Do Companies Need a Board-Level Risk Management Committee?

On 19 March 2013, the Global Corporate Governance Forum* published a paper by Ivan Choi, who is a Hong Kong based colleague of mine, in their publication Private Sector Opinion.
Ivan invited me to write a foreword to his paper, which follows. The paper itself can be accessed at:

http://www.gcgf.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Global+Corporate+Governance+Forum/Publications/

The financial crisis and its rippling effects on the wider corporate sector have prompted companies to rethink how they govern and manage risk. This paper discusses the board’s role in the governance of risk and the benefits of establishing a separate board-level risk-management committee – a need that applies to financial and nonfinancial institutions, as well as large and small companies.

Foreword

All business decisions involve risk. The challenge to boards and senior management is to balance risk with acceptable reward, to create value without hazarding the enterprise. This means understanding the corporate exposure to risk, determining how those risks are to be faced, and ensuring that they are handled appropriately.

There are four possible responses to a business risk:

1. Avoid the risk. Abandon the proposed project.
2. Mitigate the risk. Make capital investments or incur on-going expenditures – for example, by obtaining standby equipment, duplicating critical components, investing in staff training – plus establish risk policies, such as requiring top executives to travel separately in case of an accident.
3. Transfer the risk. Spread the exposure to other parties. Insure against the risk, although some risks may be uninsurable. Hedge the risk by negotiating long-term contracts. Create derivative instruments, agreements with financial institutions that transfer the risk to third parties.
4. Retain the risk. In other words, accept the risk. This is often the only available solution for strategic risks.

Risk is often handled well at the operational level, taking appropriate precautions and insurance against, for example, fire, theft, employee accidents, and vehicle damage. Risks internal to the organization are usually recognized.

Risks at the managerial level tend to be less well-handled. These risks are not so obvious: product liability, loss of profits following an incident, failure of computer-based systems, reputational loss following a media allegation of corporate bribery, for example.

But risks at the strategic level may not be recognized at all, even by top management. Consider, for example, the massive fines that international banks had to pay for the Libor rate-rigging scandal, the market disaster and product liability that Boeing faced with the failure of the batteries on its 787 Dreamliner airplane, the loss of life and horrendous cost to BP of the collapse of the Deepwater Horizon oil rig, or Tokyo Electric Power’s disaster at the Fukushima Daiichi atomic power station. These examples cover catastrophic costs and huge reputational damage, but every company faces strategic risks that could threaten its existence. Many strategic plans fail to consider risk. Directors and senior management need to face up to the unexpected “what if…” questions.

This paper goes to the heart of these issues.

Crucially, it argues that successful organizations should focus on risk management at every level. But the responsibility for risk management starts with the board. The paper advocates that a board-level risk management committee, separate from the board-level audit committee, offers a sound basis for enterprise-wide risk management.

Many corporate failures can be attributed to the board’s inability to recognize the underlying risks faced by the company and to take appropriate mitigating actions.

Corporate governance and enterprise-wide risk management are interconnected. Risk management, like corporate governance, involves both conformance and performance aspects: ensuring that past and present issues are well handled while also looking to the future.

This paper differentiates the roles of the audit committees and the risk-management committee. The risk-management committee has an oversight role in developing, updating, enforcing, and monitoring the implementation of the risk-management policy on behalf of the board. Usefully, the paper makes specific recommendations on the duties of such a committee and realistically sets the benefits against the costs.
All company decisions involve risk. Sound risk management starts with board-level responsibility. This paper has important messages for board chairmen and directors, both executive and nonexecutive. The paper will also provide valuable insights for chief executives and senior management responsible for implementing the board’s risk policies. Staff involved in risk management, including the CFO and finance staff, the company secretary and secretarial staff, and the risk function if there is one, will also find this paper relevant to their work.

