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Corporate Governance Intro

Before the late-2001 financial implosion at Enron " Fortune's 7th largest of the famed 500 " resulted literally in the disappearance of that Houston-based corporation, and before the largest corporate bankruptcy filing in history " WorldCom in 2002 " few people in the United States regularly used the term "corporate governance."

"CG" and "corpgov" were terms familiar to and important to institutional investors, corporate counsel or law firm securities lawyers, corporate secretaries, a relatively few business and financial journalists, perhaps even fewer securities analysts, and some other professionals whose livelihood depended on the capital markets or Corporate America.

After the 2001-2002 rounds of stunning corporate scandals and failures " and passage by the congress of the comprehensive package of Sarbanes-Oxley ("SOX") statutes in July 2002 " corporate governance was suddenly quite familiar to a lot of people in the United States. That especially included journalists who began using the term in headlines and in their news reports and opinion columns in both print and electronic formats. Cable TV's talking heads were spouting "governance" to all in hearing/viewing distance. Today there are dozens of free and subscriber-based Web sites devoted to "governance" issues.

President George W. Bush may have been the first Chief Executive of the United States to utter the phrase in his State of the Union speech (January 2002), putting governance on the discussion agenda for millions of Americans. (Click to see highlights of his program.)

CorpGov Today

Corporate governance today generally refers to the strategic and operating (tactical) principles, structures, policies, and practices of corporate boards of directors -- who are elected as their representatives by shareholders -- and the senior "C" suite officers that the boards appoint. And, CG involves various aspects of the relationship between stockholders and the board and senior officers.

As the editor of Corpgov.net (the global Corporate Governance Network) points out: "Corporate governance is most often viewed as both the structure and the relationships which determine corporate direction and performance. The Corporate Governance framework depends on the legal, regulatory, institutional and ethical environment of the community. Where the 20th may be viewed as the Age of Management, the early 21st Century is [predicted to be] more focused on governance..." (Author: James McRitchie, August 1999; see: www.corpgov.net/library/definitions.html ). 

 Burning Governance Issues

Today's mainstream hot button CG issues include:

  • Nomination and election (processes and practices) of members of the board of directors. (A growing number of shareholders want significant reforms in this process, including direct nomination of directors to stand for election.)
     
  • Independence of the board of directors, and especially the key board committees. Board members are elected by shareholders as their representatives " to hire/fire and oversee senior management.
     
  • Director professionalism. (Boards have formal codes of conduct and practices and informal expectations of member behavior. NYSE and NASDAQ Exchange have adopted more stringent rules addressing board responsibilities and norms of behavior.)
     
  • The attitudes and behaviors of "Imperial CEOs," who ignore the interests of the shareholders. Which leads to the burning issue of the day --
     
  • CEO and "C" suite compensation " the hottest of the hot buttons for the 2006 proxy voting season and the grist for journalists' articles on "out-of-control" CEO pay in particular. New rules are proposed for more complete transparency on CEO pay by the Securities & Exchange Commission " another hot governance debate for 2006 proxy seasons. (See Shareholder Activism.)
     
  • "Parachutes," for key insiders, golden, silver, platinum and so on, especially designed for corporate officers, granted by the board and triggered by a prescribed future event. (Recent parachute triggers include companies being merged or sold and officers of the acquired organization.)
     
  • "Shareowner Rights," addressed or ignored by the board or senior management. Denial of rights is a sure-fire prescription for a governance campaign mounted by investors, their advisors, and other parties. Red meat for journalists, too!
     
  • Company or Board Communication (or serious lack thereof) with shareholders. (Federal regulations require boards to create means of dialogue or at least communication back and forth with the owners.)
     
  • Accounting issues, Financial Reporting issues, Transparency, Disclosure practices " each could be source of disappointment for shareholders.
     
  • Political contributions by the corporation " social investment shareholders want more information on "527" and other contributions and a better system of accountability for corporate executives and members of boards...so that company assets are not used for political objectives not shared by the owners.

The above list is not all inclusive, nor is it restricted to publicly-owned corporations; organizations in the social sector (not-for-profits, foundations, academic bodies, charities, religious bodies) are also being pressed by stakeholders to adopt Best Practices in their corporate governance. (See the Editors' intro on Institutional Governance.)

