CAN CORPORATE GOVERNANCE BE A VALUE DRIVER OR IS IT SIMPLY A NECESSARY COST OF COMPLIANCE?
Particularly in the United States, but also globally, much of the recent focus of companies in the area of corporate governance has been in terms of compliance with Sarbanes-Oxley, most notably its section 404 on internal controls. This is a costly and complex process and carries with it the overhang of prosecution, both civil and criminal. Outside the United States there is the additional dimension of imposed compliance with another country's regulatory requirements — which can be not only costly, but also at odds with prevailing governance structures. In this context one should not be surprised to see many weary and threatened corporate executives viewing governance reform as a costly compliance burden whose benefits may not outweigh its costs.
'Governance fatigue' of this nature, if it were to become generalized, would be unfortunate for many reasons. Among them, it is possible to cite two specific concerns:
- A false impression that Sarbanes-Oxley has rooted out all future corporate governance problems. That would be both naïve and wishful thinking. The market needs to recognize that governance risks cannot simply be legislated away by regulatory fiat. From an investor's perspective, governance is a risk factor that needs to be understood on a case-by-case by basis for individual firms. There remains a role for market diligence.
- A tendency to stop at compliance or to assume that baseline compliance means good governance. Governance is ultimately less about compliance than it is about creating corporate culture that supports overarching principles. Governance, and corporate responsibility more broadly, can be viewed positively — as a source of competitive advantage and enterprise risk management.
In this context, how should investors assess companies with regard to matters of corporate governance and responsibility? What should companies themselves be doing in this context, both to promote good governance and to facilitate an appropriate understanding of its governance profile among investors and other stakeholders?
CORPORATE RESPONSIBILITY FROM A RISK MANAGEMENT PERSPECTIVE
Where do corporate responsibility and the related area of social and environmental reporting fit within this mix? In our governance criteria, we approach this area in the category of what we define as stakeholder relations — with a particular focus on non-financial stakeholders, including employees, customers, suppliers and local communities.
In this regard the relations that a company has with its key stakeholders can be critical to its own long-term financial and operational sustainability — and not just that of society more broadly. This may be particularly the case in areas such as Asia and Europe, where the traditional theory of the firm as a simple profit maximizer is challenged by alternative interpretations, which may give non-financial stakeholders higher priority. It is an aspect of the broader principle of responsibility for a company to address and show sensitivity to legitimate non-financial stakeholders, including employees, local communities, environmental interests, regulators, and governments. These are important constituencies in the near term, and the maintenance of positive relationships stands to enhance a company's longer-term sustainable competitive advantage — or to lessen vulnerability to legal challenges, operational disruption, or loss of brand or franchise value. Hence it is important to appreciate the nature of a company's relations with its non-financial stakeholders. For well-governed companies, this should be an area of explicit focus by both company executives and board directors.