*The Global Corporate Governance Forum is part of the International Finance Corporation’s Corporate Governance Group. The Forum is a donor-supported facility, co-founded in 1999 by the World Bank and the Organisation for Economic Co-operation and Development (OECD) and supports corporate governance reforms in developing countries, promoting good practices in corporate governance. It also supports director training organizations engaged in implementing corporate governance reforms. Private Sector Opinion is one of their many publications. http://www.gcgf.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Global+Corporate+Governance+Forum

Bob Tricker 23 March 2013

Board Diversity

Board diversity, and in particular the presence of women in the boardroom, has seen a number of developments in recent months. There have, for example, been significant developments in the European Union (EU).

Back in March 2012, the European Commission (EC) publication “Women in economic decision-making in the EU: Progress report” http://ec.europa.eu/justice/newsroom/gender-equality/opinion/files/120528/women_on_board_progress_report_en.pdf
highlighted that, whilst progress had been made in increasing the number of women on corporate boards, nonetheless a quarter of the EU’s largest companies (25%) still had no women on their top-level board.

Subsequently, in November 2012, the EC adopted a law which sets a minimum objective of “40% of the under-represented sex in non-executive board-member positions in listed companies in Europe by 2020, or 2018 for listed public undertakings”, see IP/12/1205 http://europa.eu/rapid/press-release_IP-12-1205_en.htm and MEMO/12/860 http://europa.eu/rapid/press-release_MEMO-12-860_en.htm

The main elements of the draft law include that a company which does not have 40 per cent of women on its supervisory board will be required to introduce a new selection procedure for board members which gives priority to qualified female candidates (note the emphasis on qualification, i.e. no one would be appointed to the board just because they are female). It is worth noting that the law only applies to the supervisory boards or non-executive directors of publicly listed companies, due to their economic importance and high visibility (small and medium enterprises are excluded). However, alongside this, there is a provision for a “flexi quota” which is an obligation for companies listed on the stock exchange to set themselves individual, self-regulatory targets regarding the representation of both sexes among executive directors; this flexi quota to be met by 2020 (or 2018 in case of public undertakings), and with companies reporting annually on the progress made.

In order to become law, the Commission’s proposal needs to be adopted by the European Parliament and by the EU Member States in the Council. On 15 January 2013, the draft law successfully passed the Subsidiarity Check (this is where national parliaments give opinions about whether it is appropriate to tackle an issue at EU level or whether it is best left to the Member States).

On 25th January 2013, an EU Press release “Regulatory pressure gets the ball rolling: Share of women on company boards up to 15.8% in Europe” http://europa.eu/rapid/press-release_IP-13-51_en.htm showed an increase in the number of women on boards to 15.8%, up from 13.7% in January 2012. This comprised an average of 17% of non-executive board members and 10% of executive board members with an increase in the share of women on boards in all but three EU countries (Bulgaria, Poland and Ireland).

Countries with quota legislation are in the vanguard of these increases. For example, Italy recently adopted a quota law that requires listed and state-owned companies to appoint one third women to their management and supervisory boards by 2015; and France, which introduced a quota law in 2011, has become the first EU country to have more than one woman on the top-level board of all of its largest listed companies.

However Scheherazade Daneshkhu and James Boxell in their article ‘Evolution not revolution in French companies’ (FT, Jan 2013) point out that none of the CAC 40 (France’s largest companies) are currently headed by a woman. In Germany, the DAX 30 companies all operate voluntary schemes for promoting women but, as Tony Barber points out in his FT article ‘Germany shifts the debate about women on boards’ (January 2013), ‘the rising proportion of women on German supervisory boards – at 16 per cent, a bit above the EU average – obscures the fact that a majority are workers’ representatives, not career executives’.

It seems clear that there is increasing board diversity in various countries and that whilst the pace of change may be slower than some would like, nonetheless change is occurring. Furthermore, developments at both national and international levels should facilitate more board diversity in the future.

