Corporate governance has been promoted. Previously used to sharing floor space with other board committees – such as the nomination committee – governance committees are increasingly getting their very own identity. And they’re going their own way, too.
Anxious to help restore the post-Enron breach of trust, stand-alone corporate committees devoted to exemplary governance certainly appear to be a step in the right direction. If companies create a full corporate governance committee, it ensures the entire board focuses on governance, say some governance experts. ‘It’s important enough that a proper committee is needed to oversee it,’ says Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, a fan of the development.
Part of the trend has been driven by new NYSE listing requirements, which came into force in November 2003, aiming to help separate the roles of management and directors. The NYSE changes also mean listed NYSE companies had to create a committee that addresses corporate governance. In many cases, companies simply put governance and nomination committees – natural bedfellows – together. And some flexibility was offered.
‘If you want the entire board to carry the weight of corporate governance responsibility, and the board consists of independent directors, you could get rid of the governance committee, but then the entire board would have to take charge of all those functions,’ says Jim Potter, a lawyer at food producer Del Monte. Naturally, though, it makes sense for many directors to simply delegate power.
Not all glory
But any company considering a move to a stand-alone governance presence should go carefully, counsels Rob Wylie, managing director at Deloitte & Touche’s center for corporate governance.
‘You need to look at its charter, and its purpose,’ he explains. ‘Is it there to establish a set of principles for good governance, and so leave other non-governance responsibilities for other committees? There is a real danger that could happen. And that comes down to board leadership and how these processes and interactions are followed.’
Despite some companies establishing single-entity governance committees, Wylie says there’s plenty of logic to support retaining a combined nomination and governance arrangement, especially if it has worked well thus far. ‘By combining two committees you have the ability to take a more active role in the application of governance – for example, looking at the board’s composition and performance,’ he adds.
Wylie is not the only skeptical voice in the rush toward separate governance teams, either. Jeffrey Sonnenfeld, associate dean at the Yale School of Management, also has his doubts. ‘I’ve been on these committees and I’m not sure whether, if you already have five or six different committees, adding yet another one is going to do any good,’ he says. ‘Good corporate governance should be central to every committee. A nominating committee is not that busy – it should have time for [corporate governance]!’
Sonnenfeld also warns that a glut of committees means more directors, both independent and inside, spending more time staring at each other across meeting tables. ‘It can start to become a perfunctory exercise for people to go through,’ he says. ‘People get typecast according to the areas they cover. Or what happens if they have the audacity to speak on subjects outside their immediate expertise? People could think they lack the credibility to deal with it.’
Impressive debut
Nevertheless, a separate corporate governance committee surely means directors, management and others – whistle-blowers, staff resentful about possible favoritism, anyone concerned about sexual harassment – know exactly where to turn.
Sonnenfeld agrees: ‘Certainly some whistle-blowers aren’t sure now which committee to turn to. Not all audit committees, for example, have set up a governance charter to go beyond financial propriety. Just as long as the creation of more committees doesn’t turn into a committee police force with mirror glasses and clipboards going around asking silly questions.’
Nell Minow of corporate governance watchdog lobby group the Corporate Library says there are advantages and disadvantages in creating more committees. But regardless of which new committees get bolted on, it’s the quality of individuals at top table that counts.
‘What matters is the independent and effective judgment of the board,’ Minow says. ‘I’d look at statements by the committees of their charters and procedures, and the only evidence that really matters: how a board handles the most difficult decisions, including remuneration and succession.’
Maybe so, but how do you slam the brakes on a bandwagon after it’s going full speed? For some, the whole corporate governance issue looks in danger of becoming almost an end unto itself. So where could the governance vehicle be headed next?
Lawyer LaDawn Naegle, a partner at Bryan Cave LLP in Washington, believes the next stop is companies increasingly focusing on corporate compliance programs. Compliance programs headed by separate corporate compliance officers are likely to become more common, and these programs might report indirectly to corporate governance committees. ‘The SEC and the Department
of Justice already say companies that have these compliance programs in place will be more favorably reviewed, or less likely to have a criminal action taken against them,’ Naegle explains.
Although Naegle says pressure to build even more corporate governance guidelines into business looks inevitable, she believes the process shouldn’t be too onerous. ‘Most companies already have all the pieces,’ she says. ‘It’s really just a case of putting them all together.’
