“Corporate governance is in transition; governance must be much more than simple compliance. If we take the initiative and anticipate problems, we can avoid such pitfalls as excessive legislation.”

Russell S. Reynolds, Jr.
Chairman

Governance Viewpoint

Why is corporate governance an important issue today?

The corporate scandals beginning with Enron, WorldCom and Parmalat and continuing with Hollinger and Computer Associates underscore the importance of accountability and trust. Although each governance failure stems from a different cause, each represents a breakdown in faith and duty between the investor and the corporation’s directors and officers. No market economy, indeed no civilization, can long endure without mutual trust and faith that public institutions including corporations will do everything in their power to represent and advance the interests of all investors—not merely the interests of a select few.

Good governance is more than mere process. It’s about restoring and preserving reputations tarnished by inadequate oversight, lack of transparency and irresponsible business conduct. The decline in public trust has to be restored. Good governance is essentially about reestablishing the critical importance of personal integrity and character.

It is part of a continuing pattern of globalization of markets, mergers and acquisitions, stringent listing requirements, company ratings, litigation, and the increasing role of institutional investors—mainly pension funds—and activist groups that are all among the driving forces behind the evolution of how business should conduct itself.

What are the most important elements that contribute to good corporate governance?

Transparency and disclosure in financial reporting are the cornerstones of good corporate governance. Timely and accurate disclosure of information about financial and operating performance is central to effective board oversight. Accountability and loyalty of the board to both the company and the shareholders are also fundamental. All shareholders must be treated fairly and equally. Above all, governance is not a box-ticking exercise and boards that treat it as such will discover this to their detriment. Boards should not usurp management’s role in running the enterprise, but they must be vigilant in monitoring and measuring management’s performance on behalf of those who have invested in the company. Independence is the board’s most critical feature because it facilitates board objectivity, required to review management activity.

How can RSR Partners help?

Having advised companies and assisted boards in their need for new thinking, RSR Partners is mindful of the needs of boards in transition today. We analyze the board in a larger competitive context. Our search principals, all of whom are experienced professionals, look beyond the narrow specification to understand where the board and company are in its journey to accomplish strategic goals. We are not constrained as some search firms are, in seeking appropriate candidates. In most cases, we have been able to introduce candidates that the board’s own network would not have been able to identify, let alone pursue on its own. For example, we identified a board candidate for a prominent technology-based company whose background and experience differed from the nominal specification for the board. Within six months, the chairman told us privately that the individual we brought to his board rated an 11 on a 1 to 10 scale. Mindful of its strategic goals as a firm and having a deep sense of the client’s board culture, we were driven to find someone who would exceed expectations.