Over-Engineered & Gold-Plated: How Corporate Compliance Is Killing Enterprise: Corporate Governance Is at a Pivotal Junction, Argues Visiting Professor and Author Bob Garratt. Poised between the Demands of Conformance and Performance, Directors Are Headed for Turbulent Times. So What Should We Expect?
Le Pla, Ruth, New Zealand Management
In the straight-talking, no-nonsense world of professor Bob Garratt, corporate governance may be dead fashionable" nowadays, but it is fundamentally flawed. Thoughtless and slavish adherence to legislative constraints imposed since big-name boardroom bandits at Enron, WorldCom and Parmalat were made to ride out of town, has created an era of corporate conformance. Tick the boxes. Run through the drill. Comply with the codes.
In New Zealand for a whistle-stop tour and presentations at AUT University and the Institute of Directors, the London-based author of corporate blockbusters such as The Fish Rots from the Head, Thin on Top and The Twelve Organisational Capabilities says it's time to challenge the "increasing nonsense" of the Sarbanes-Oxley Act and revert to true professionalism in corporate governance.
The Act, he says, is "mad, bad and dangerous to know". Even Michael Oxley, couped up at the International Corporate Governance Network conference in London during the July 7 bombings this year "admitted that it had gone too far and that slavish adherence to SOX compliance was having negative effects on US business", says Garratt.
"Now in extreme circumstances if a US CEO and CIO mis-sign their quarterly accounts they can be fined personally a maximum of US$5 million and get 20 years in jail."
The Enron case, is particularly worrying on a number of dimensions, he says, as a combination of directoral, auditor, consultant, legal, media, investment banker and analyst overview failures led to "right-minded but hasty and ill-considered legislation".
Politicians have one obvious tool--legislation--"and are seen to be rewarded by the electorate for using it".
In Garratt's mind, corporate governance is now set for a very turbulent time. Key considerations will be how the United States will pull back from Sarbanes-Oxley and how it will handle the separation of chair and CEO roles.
The problems are international in scope. "To be absolutely crass, most of the corporate governance problems in the United States centre around fraud. In the UK they centre around strategic incompetence."
Continue along our current trajectory, predicts Garratt, and in two years' time corporate governance will be effectively dead--so compliant that it will have frozen everything in its tracks. Compliance has become an industry in itself, peopled by "instant experts" touting corporate governance fixes "without being aware that they are offering only one aspect of it--compliance".
Garratt's beef is that compliance is necessary but not sufficient. "Sufficiency comes from a board balancing the continuous directoral dilemma of board compliance (prudent control) with board performance (driving the enterprise forward).
"It's a particular irony that the very people who helped get us into this mess--lawyers, external consultants, investment bankers and fund managers--are the very ones now being asked to get us out of it. They're making huge consultancy fees by creating a compliance system which I believe is over-engineered, gold-plated and is killing enterprise again."
In the United Kingdom the winds of change are already blowing through the halls of corporate insurers who are increasingly pushing to see chartered directors at the helm of organisations. They are already offering better rates in these circumstances as they "feel a lot more sure about their insurees".
This is part of a wider move--evident to a lesser degree in the United States as well--that is both putting pressure on the competence of managers and leading directors to look at ways in which they can reassure credit ratings organisations and even shareholders of their competence. …