The Missing Link in Corporate Governance

By Julien, Rick; Rieger, Larry | Risk Management, April 2003 | Go to article overview

The Missing Link in Corporate Governance

Julien, Rick, Rieger, Larry, Risk Management

Continued skepticism among shareholders due to the dot-com meltdown, accounting scandals and the largest corporate bankruptcies in history have made corporate governance an issue that will not go away. Formerly regarded as a series of arcane legal and regulatory hurdles to clear, corporate governance has become a critical topic of concern for everyone in business. One of the newest players in this scenario is the risk manager, who is poised to play a significant role.

Corporate governance has become an issue for a growing number of risk managers not just because of skyrocketing directors' and officers' liability premiums. Companies are self-insuring an increasingly large amount of this exposure due to both higher deductibles and lower coverage levels. The current climate also makes it increasingly difficult for companies to attract and retain topnotch directors, executives and employees, especially if they sense a company's corporate governance process is not well defined or well respected.

This situation has put the risk manager in a place of authority to play a part in managing corporate governance standards. Rather than narrowly focusing on meeting the terms of the new rules passed by the U.S. Congress and the major stock exchanges, risk managers must ask the long-term questions:

* How effective are our corporate governance processes?

* Do we need to improve them and, if so, in which specific areas to prevent losses?

* How can we improve our corporate governance to improve the long-term sustainability of our organization?

By helping to develop more efficient processes to monitor risks and by strongly supporting a companywide culture of sound corporate governance, risk managers can play a valuable strategic role in the company.

What Is Corporate Governance?

Corporate governance is the system within an organization that protects the interests of its diverse stakeholder groups. The best approaches recognize that stakeholders are more than shareholders, and include customers, employees, suppliers, retirees, communities, lenders and other creditors.

There are plenty of reasons why good corporate governance is critical to a company's well-being, aside from preventing its CEOs and CFcs from having to testify before Congress or being led away in handcuffs. It is an important element of meeting legal requirements and upholding fiduciary responsibilities to investors. It helps the organization attract and retain good employees, officers and directors. It makes the organization an attractive business alliance partner, and it generates community support.

While good corporate governance is clearly the ethical thing to do, recent studies show that it also yields improved shareholder returns, making the effort well worth the cost. According to the University of Michigan Business School, firms with strong corporate governance also exhibit profitable investment opportunities and increased reliance on external financing. Likewise, McKinsey & Company states that most investors will pay a premium for companies with high governance standards. Business Week, Columbia Law Journal and The Journal of Economics have also noted links between strong governance and strong financials.

Good corporate governance is evolving from command-and-control dictums to a more proactive and continuous process that assesses, sources, measures and manages risks across the enterprise. Effective governance instills a culture of sound business practices and ethics; an understanding of company risks and how to manage them; and efficient, appropriately executed processes to manage and monitor risk on an ongoing basis.

New requirements place additional responsibility on the board of directors to implement strong risk management processes, which often include more progressive internal auditing. This can help companies shift their corporate governance focus from legal and regulatory compliance to broader-based business risks.

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