Chris Mallin 6th February 2013

Remuneration (Compensation) Committees and their Advisers

Background

Executive remuneration (compensation) is always a hot topic, and the remuneration committee is often focussed upon as the key corporate governance mechanism in setting executive director remuneration (although recently the ‘say on pay’ has seen a growth in shareholder influence over executive pay packages as discussed in this blog and elsewhere).
The UK Corporate Governance Code (2012) states that ‘The board should establish a remuneration committee of at least three, or in the case of smaller companies two, independent non-executive directors. In addition the company chairman may also be a member of, but not chair, the committee if he or she was considered independent on appointment as chairman. The remuneration committee should make available its terms of reference, explaining its role and the authority delegated to it by the board. Where remuneration consultants are appointed, they should be identified in the annual report and a statement made as to whether they have any other connection with the company (para D.2.1). http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK-Corporate-Governance-Code-September-2012.aspx

Remuneration consultants

Remuneration committees may draw on the advice of specialist remuneration consultants when constructing executive remuneration packages. The UK’s High Pay Centre (2012) publication ‘The New Closed Shop: Who’s Deciding on Pay?’ http://highpaycentre.org/files/hpc_dp_remco.pdf states that remuneration consultants are ‘normally hired by the remuneration committee. The voluntary guidelines for remuneration consultants state that if they are engaged by the remuneration committee they cannot also work for the executive, whose pay they are determining. The advice they provide varies, but typically includes designing new remuneration plans, and drawing up a comparator group against which the executive pay can be benchmarked’.

Remuneration Consultants Group (RCG) Voluntary Guidelines

The voluntary guidelines to which the High Pay Centre refers were published by the Remuneration Consultants Group (RCG) which was formed in 2009 and represents the vast majority of executive remuneration consultancy firms advising UK listed companies. In fact the RCG’s website states that ‘Any consulting firm, or individual acting as a sole trader, named in the relevant Directors’ Remuneration Reports of at least one FTSE350 company is eligible to become a registered member of the RCG. If a parent firm has separate legal entities acting as Remuneration Consultants then only one of the family of firms may be such a member of the RCG’.

The RCG published the Voluntary Code of Conduct in Relation to Executive Remuneration Consulting in the United Kingdom in 2009 and it is revised every two years , the most recent edition was published in 2011. The Code states that ‘Executive remuneration consultants, comparable with other business professionals, should comply with the fundamental principles of transparency, integrity, objectivity, competence, due care and confidentiality. They should also ensure that, whether or not part of a larger consulting group providing a wider range of services, their internal governance structures promote the provision of objective and independent advice. The full Code is available at: http://www.remunerationconsultantsgroup.com/assets/Docs/December%202011%20Code%20of%20Conduct.pdf
The effectiveness of the Code was reviewed in 2012, see http://www.remunerationconsultantsgroup.com/assets/Docs/Annual%20Review%20including%20Code%20Effectiveness%20Review%20December%202012.pdf In early 2013, following on from the 2012 review, the RCG urged remuneration committees to cite use of the Code to show external audiences that they have followed due process with regard to executive remuneration.

Pros and cons of remuneration consultants

The fourth edition of ‘Corporate Governance’ (Mallin, 2012), discusses the role of remuneration consultants, identifying academic literature in the area highlighting both potential benefits and downsides of remuneration consultants. Various studies are considered but to mention two here, Voulgaris et al. (2010), in a study of 500 UK firms from the FTSE 100, FTSE 250, and the Small Cap indices, find that compensation consultants may have a positive effect on the structure of CEO pay as they encourage incentive-based compensation. On the other hand, Murphy and Sandino (2010) examine the potential conflicts of interest that remuneration consultants face, which may lead to higher recommended levels of CEO pay. They find ‘evidence in both the US and Canada that CEO pay is higher in companies where the consultant provides other services, and that pay is higher in Canadian firms when the fees paid to consultants for other services are large relative to the fees for executive-compensation services.’

US developments

In the US, the Stock Exchange Commission has approved new corporate governance listing standards for the New York Stock Exchange (NYSE) and the NASDAQ. The standards generally apply to any company with listed equity securities.

