Good Corporate Governance

By Dr. Earl R. Smith II DrSmith@Dr-Smith.com www.Dr-Smith.com Corporate governance and the reputation of the individuals composing the Board of Directors have a direct impact on the stock price of the company they govern. Individuals with unique leadership styles and varying levels of ethical standards must come together under one corporate code of ethics and conduct business in a complex and ever-changing business environment. Governance involves many different competing issues requiring assessment by humans prone to serving their own self-interests. Good governance requires safeguards and redundant checks to ensure prioritization of the interests of the shareholder above that of the individuals placed in authority over corporate assets. Good governance by a corporate board will ensure managements compliance with the boards stated mission and strategy. The board will effectively communicate with the shareholders of the company and take measures to act upon shareholder concerns. It is the board of directors responsibility to assess the accuracy of corporate financial information provided to shareholders and the investment community. Independent third party auditors are a tool commonly used as a good governance practice by a board of directors to attest to managements accuracy in reporting corporate finances. The Board of Directors should be composed of a majority of independent directors in compliance with Sarbanes-Oxley.1 The independence of the board allows for a more free and accurate assessment of corporate management. However, the interplay of individual leadership styles and personalities needs to be considered when relying on the information compiled by the Board. The composition of the committees established by the board is critical to ensuring employee directors do not have undue influence on the integrity of the information flowing to the shareholders and investment community. Professional governance will often employ performance incentives designed to link corporate managements total compensation to achieving a boards strategic objectives. A compensation committee assists the Board of Directors with assessing current compensation
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Experience and prudence has lead me to recommend this even for my closely-held, private clients

plans and recommending a plan to retain management talent and focus management efforts on the strategies outlined by the Board of Directors. The compensation committee, like the independent auditors, is a tool to ensure corporate managements compliance with the established board of directors strategic plan. The compensation committee should assess managements effectiveness in achieving the measures established board of directors prior to awarding performance incentives to corporate management or the CEO. The Sarbanes-Oxley Act of 2002 set regulations in place for corporate ethics. Many boards go far beyond Sarbanes-Oxley to a corporate culture of high moral values and ethics. Rules and regulations provide a baseline of performance, but companies with established cultures of high integrity tend operate as well as - or better than - companies simply trying to comply with SOX regulations. Boards that establish active and aggressive Audit Committees led by knowledgeable professional directors and engaging competent advisors are much more comfortable with shareholder and institutional investor scrutiny. A culture of strong corporate ethical behavior and compliance management policies leads to strong shareholder confidence. Since Sarbanes-Oxley, most stock exchanges have tightened listing requirements and enumerated governance models and structures. Private companies not listed on exchanges have adopted many of the same governance practices as companies complying with listing requirements and falling under the Sarbanes-Oxley regulations.2 Nonprofit boards often publish audited financial statements and corporate controls in an effort to ensure stakeholders of their good corporate governance practices. No single governance structure will fit every board of directors or every company, and good governance is relative and varies by industry. Many corporations consider the Sarbanes-Oxley Act onerous, yet other boards have established cultures that far exceed mere compliance with Sarbanes-Oxley. Corporate ethics is a reflection of the ethical standards of the individuals of the leadership of the corporation. Rules and regulations can establish baselines of behavior, but the board must assess their performance and enact redundant controls to ensure compliance with the standards of the culture of the company they serve. The Board must be independent enough to act swiftly and decisively when the actions of any board member falls short of the ethical standards the board of directors have established.
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Private companies, which comply with SOX regulations, seem to be reaping an additional benefit - they transact at higher multiples than those that do not. This makes sense from the perspective of the acquiring company - compliance can sharply reduce uncertainties

~~~~~~~~~~ Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic advisor to CEOs. Dr. Smith specializes in leadership development and advising management on leadership styles that make them leaders that are more effective. He also works as an executive and/or life coach in the areas of personal growth and spirituality.