Jon Woodruff,
Head of Global Technology, Media and Telecommunications M&A, Goldman Sachs & Co.
Moderator:
Betsy Zeidman, Director, Center for Emerging Domestic Markets, Research Fellow, Milken Institute
Brian Farrell maintains that overemphasis on compliance at the expense of business planning has become a significant problem. At left is Gregory Taxin.
"Rules exist to govern behavior," said Alan Greenspan in 2005, "but rules cannot substitute for character." Businesses today must abide by regulations passed in response to the scandals of the late 1990s and early 2000s. However, while rules may ensure a certain level of responsibility, the panelists indicated that the regulatory changes had not been wholly positive.
At issue was the cost benefit tradeoff for compliance programs -- balancing the costs of compliance against the benefit to shareholders in the long run. The panelists agreed that the new regulations had improved visibility and transparency but also produced some negative consequences. As Jon Woodruff of Goldman Sachs noted, "Rules-based systems come about as a result of problems. ... (They) solve problems and move us in the right direction but create their own problems."
One positive contribution of recent regulations is the increased attention to and discussion of compliance and governance from boards of directors. Woodruff noted "significantly greater recognition within the boardroom of the responsibilities and role of board members." Seth Jaffe of Williams-Sonoma described his company's efforts to implement Section 404 of the Sarbanes-Oxley Act to target risk areas and focus on process improvement within business. Self-policing and debate on boards increased, as well, he said.
However, overemphasis on compliance at the expense of business planning has become a significant problem. Brian Farrell of THQ Inc. said "more time [was being] spent in boardroom on compliance rather than strategy. We need to move back away from total focus on compliance." Efficiency in this new environment is necessary to ensure that the board has time to deal with the business itself after covering appropriate compliance issues.
The panel also addressed concerns about the widespread application of particular criteria, or one rubric, to assess compliance. Although investors may need measures to assess company performance, investor-driven attempts to create a comprehensive approach to evaluate company value may be driving firms to a single corporate governance structure. These changes may result in less than optimal behavioral changes. Gregory Taxin of Glass, Lewis & Co. emphasized the need to "appreciate subtleties of each company′s management team on a company-by-company basis, not on broad-brushed generalities."
The pressure to stay off lists of "badly governed companies" is also exacerbating problems. Performance scoring by research firms focus on how a company performs according to a set of fixed criteria. While some of the criteria do cover important aspects of governance -- such as alignment of shareholder and board member interests -- all criteria are applied, "whether you're a startup biotech or old-style steel manufacture," despite the differences in size, composition and industry focus. Taxin noted that this investor emphasis on a one-size-fits-all rubric may cause companies to "move from the diverse landscape of governance practices they previously had and converge on (these criteria)."
Panel members also tackled the issue of shareholder engagement is such issues as executive compensation. "Shareholders rightly care about exec compensation because we believe that pay drives behavior," said Taxin. "Shareholders are interested to know in what manner execs are incentivized -- toward growth, toward acquisitions or toward selling the company" -- because that incentive will drive executive conduct.
Jaffe noted too that many companies suffer from the lack of feedback mechanisms linking shareholders to the board. He suggested that "the fundamental cure for most corporate ills is disclosure," but other panelists disagreed. "It's fine to have disclosure," countered Taxin, "but there's no way for feedback on that disclosure." While feedback systems exist in commonwealth governments, such as Australia and the UK, these only allow for an advisory or nonbinding vote by shareholders, which do not obligate the board to act on shareholder feedback. "Having a cleaner place for feedback and allowing a market mechanism ... for shareholders to provide feedback ... would both be healthy for public companies and likely stave off any other regulatory action ... which would be in everyone's interest," he argued. "When shareholders object, there ought to be some mechanism by which shareholders can carry the day" regarding representation, major actions and decisions by the board.
Jaffe also reminded the audience that stakeholders need to "separate the drama from the reality." Concerns over corporate governance are legitimate, he said, but only occur in a small number of cases. Woodruff concluded, "We are trying to create a system that addresses problems that occur at 1 percent of companies. We are balancing decisions that prevent big problems in a small subset of companies without negatively impacting all companies."
Global Conference 2013
Former Prime Minister Tony Blair, philanthropist Bill Gates and Strive Masiyiwa of Econet Wireless discuss advancing prosperity in Africa.