The provisions include that, from 1st July 2013, compensation committees have to conduct an independence assessment of advisers including compensation consultants and legal counsel from whom they wish to seek advice. A non-independent adviser may still be used but the independence assessment must still be carried out. There are also new, stricter independence criteria for compensation committee members.
Weil, Gotshal & Manges LLP give a useful summary of the new standards in their Alert ‘New NYSE and Nasdaq Listing Standards on Independence of Compensation Committees and Their Advisers: It’s Time to Prepare’ (January 28, 2013, Weil Alert) http://www.weil.com/news/pubdetail.aspx?pub=11491

Concluding thoughts

The role of remuneration consultants and their potential influence on executive remuneration packages has become the focus of more attention in recent years. The new US standards relating to the independence of compensation committees and their advisers go much further than in many countries, including the UK. Time will tell whether other countries follow suit and introduce tougher recommendations and guidelines.

Chris Mallin
1st February 2013

High corporate governance standards: low ethical performance (the NewsCorp case)

The following case has been adapted from the second edition of Corporate Governance – principles, policies and practices, due to be published early 2012.

The News Corporation case
News Corporation (NewsCorp) is a media conglomerate, founded by Rupert Murdoch in Australia in 1979. In 2010, the company, now head-quartered in New York, had world-wide revenues of over $30 billion, profits of over $2.5 billion, and over 50,000 employees. The company’s main revenues come from cable networks, with the Fox News channel, and filmed entertainment. Publishing, including newspapers, accounted for less than 20%. NewsCorp shares are listed on NASDAQ and the Australian Securities Exchange.

Rupert Murdoch, born in 1931, has enjoyed unrivalled political influence around the world, being described by the Economist (23.7.11) as “a press baron, a manipulator of politicians, and a king maker.” The Murdoch family dominate the control of NewsCorp using dual-class shares. The ‘A’ shares, which account for 70% of the equity, have no voting rights, and consequently the holders of these shares have no say in board-level appointments. The B shares, which account for 30% of the equity, carry all the votes. The Murdoch family control about 39% of these voting shares, giving them unassailable control

News International Ltd. is the wholly-owned British subsidiary of NewsCorp, publishing the “The Times” newspaper, and the “News of the World”. The chairman of News International is James Murdoch, born in 1972, who is Rupert Murdoch’s son.

The seventeen directors of NewsCorp include nine who are nominally independent, but whose length of service and connections would make that definition doubtful in some corporate governance codes. They are:
Rupert Murdoch, Chairman and Chief Executive Officer, NewsCorp
José María Aznar, independent director. Former President of Spain. President,
Foundation for Social Studies and Analysis
Natalie Bancroft, 34, independent director, member of the family that controlled
Dow Jones and Wall Street Journal prior to their disputed take-over
by NewsCorp
Peter Barnes, independent director, Chairman of Ansell Limited a US-based and
Australian-registered maker of industrial gloves
Chase Carey, Deputy Chairman, President and Chief Operating Officer, NewsCorp
Kenneth E. Cowley, independent director, Chairman, R.M. Williams Holdings Pty.
Limited
David F. DeVoe, Chief Financial Officer, NewsCorp
Viet Dinh, 43, independent director and chairman NewsCorp Nominating and
Corporate Governance Committee. Professor of Law, Georgetown
University. Having fled war torn Vietnam, he served as assistant attorney general under President George Bush
Rod Eddington, independent director appointed in 1999. Chairman for Australia and New Zealand, J.P. Morgan. Former chief executive of British Airways
and of Australia’s Ansett Airlines. Said to have been mentor to Rupert
Murdoch’s son Lachlan, who is also a NewsCorp director
Joel Klein, Executive Vice President, CEO, Education Division, NewsCorp
Andrew S.B. Knight, independent director. Chairman, J. Rothschild Capital
Management Limited
James Murdoch, Deputy Chief Operating Officer, NewsCorp
Chairman and CEO, International News Corporation
Lachlan Murdoch, Executive Chairman, Illyria Pty Ltd
Thomas J. Perkins, independent director. Partner, Kleiner, Perkins, Caufield & Byers
Arthur M. Siskind, Senior Advisor to the Chairman, NewsCorp
John L. Thornton, independent director appointed in 2004. Professor and Director of
Global Leadership, Tsinghua University of Beijing. Formerly Chief Operating Officer of Goldman Sachs and an independent director of HSBC involved in power struggles at board level.
Stanley S. Shuman (Director Emeritus), Managing Director, Allen & Company LLC
Source: www.newscorp.com/corp_gov/bod.html

The matter of succession has been raised by some analysts. The possibility of a dynasty passing from father to son was questioned, and the suggestion made that Rupert Murdoch move to non-executive chairman and a new appointment made as CEO. The name of Chase Carey, currently COO NewsCorp, was often mentioned.

