OP-ED: Executives learning to live with governance reform

There has been a lot of talk about the huge cost of governance reform, both in time and money, and how it actually could drive some very substantially sized public companies into going private just to avoid a costly and time-consuming paper chase.

There has been a lot of talk about the huge cost of governance reform, both in time and money, and how it actually could drive some very substantially sized public companies into going private just to avoid a costly and time-consuming paper chase.

Some skeptics have questioned whether all this additional accountability and financial reporting really leads to increased shareholder value. Because we are still in the early days, the jury is still out on that score.

But grousing about governance reform is a bit like grousing about the weather: It's good for small talk around the water cooler, but it's really not going to lead anywhere. Governance reform is here to stay, and companies that are still yearning for the pre-Sarbanes-Oxley days need to get over it. And, actually, there's recent evidence that most senior executives are not only getting over it, they're getting on with it pretty well.

The new attitude among senior managers is reflected in this year's global Corporate Reputation Watch survey of global senior executives. Hill & Knowlton and the Economist Intelligence Unit cooperated in this seventh annual survey, which sought the views of senior executives in leading global businesses throughout North America, Europe, and Asia.

Only 8% of the 175 senior executives we surveyed feel the task of complying with the new financial disclosure and corporate governance standards poses a real challenge to running a competitive business, while almost half (45%) say the compliance burden is "heavy, but manageable." Furthermore, 48% say that the burden is "reasonable." Moreover, almost two-thirds of those surveyed say it is no more difficult to recruit board members today than it was before the new governance reforms were adopted, while only 8% believe it is "much more difficult" to recruit these individuals.

In addition, the majority of these executives believe that the lasting effect of governance reform will be positive and should help re-instill investor confidence in corporations. Reliable financial data, transparent disclosure, and strong corporate governance are either essential or important elements of companies' reputations, according to 66% of those surveyed.

While ensuring transparency in financial reporting and underscoring the independence of boards are the salient trends for reform, according to our respondents, other actions are considered less substantive and perhaps more cosmetic. While in Europe the practice of appointing a non-executive chairman is common, only 24% of those surveyed globally said this practice had been implemented at their companies over the past two years. Twenty-eight percent reviewed their auditor relationship during that time, and only 11% appointed a chief ethics officer.

Our respondents' sanguine reaction to the subject of corporate governance is not an aberration. The McKinsey Quarterly (2004, No. 2) reported similar results in a poll of 150 directors that it conducted in autumn 2003 in conjunction with the Directorship Search Group. Nearly 70% of the respondents said recent governance reforms had improved board governance either "a lot" (28%) or "moderately" (41%). More than three-quarters of respondents said that additional reform was needed (22% said "a lot," 28% said "a moderate amount," and 26% said "a little").

Senior executives' seeming solidarity on this issue might reflect simple acceptance of reality. Yet it might also signal a shift in attitude, from viewing the new governance measures as a hindrance to treating them as an opportunity to gain competitive advantage. In this new environment, senior corporate management is eschewing quick fixes, like turning out their auditors, and looking at actions that can have long-term impact. The most enlightened companies are looking at governance practices as a potential source of differentiation and calling them out in their annual reports and on websites.

Beyond compliance, every company can take specific communications steps to enhance its reputation in this area:

  • Look at transparency strategies to make sure that transparency goes beyond financials to embrace full and candid communications about issues that are facing the company and affecting its profile as a corporate citizen.

  • Embark on a program of proactive outreach to key stakeholders - particularly institutional investors, NGOs, and others - in order to help underscore company strategy and commitments.

  • Be more aggressive about enlisting the involvement and participation of independent board members in selected instances with the media, as well as with employees and other stakeholders.

    The latest CRW survey tells us that senior executives are exercising a bit of management jujitsu, converting something that was potentially threatening into an organizational benefit. They are realizing that if governance reform can strengthen the bonds that companies have with their shareholders while re-instilling investor confidence in the equity markets, the price - albeit high - is worth it. This is a healthy development, one that should be welcomed by those who believe that clear, transparent, and honest communications have a key role to play in reinforcing a company's governance commitments.

  • Harlan Teller is president of Hill & Knowlton's worldwide corporate practice.

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