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Is corporate governance on trial?

Updated Monday 12th March 2007

It might be Conrad Black in the dock this time, but - more widely - is corporate governance on trial?

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Conrad Black may or may not have been a greedy man, but either way he stands accused of defrauding his company and its shareholders. If he is finally found guilty, how was he allowed to get away with it for so long? It’s the role of a public company’s board, and in particular its non-executive directors (NEDs), to oversee its executives and ensure they behave responsibly. The case of Conrad Black is not a one-off, as a series of corporate scandals on both sides of the Atlantic bear witness too. So, should our systems of corporate governance be put on trial?

The case for the prosecution is strong:

NEDs are meant to be independent and capable of subjecting executive decisions to objective, critical scrutiny, but too often boards appear to be a cosy club. Although shareholders may have to vote for their directors it is the board that nominates them in the first place and so the danger is they become a self-perpetuating elite. Many NEDS are current or former executives – they often have a vested interest in not rocking the boat. This is what Bob Monks a founder of shareholder activism in the US has to say:

‘Trying to make boards function is like squaring the circle. You can huff and puff all you want, but you can’t make a legitimate governing institution out of a self-perpetuating body.'

Monks should know, he has served on many corporate boards and was thrown off the board of Tyco for pointing out things that were wrong, before the CEO at the time was later indicted for his lavish perks.

Perhaps a bigger, but less noticed, scandal is that of executive earnings and share options. As a recent survey by the Guardian showed executive pay has soared in the UK, growing by 28% in the latest year. Top chief executives pay has risen from 25 times what an average staff members earns not long ago to over a 100 times. In the US it has been estimated that up to 10% of equity was transferred to directors as stock options in the 1990s. This is often justified by the myth that top pay is linked to performance, but research suggests there is little relationship between FTSE performance and directors’ pay. Clearly putting non-executive directors in charge of executive pay has done nothing to control this gravy train.

Further reading

  • Corporate Accountability and Ethics – a disregard for ethics can lead to trouble: remember the Enron saga.
  • RAGM.com – one of the best places to start is the Robert Monks website
  • Corporate Governance by Robert A.G. Monks and Nell Minow, Blackwell Publishing
 

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