Details of the board committees can be found at: http://www.newscorp.com/corp_gov/bc.html, which also provides access to the charters of those committees, including the Nomination and Corporate Governance Committee. The News Corporation Statement of Corporate Governance is at www.newscorp.com/corp_gov/socg.html

NewsCorp publish the group’s standards of business conduct, which can be accessed at www.newscorp.com/corp_gov/subc.hrml
The concern for ethical conduct is reflected in a letter from Rupert Murdoch, Chairman and Chief Executive Officer:

Dear Colleagues:
For more than a half century, News Corporation has shaped global media by ensuring the public’s needs are met and that our offerings are of the highest caliber. Today, hundreds of millions of people around the world trust us for the best quality and choice in news, sports and entertainment.
This public trust is our Company’s most valuable asset: one earned every day through our scrupulous adherence to the principles of integrity and fair dealing.
We have revised this Standards of Business Conduct to make it easier to read and use, and to clearly outline what we should all expect of ourselves as colleagues. Each of us has the power to influence the way our Company is viewed, simply through the judgments and decisions we each make in the course of an ordinary day.
It’s an important responsibility and I’m honored to share it with you.
Rupert Murdoch
Source: www.newscorp.com/corp_gov/sobc_letter.html

Disaster strikes NewsCorp and its subsidiary News International
In July 2011 the best-selling British Sunday newspaper, the “News of the World”, was closed after 168 successful years. For some years, the company had faced damaging allegations of telephone hacking to obtain stories, but had claimed that this was the work of a single rogue, free-lance investigator, who went to jail. But subsequently it emerged that the practice was widespread and known to senior executives. The public were not too concerned when they believed that the hacked telephones belonged to entertainment and sports stars, and other celebrities. But when it emerged that the journalists had intercepted voice messages of a missing 13 year-old school girl, Milly Dowler, who was subsequently found murdered, the public mood changed. Worse, it was discovered that journalists had deleted messages from her cell phone to make more space for subsequent material, leading her parents to believe she was still alive. Evidence emerged that telephone hacking to obtain stories was widespread and ran to thousands, including families of soldiers killed in Iraq and Afghanistan and people killed in the terrorist bombings in London. It was then alleged that large sums had been paid to celebrities, who had discovered that their voice mails had been listened to by the “News of the World”, to settle actions for breach of privacy. On 19 July 2011, Rupert and James Murdoch were summoned before a committee of the British House of Commons to answer questions. Rupert Murdoch said that “this is the most humble day of my career”

Worse was to come, when it appeared that payments had been made to police for information. This raised the possibility of prosecution for bribery under the American Foreign Corrupt Practices Act. Some senior police officers resigned.

The BSkyB deal fails
News International owned 39% of the company BSkyB, which ran the successful British satellite Sky TV station. James Murdoch was chairman of BSkyB. In early 2011, New International bid for the remaining shares. Expectations were high that the bid would be approved by the UK broadcasting and competition authorities, and accepted by the shareholders. However, the saga over telephone hacking and payments to police caused the government to block the bid, which was abandoned on 14 July 2011. News Corp shares plunged 7%, wiping $3bn. off its market value. Nevertheless, on 29 July 2011, the BSkyB board of directors unanimously voted for James Murdoch to remain as chairman.

Some questions inevitably arise
1. How can the disreputable behaviour have occurred at the News of the World when the Group had such a clear commitment to high standards of conduct?
2. As the top executives of the subsidiary and the holding companies respectively, should either James or Rupert Murdoch be held responsible, for the bad behaviour in a relatively small and not very significant part of the Group?
3. Is the use of dual class shares to maintain a family’s domination over a public company really desirable? Is it right that the ‘A’ shares, which account for 70% of the equity, have no voting rights and therefore no say in board-level appointments?