Points-of-View on CorpGov

Following are some comments on corporate governance that will be helpful to you:

From the influential CFA Institute " the organization of professional analysts

The Centre for Financial Market Integrity, the professional accreditation association for thousands of financial analysts and money managers, published its "Corporate Governance of Listed Companies: A Manual for Investors," in April 2005. Said CFA: "A number of studies have show that there is a strong positive link between good corporate governance practices, profitability and investment performance...the Manual is a comprehensive guide to help analysts and investors around the world assess a company's corporate governance policies and the associated risks they need to consider before making investment decisions..." Click here for details (http://www.cfainstitute.org/pressroom/05releases/200504_01.html

From President George W. Bush

In his January 2002 State of the Union, President Bush outlined decisive (and historic) steps that were being taken in his Administration's "corporate governance program," aimed at prosecuting corporate criminals and restoring confidence in our markets. President Bush's Executive Order created a Corporate Fraud Task Force and spelled out a comprehensive set of action steps that led [in part] to provisions of Sarbanes-Oxley in July 2002. (Click here for highlights of the Bush Administration prescriptions for reform).

From Business Week magazine " Editorial

In its May 6, 2002 issue, the editorial headline read, "Corporate Governance: The Road Back." The editors observed that "...a new era of reform is dawning for Corporate America. Sparked by a popular revolt of the investor class and driven by a Republican Administration surprisingly intent on change, this movement aims to restore core American values of fairness, equity and responsibility to the practice of big business in the United States...it cannot be ignored..." (This was two months before passage of Sarbanes-Oxley into law.)

Business Week Cover Story:

"The Crisis in Corporate Governance" (May 6, 2002) " Cover copy read: "Special Report " Excessive Pay. Weak Leadership. Complacent Boards. Questionable Accounting. How to Fix the System." Asked the editors inside the pages: "Excessive pay, corrupt analysis, auditing games: It all adds up to capitalism's biggest crisis since the trustbuster era. What will it take to restore the public's faith in the system?" (Our editorial note: It took the sweeping program set out by President George W. Bush and congressional passage of Sarbanes-Oxley to begin the process. You'll find ample information on both in Accountability Central.)

Former Federal Reserve Chairman Alan Greenspan

Federal Reserve Chairman Alan Greenspan addressed the topic of corporate governance at the Stern School of Business at NYU on March 26, 2002.

"Corporate Governance," he observed, "has evolved over the past century to more effectively promote the allocation of the nation's savings to its most productive uses. The resulting structure of business incentives, reporting and accountability has served us well. We could not have achieved our current level of national productivity if corporate governance had been deeply flawed...

"There can be only set of rules for corporate governance, and it must apply to all. Crafting the rules to provide the proper mix of regulatory and market-based incentives and penalties has never been easy. I suspect that even after we get beyond the Enron debacle, crafting and updating such rules will continue to be a challenge..."

John Bogle, Founder " Vanguard Funds

In recent years, the founder of the huge Vanguard family of mutual funds has become outspoken on the need for improved governance in the financial services industry. In a powerful Commentary piece in The Wall Street Journal (November 18, 2004), Mr. Bogle wrote: "...it is the responsibility of €˜good apples' to put their own character on the line, beginning with the recognition that the financial services barrel that holds all the apples " good and bad alike " is badly in need of repair..." And, he advised: "...without maintaining its character, operating with integrity, responsible conduct, and service to others before service to self " no financial service firm can achieve long-term success..." (See www.online.wsj.com/article_print/0,,SB110074127963877573,00.html )

Citigroup Response to Critics

Under the new leadership of CEO Robert Prince, the global Citigroup organization " long an acknowledged leader in financial services industry innovation " adopted in Spring 2005 a comprehensive, the updated "Citigroup Initiatives " Corporate Governance and Business Practices."

General Counsel / Corporate Secretary Michael Helfer proclaims the initiatives to be at the forefront of best practices in CorpGov. (Citi sets out a Five Point Plan to help permanently embed in its culture a commitment to the highest standards of integrity and professionalism...Citi's acknowledged highest priority.)

Citi's goal, the organization explains in its 2005 Five Point Plan, is to be the most respected global financial services company. The Five Points for strengthening its governance platform are: (1) Expanded Training; (2) Enhanced Focus on Talent & Development; (3) Balanced Performance Appraisals and Compensation; (4) Improved Communications; (5) Strengthened Controls. Citi's intensified focus on corporate governance began in spring 2003, as the organization emerged from a period in which its reputation was tarnished was prosecutors, regulators, journalists, social investors, and social advocates targeted the giant banking/insurance/investment banking/brokerage company.

# # #

-- From the Editors at Accountability Central.

You are invited to send news, reports, editorial contributions and personal opinion items for consideration for publication on Accountability Central by email to: news@accountability-central.com 

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