Academic journal article Business Economics

Corporate Governance: What Has Happened and Where We Need to Go

Academic journal article Business Economics

Corporate Governance: What Has Happened and Where We Need to Go

Article excerpt

Corporate scandals have contributed to the $7 trillion dollar loss in the aggregate market value of American corporations as of March 2003. Many of the scandals were the consequence of shifting power in favor of chief executive officers and away from boards of directors. We are now entering a period of increased government activism that also requires a thorough review of how directors, executives, and financial and legal services view their responsibilities. Board members must reassert their authority and their responsibility to shareholders and other stakeholders. There must also be a shift in focus on the part of directors and executive management from "hitting the numbers" to a longer-term focus and a reassertion of strong ethical foundations for corporations. This effort must be led by boards of directors, the stewards of shareholder and other stakeholder interests. While there are several specific issues that need to be addressed regarding corporate governance, corporations should not be so oriented toward narrow compliance that larger ethical issues are neglected and flexibility and entrepreneurship are inhibited.

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I appreciate the invitation by NABE to speak to you today and would like to note that the economics profession should be very proud indeed that one of your own, Cynthia Glassman, is making such a profound contribution to the vital work of the Securities and Exchange Commission. As Commissioner Glassman noted, this is one of my first public appearances since my swearing in as Chairman of the SEC, and I am pleased to present some thoughts about corporate governance to this group.

I believe that the inattention to good corporate governance practices over the past decade or more is at the heart of what has gone so terribly wrong in corporate America in the past few years. If significant steps are not taken to revisit and remodel corporate governance practices, corporate America will continue to attract the anger and animosity not only of disillusioned shareholders, but also of a much broader cross-section of American society.

The Need to Rethink Corporate Governance

Corporate governance is, for sure, a hot topic these days. We have all seen countless articles in newspapers and magazines discussing the subject. We have heard numerous proposals from the exchanges, public policy think tanks, shareholder advocacy groups, and individual scholars. Congress, leaders of the Administration, and the SEC have put forth their own proposals related to corporate governance as well. It's no understatement to say that there are plenty of ideas out there--almost a cottage industry, and no shortage of opinions.

For the most part, this has all contributed to a healthy dialogue about what companies can and should do to ensure that they are living up to the expectations of investors and serving as respectable participants in America's business environment.

The intense discussion of corporate governance and increased scrutiny of business has already led to changes in corporate behavior and philosophy that go beyond the new laws and regulations. The most fundamental, almost seismic, change has been the growing recognition that, for the protection of investors, the primary responsibility for guardianship of corporate governance practices must reside with the board of directors and must not be diluted by the power of the chief executive.

Over the past decade or more, at too many companies, the chief executive position has steadily increased in power and influence. In some cases, the CEO had become more of a monarch than a manager. Many boards have become gradually more deferential to the opinions, judgments, and decisions of the CEO and senior management team. This deference has been an obstacle to directors' ability to satisfy the responsibility that the owners--the shareholders--have delegated and entrusted to them.

The need for such a change has, of course, been driven by a distressing array of corporate malfeasance that is all too apparent. …

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