Magazine article New Zealand Management

Caring Shareholders Can (Also) Add Value: I Wrote in the Director in November Last Year about How 'Caring Directors Can Add Value' to an Enterprise. There Is, However, an Important Related Theme: How 'Caring Shareholders Can Add Value'

Magazine article New Zealand Management

Caring Shareholders Can (Also) Add Value: I Wrote in the Director in November Last Year about How 'Caring Directors Can Add Value' to an Enterprise. There Is, However, an Important Related Theme: How 'Caring Shareholders Can Add Value'

Article excerpt

Shareholders. after all. are the owners and directors are merely their agents--stewards of shareholder property--and much of what has been done in the name of corporate governance is implicitly for the benefit of shareholders. So, an interesting question emerges: while boards are accountable to shareholders, who are shareholders accountable to? Are there any responsibilities associated with being a shareholder? Do shareholders care about corporate governance?

It is fair to assume that shareholders do care about corporate governance. The separation of ownership and control that characterises much of the nature of modern business means that management can make self-serving decisions at the expense of shareholders. Effective corporate governance arrangements should lead to scrutiny of management and better decisions, and so better outcomes for shareholders.

However, the relationship between corporate governance and business performance is complex and doesn't easily lend itself to statistical validation. Consequently, there is little 'scientific' evidence that the costly corporate governance improvements are producing net benefits to shareholders in terms of improved performance. In the absence of a frame work for assessing the value of more governance regulations, there will be scepticism and a lingering concern about who really benefits from the added cost.

Shareholders need a framework through which they can evaluate the benefits of corporate governance. I offer the following:

* Evidence suggests the overall standard of corporate governance in this part of the world is relatively high. Few companies have failed because of poor corporate governance and there is no evidence of excessive executive compensation as paid in the United States.

* Increased emphasis on corporate governance is no guarantee of superior performance, or even profitability. Businesses occasionally disappoint and some fail, such is the nature of the competitive market.

* The real corporate governance issue is performance. The sum of wealth destroyed through fraud and other malpractice is a drop in the ocean compared to what's destroyed by poor performance.

* Three key inputs to superior performance are monitoring, evaluation and incentives.

It is debatable whether shareholders have benefited from recent corporate governance reforms. For example, Britain's magazine The Economist (21 May, 2005 pp81-83) highlighted a University of Rochester study which estimated that the net private cost of Sarbanes-Oxley reforms in the United States amounted to US$1.4 trillion. The article suggested the law of unintended consequences came into play and that the major beneficiaries of the reforms are the accounting firms which, by and large, represent the profession that was generally at fault in the scandals and which subsequently shaped the new legislation. According to the article, United States companies (shareholders) paid, on average, $2.4 million more for their audits in 2004 than in 2003.

There are no comparative figures for New Zealand and Australian companies but, there is no doubt boards generally spend considerably more time on corporate governance procedures than they did and, even though directors are working harder than ever, the emphasis on governance compliance crowds out discussion on other important topics. …

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