In a broadly based response to the crisis, the New York Stock Exchange, Nasdaq, The Conference Board, The National Association of Corporate Directors, and various governance rating services have all issued best practices guidelines. Governance experts have used them as a measure of improved performance by boards of directors. All of these organizations made good-faith efforts to improve corporate governance. Failure to abide by the guidelines issued by the major stock exchanges, for example, could result in a company losing its listing. Those issued by the prestigious Conference Board, on the other hand, rely solely on logical suasion to encourage reform. In either case, shareholders should feel grateful that new guidelines have caused executives, directors, and the investing public to think harder about what good governance actually means. Unfortunately, the benefits of these guidelines may stop there. In truth, a board may comply with all these suggestions and continue to perform poorly.
The ineffectiveness to promote real change may stem from how the guidelines were developed. The issuers of guidelines usually solicit input from corporate executives and other interested parties, all of whom may have conflicting interests. It’s a familiar process. Someone proposes a fairly radical new rule that will strongly encourage or even force change. Then the howls of protest begin. Those affected, the companies and lobbyists alike, point out real as well as obscure unintended consequences as they attempt to protect their own interests. The meaningful change morphs into the most benign change possible.
Most of these guidelines are at best quite bland: Require an independent director to approve CEO compensation. Have a majority of independent directors on the board (after a grace period). Adopt a written code of corporate conduct. Have a written charter for the audit and other committees. Require the audit committee chairperson to know something about finance. Require CEO certification of financial statements. Gain stockholder approval of equity-based compensation plans. Hardly anyone would argue with the appropriateness of any of those guidelines; they’re commonsense rules. And few boards, if any, would have a terribly difficult time complying with them.
If Sarbanes-Oxley had been passed in the 1990s, would it have prevented the abuses and scandals of the past few years? The evidence seems to point to no.
Boards wanting compliance assistance, however, will find it readily available. Some rating services not only publish guidelines and rate companies on compliance, they also provide consulting services and canned solutions to help boards achieve compliance. Jeffrey Sonnenfeld, Associate Dean of the Yale School of management described such practices in a Wall Street Journal article titled, “Introducing the Watchdogs for Corporate Governance.” He noted that if companies purchase accredited director training and consulting services to evaluate director incentive packages from the rating agency Institutional Shareholder Service, “the client’s payoff is a nice boost in scores.” At least it’s an efficient process: one stop shopping for better governance.
Guidelines are checklists, and checking the boxes has little or nothing to do with good governance. By checking the right boxes, companies can give the appearance of improved governance; some may believe they actually have improved. But by-the-numbers conformance to guidelines, in and of itself, does not prevent terrible governance.