Corproate Governance 2012

April 18, 2012

Corporate Governance…2012
by noble1119

Are corporations operating more efficiently or ‘better’ than the pre Sarbanes Oxley Act era? Before I even begin to delve into this, we all need to have a clear understanding of the subject. What is corporate governance? According to the ‘Essentials of Corporate Governance’ by Sanjay Anand, “Corporate governance is a broad and complex concept that incorporates almost every aspect of corporate life, compounded by the fact that it has evolved to encompass ethical duties to employees, environmental activity, political involvement and employment practices”. (1) However, according to the Cadbury Committee (1992), simply put, corporate governance is "the system by which companies are directed and controlled”(2).

The corporate debacles of the early 2000’s brought into question the accounting practices and activities of many corporations throughout the United States and were a factor in the creation of the Sarbanes–Oxley Act (SOX) of 2002. SOX, a US federal law, set new or enhanced standards for all U.S. public company boards, management and public accounting firms.

SOX provided the basis for many revised, restructured and reengineered corporate governance strategies and policies in hundreds of organizations. Companies were being ‘forced’ to either take hard look at the structure of their organizations, the makeup of the board members, financial accounting systems and employee responsibilities and then make necessary changes or face fines in the millions of dollars and/or jail time.

Corporations continue to implement changes to their corporate governance practices and policies to increase director accountability. Much attention is being given to the board members, such as past performance, conflicts of interest, and their ability to do the job. Directors are required to work within the confines of the law and are responsible for the interests of the shareholders. But what about the interests of the employees? It could be said that by looking after the interests of the shareholders, that it would include the interests of the employees. IN MY OPINION, that thought process didn’t seem to hold true when we look at the horror the employees at Enron and HealthSouth experienced when they no longer had their retirement funds.
According to an article by Yvan-Claude J. Pierre and Jason M. Barr (3/2/2012), companies may need to address five governance issues in 2012. They cite: Rotation of committee members, board diversity, independent chairmanship, lead independent director and auditor rotation. (3) As you can see, most of these issues center on the board of directors.

In considering the rotation of the committee members, corporations might also weigh the value of that rotation against the benefits of continuity. Pierre and Barr states that “if it would balance director experience and interest, and aid the board in carrying out its fiduciary duties of the shareholders, then maybe a formal rotation policy may be in the a company’s best interest.”

The Securities and Exchange Commission “requires that companies discuss their board diversity policies in its proxy statements, disclose how they select nominating committees, how they are implemented, and how they measure their effectiveness.” However, the SEC does not define ‘diversity’. They leave that up to each company to disclose.

More on Pierre and Barr’s discussion on their view of the five corporate governance issues of 2012 can be found in the article: United States: Corporate Governance Best Practices – 2012 Proxy Season, 07 March 2012.

In light of all of the regulatory and compliance policies, corporations are taking on the challenge to improve current business processes by applying well thought out internal controls. Automating compliance initiatives allows corporations to lower the hard and soft cost of compliance.

Consider the company where you are currently employed. Have you had an opportunity to look over their corporate governance policies and guidelines? What about their structure? How diverse is the committee? How informed are you about the business, holdings, transactions? When was the last time your company made revisions to its governance policies? Have those changes directly impacted you as an employee? When was the last time that you really looked over the proxy or financial statements of the company?

Resources:

1. Anand, Sanjay. Essentials of Corporate Governance. Corporate Governance; 2008 Good Corporate Governance, Chapter 6

2. http://en.wikipedia.org/wiki/Corporate_Governance

3. United States: Corporate Governance Best Practices – 2012 Proxy Season

07 March 2012

Article by Yvan-Claude J. Pierre and Jason M. Barr

http://www.mondaq.com/unitedstates/x/167720/Corporate+Governance/Corporate+Governance+Best+Practices+2012+Proxy+Season

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3 Responses to “Corproate Governance 2012”

  1. Blane McCarthy said

    Well written. Gives a nice peak into some of the issues corporations have to deal with in response to this massive piece of legislation. Hopefully automation will enable the implementation in a way that derives the desired benefits without drowning corporations in a sea of regulator burden.

  2. Ron Ramsey said

    I work for a company who was the SEC’s “poster-child” for the importance of SOX compliance. SOX certainly impacted the way the company handles internal controls, auditing, etc.

  3. Cedric Matthews said

    I believe that corporate governance should be communicated better throughout an organizations entire workforce at all levels. With any organization I believe the more corporate governance is understood among an increased number of people at all levels there will be increased consistency on how those organizations are directed and controlled. Thank you for the insighful blog on this topic.

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