Academic journal article The McKinsey Quarterly

Gloom at the Top. (This Quarter)

Academic journal article The McKinsey Quarterly

Gloom at the Top. (This Quarter)

Article excerpt

The collapse of several large US companies and evidence of misleading accounting at many others have unnerved investors everywhere. They ask the obvious question: "What happened to corporate governance?" Sadly, the answer, at many companies, is that the reforms of recent years didn't go nearly far enough or were simply ignored by management.

Government, regulators, stock exchanges, and leading executives are responding to the present crisis, but let's not fool ourselves: most of the work is yet to come. If companies are to regain the trust of their investors and other stakeholders, they must act positively, transparently, and comprehensively to revise the way they are governed.

McKinsey consultants have long explored corporate-governance trends, in both the developed and the developing worlds, in the pages of The McKinsey Quarterly. On several occasions, we have returned to the role of the board of directors--a particularly important element--and enjoined chief executives to accept its independence. The result of a lack of independence is now clear: weak board oversight. By failing to ask the right questions, boards can make it possible for managers to behave improperly and to pursue poor long-term corporate strategies. The ultimate consequences may include fraud and bankruptcy.

In this issue, our colleagues review the steps a reform-minded company can take to transform its board into a real instrument of corporate governance. Only a few companies have struck the proper balance between the board's role in promoting the strategic and operational development of the business, on the one hand, and in overseeing its management, on the other. Merely revising policies on how to account for executive stock options, for example, won't do the trick. In "Change across the board," Robert F. Felton and Mark Watson insist that trust can be rebuilt only with a comprehensive, integrated approach, such as making boards more independent and assertive, giving them a bigger role in setting corporate strategy recognizing their role in managing risk, overhauling the compensation of management, reviewing--Immediately--corporate accounting practices, and communicating more openly with shareholders. …

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