Bob Tricker 8 September 2011

Diversity in the Boardroom

Recent years have seen an increase in emphasis on board diversity and, in particular, on women in the boardroom.  Some argue that it is only equitable that the gender balance on the board be addressed and, moreover, redressed given that, broadly speaking, half of the population are women and half men whereas a typical board has a majority of male directors.  Nor is it ‘just’ a case of boards being generally male-dominated, a natural consequence of this is that women are under-represented on the key board committees such as the audit, remuneration and nomination committees, as well.

Others argue that, in addition to the gender balance aspect, female directors bring their own strengths to the boardroom in terms of their life experience, their mode of thinking and their ways of dealing with both people and situations.  Some argue that there are positive financial benefits to have more women on the board, whereas others state that the benefits are more to do with the way that the board operates with women more inclined to discuss matters in depth and to try to reach a consensual solution.

The UK Corporate Governance Code (2010) http://www.frc.org.uk/corporate/ukcgcode.cfm encourages the board to consider the benefits of diversity, including gender, to try to ensure a well-balanced board and avoid ‘group think’.  Similarly the German Corporate Governance Code (2009) states ‘The Supervisory Board appoints and dismisses the members of the Management Board. When appointing the Management Board, the Supervisory Board shall also respect diversity’ (5.1.2) and the Dutch Code of Corporate Governance (2008) advocates ‘The supervisory board shall aim for a diverse composition in terms of such factors as gender and age (111.3).

An early exponent of women’s representation in the boardroom was Norway which, since 2008, has enforced a quota of 40% female directors on boards of all publicly listed companies.  Similarly Spain introduced an equality law in 2007 requiring companies with 250+ employees to develop gender equality plans with clear implications for female appointments to the board. Moreover in 2015, legislation will become effective in Spain which requires Spanish companies to ensure that 40 per cent of board members are female.

However as Emiliya Mychasuk (FT page 12, 8^th Dec 2010) ‘The quandary of quotas’ points out, there are doubts over the effectiveness of quotas in helping women climb the corporate ladder as whilst the number of women on the board may increase over time , there is not a corresponding improvement in the number of women in senior line management positions.

In the UK, Brian Groom (FT, Page 4, 2^nd December 2010) ‘Drive for more women on the board levels off’ points out that ‘the proportion of women on FTSE100 boards seems to have plateaued at 12.5%, prompting demands for a “wind of change” to prevent the UK from falling behind other countries in which the female share of top jobs is rising”.

Nonetheless there are some encouraging signs and, as Cherie Blair, (FT Weekend Magazine ‘Women of the Decade’, portrait by Richard Nicholson, Page 28, 11^th/12^th Dec 2010) states ‘The glass ceiling absolutely still exists, but it’s splintering each year’.

Whilst it is fair to say that the number of females with experience at board level in large UK companies is relatively limited, non-executive directors can be drawn from a much wider pool including the public sector and voluntary organisations.  In this regard headhunters and recruitment agencies have a role to play by widening the pool of potential candidates which they look at and thereby, hopefully, increasing the number of women candidates put forward to companies.  Companies themselves can have a fundamental impact by advocating and supporting appropriate mentoring schemes.

Diversity should not be for diversity’s sake, it should be for the benefit of the company, its shareholders and other stakeholders.  Women can bring new insights to the board, looking at things from a different point of view and maybe challenging long-accepted opinions, and potentially adding value.

Chris Mallin 5^th January 2011

Fingers in the Corporate Governance Dyke

Developments in corporate governance thinking and practice have typically been responses to company collapses. The original UK Cadbury report (1992) followed unacceptable excesses in the Guinness and Maxwell companies.  The US Sarbanes Oxley Act (2002) was a response to the collapse of Enron, WorldCom and others, with the resulting loss of market confidence and the implosion of Andersen their auditors.

 Predictably, the 2007 (and ongoing) global financial crisis will lead to further changes to governance rules, regulations and reporting requirements. 

