get the word out to shareholders, employees, customers, vendors, and the general public about corporate governance practices. The Sarbanes-Oxley Act and new administrative regulations created disclosure requirements many firms find onerous, but their transparency must transcend government demands if they want to be seen as leaders in good corporate governance. "You are starting to see actual corporate governance plans," Stocker says. "You are seeing companies that are reaching for the high ground." Claes, however, warns firms against holding themselves out as examples of good behavior. "Anywhere in the world, a couple of employees can get together to do serious damage to the corporation," he says. That is all the more reason to make stakeholders aware of policies and codes of conduct, Verrengia counters. "When there are exceptions by individuals, then the company can say, 'This individual has violated our standards. Here's what we will do to reinforce that and make it harder for people to violate those standards in the future,'" he advises. Experts almost universally agree one of the best places to publicize such policies is on the internet, where all stakeholders can read them fully without media filtering. Corporate Communications Broadcast Network (CCBN) has carved a healthy business niche by building and hosting IR websites for about 2,000 public companies. The way the board and top executives run a company undoubtedly means a lot to its prospective investors, but Verrengia warns that corporate governance should not be viewed as the be all and end all of IR. No matter how well a company is governed, profitability and product innovation still remain its biggest attractions for investors. "There are people who wish that it were different, and some of those people are in communications," Verrengia explains. "Having good corporate governance keeps you in the consideration set for investors. Evidence of bad governance can get you out of the consideration set. It's not the deciding factor." ----- Rating the ratings Corporate governance rating organizations began sprouting up in the new millennium, seemingly fertilized by the rotting compost of badly run businesses. Companies offering these upstart services include Standard & Poor's (S&P), Institutional Shareholder Services (ISS), The Corporate Library, and GovernanceMetrics International (GMI). Each uses a different formula to rate companies on things like financial disclosure, board makeup, shareholder voting rights, executive compensation, takeover defenses, and acquisitions. The organizations' differing methods make courting favorable ratings difficult for IR representatives and corporate secretaries: A company might rank highly on one group's chart but not on another's. "Many corporate communications folks feel it is a hard situation to win," says Peter Verrengia, New York regional president and corporate credibility advisory practice head for Fleishman-Hillard. Yet while these organizations pass judgment on companies' trustworthiness, they face credibility problems of their own from those who think some go a little too far in showing companies how they can improve their ratings. ISS, for example, offers a subscription service to corporations that allows them to run "what if" scenarios to see how various changes might affect their ratings. Companies also can improve their scores by putting directors through education programs that it accredits. S&P performs "interactive" analyses paid for by the companies being rated, while its competitors say their chief customers are institutional investors, insurance companies, and the like. GMI and The Corporate Library allow company executives to view their data via online portals before ratings are released, giving them the opportunity to correct any errors. Nell Minow, editor of the The Corporate Library, stresses nothing in the process allows companies to change or manipulate their scores. "When they say, 'How do we improve our grade?' I say, 'Stop overpaying the CEO,' and I don't charge them for that advice," Minow quips. GMI COO Howard Sherman says only about a quarter of the companies scored responded when they were notified of his organization's first ratings in December 2002. As the service becomes better known, more companies will pay attention, he added. But corporate governance ratings aren't nearly as influential as debt ratings or analyst recommendations. "People are using the ratings as a point of reference, but they have not turned into a fundamental investment decision-making tool in most cases," Verrengia says.

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