Economic Outlook: Shareholders now more active in questioning corporate ethics

Almost a year and half has passed since Enron, the symbol of poor corporate governance, filed for bankruptcy followed by other majors like WorldCom, Tyco and some European companies.

It is over a year since the Sarbanes-Oxley Act was signed into law in the United States and EU Commission issued similar regulatory measures to avoid the spread of the Corporate America contagion across the Atlantic. Now major world markets look healthier, as if public confidence in corporate governance and practices has returned.

This week, The Economist Intelligence Unit (EIU) issued lengthy report titled Corporate Governance, Business Under Scrutiny and described as a white paper to launch a debate about the main issue on business agenda all over the globe. As the flood of corporate scandals has slowed and the financial markets look healthier, might the governance issue be losing steam?

The EIU paper concludes that: corporate governance is still a front-burner issue for senior executives.

Companies remain focused on corporate governance reform and they're probably going to keep the focus for time to come. But whether this is reflected on performance and regaining trust is another issue.

Survey

In a survey of more than 300 senior managers around the world, asked whether companies are better governed now than they were before Enron became a household name, a third of the survey respondents agreed, double the number who felt that companies are no better governed. But the largest group of respondents, 45 per cent of the executives, said that there was no way of telling.

And only one-fifth of the executives we surveyed agreed that public trust in business was returning.

Nevertheless, evidence that substantive change is afoot is compelling. Shareholders have become more active in their examination of companies, and to judge by the recent rows over executive compensation at Glaxo-Smithkline, Tesco and others, they are acquiring a taste for showing the CEO who really is boss, and becoming more energetic in pursuit of information.

Many companies are responding by becoming more transparent, and the EIU report concludes that, compared with 12 months ago, information about governance policies and processes is easier to find on company websites and in annual reports. But there are suspicions that companies are more focused on avoiding penalties than really applying good governance.

Based on the survey and extensive research, the EIU paper puts ten points for improvement in the future (See box).

Still the matter may be illusive, as the time spent on corporate governance is devoted more to form than substance.

Suggested points for improvement

The EIU paper puts ten points for improvement in the future:
* Thorough oversight of company finances by qualified independent directors free of pressure from management and with funds to hire their own expert consultants.

* Absence of any conflicts of interest on the part of outside directors-relationships with their own businesses, consulting contracts, and so forth.

* A well-balanced board by skill and age, selected by a nominating committee independent of the CEO.

* Top executive compensation that is convincingly tied to longer-term performance on a variety of criteria. Linking incentive pay more closely to relative performance against competitors, both financially and in the market, is sensible.

* Tightening up of holding requirements that limit the ability of executives and directors to unload shares at a peak.

* Regular meetings of outside board members away from the CEO.

* Comprehensive and regular briefing of the board on strategic questions, followed by open debate.

* A board that knows how to stay out of operational questions and focuses on the big picture.

* Accessible financial accounts that clearly set out the principles behind, and consequences of, significant accounting policies and decisions.

* Transparent information on, and explanation of, corporate decisions on matters of both strategy and governance.

Ahmed Mustafa is an Arab writer based in Qatar