 In the UK, whilst the Financial Review Council found no evidence of serious failings in the governance of British business (outside the financial sector); it has proposed some changes to the UK code to improve governance in major companies. These changes are intended to enhance accountability to shareholders, to ensure that boards are well-balanced and challenging, to improve board’s performance and the awareness of its strengths and weaknesses, to improve risk management, and to emphasise that performance-related pay should be aligned with the long-term interests of the company and its policy on risk.

 The main proposals for change to the existing UK Combined Code are:

• to re-name the code the UK Corporate Governance Code
• the annual re-election of chairman or the whole board
• new principles on the leadership of the chairman, and the roles, skills and independence of non-executive directors and their level of time commitment
• board evaluation reviews to be externally facilitated at least every three years
• the chairman to hold regular personal performance and development reviews with each director
• new principles on the board’s responsibility for risk management
• performance-related pay should be aligned to the long-term interests of the company and its policy on risk
• companies to report on their business model and overall financial strategy

(see http://www.frc.org.uk/corporate/reviewCombined.cfm)

 In the United States, changes to regulatory procedures for listed companies being considered include obligatory (though non-binding) shareholder votes on top executive pay and payments on appointment and retirement, annual elections for directors, the creation of board-level committees to focus on enterprise risk exposure, and the separation of the roles of chief executive from board chairman which are called for in the corporate governance codes of most countries.  Rules that allow shareholders to nominate candidates for election to the board, delayed by the Securities and Exchange Commission, are now likely to be implemented, according to the Economist (12 December 2009).

 The OECD’s Steering Group on Corporate Governance re-examined the adequacy of their principles in the light of the global economic problems.  The real need, it felt, was to improve the practice of the existing principles, although further guidance and principles will be published in due course.  In two seminal papers four broad areas were identified as needing attention – board practices, risk management, top level remuneration, and shareholder rights.  (Grant Kirkpatrick, The Corporate Governance Lessons from the Financial Crisis, OECD February 2009 and Corporate Governance and the Financial Crisis: Key Findings and Main Messages, OECD June 2009 (see http://www.oecd.org)

 But though potentially useful, these are all piecemeal adjustments; no more than fingers in the corporate governance dyke.  To date, corporate governance codes and rules have been based on perceived best practice, not relevant concepts, accepted theory, or rigorous research. The classical agency theory, adopted in so much corporate governance research so far, is proving to be a straight jacket to thinking on the reality of power. The time is ripe to rethink the way power is, or should be, exercised over corporate entities.

 Bob Tricker

Oxley of the SOX Act to chair business ethics group

Oxley, of the Sarbannes Oxley Act, to chair business ethics group

When, following the Enron debacle, Senator Sarbannes and Congressman Oxley co-sponsored the United States Sarbanes-Oxley Act (SOX) in 2002 their names, previously unknown outside America, became enshrined forever in the archives of international corporate governance.  The landmark Sarbanes-Oxley Act may have restored Americans’ confidence in the capital markets and in the process created a new accounting oversight board for publicly traded companies.

But what we had comfortably been calling the Anglo-American approach to corporate governance was shattered.  America now required corporate governance by the rule of law (obey the law or risk the consequences), whilst the UK and the Commonwealth countries, such as Australia, New Zealand, Canada, India, South Africa and many other jurisdictions still relied on self-governance (follow the corporate governance code or explain why you have not).

After a 25-year Congressional career, Michael G. Oxley has now retired from Congress, but maintains his interest in corporate governance.  Currently counsel in the Washington, D.C. office of Baker Hostetler and senior advisor to the board of NASDAQ, he has just been elected chairman of the board of directors of the Ethics Resource Center (ERC) – see http://www.ethics.org.  ERC is America’s oldest nonprofit, nonpartisan research organization devoted to business ethics and ethics in the workplace.

“I am proud to have been selected as the chairman of the board of the Ethics Resource Center, and I am excited by the opportunity to contribute to its mission,” Oxley said. “ERC is devoted to the study and practice of organizational ethics, a topic that has been at the forefront of my work for nearly a decade.”

Maybe business ethics is the new frontier of corporate governance.