Crisis at the Top: Is Time Running out for Boards and Directors? (Cover Story)

By Story, Mark | New Zealand Management, October 2002 | Go to article overview

Crisis at the Top: Is Time Running out for Boards and Directors? (Cover Story)


Story, Mark, New Zealand Management


High profile scandals and director incompetence at home and abroad have rocked public confidence in corporate integrity. Good corporate governance is not just about staying within the limits of the law. Compliance is now a given. Directors can't act as if they are passive participants in a corporate morality play--intent and underlying sentiment matter. So what has to change within corporate governance Kiwi-style to claw back credibility and lift the game?

FAITH IN CORPORATE New Zealand has been waning for some time. The antics of the players in what became known as the "winebox affair" sowed the seeds of distrust. The tact most of the "winners" now live offshore to continue to avoid tax payments doesn't help. And our penchant for rewarding non-performing executives while shareholders suffer breathtaking losses, coupled with poor or misleading disclosure tactics and improper accounting methods, have all compromised recent boardroom and Stock Exchange reforms.

The upshot of all this, plus the downturn in global markets, the rise of the New Zealand Shareholders Association, a more complex trading environment, plus increased director responsibilities (and associated infringement penalties), is that corporate governance is now a hot topic.

And, of course, interest in the issues has been accelerated by the failures of American, Australian and local corporates including Worldcom, Enron, Xerox, Tyco, Ansett, HIH, One.Tel, BIL, Fletcher Challenge and online retailer, Harris Scarfe. Corporate governance dialogue has turned from compliance to commitment to shareholders, leadership philosophy and values. In doing so, it has raised major doubts about the professionalism of board members and the role of social responsibility.

Analysts in the United States are now questioning the wisdom of the unique relationship that exists between chairman and chief executive, who are often one and the same.

The director/board model in the United States invariably delivers fewer independent directors, and a correspondingly greater management influence over all facets of governance--including executives setting their own remuneration and share options, standards of financial reporting and involvement in the appointment of auditors.

Inadequate board controls

New Zealand's director/board model is, on the other hand, less broken and not under such pressure to change. Separation of the role and function of board and management remains an essential pillar of corporate governance here. The local view is that United States scandals reflect the inherently different US corporate governance environment. But before we get too complacent, weak corporate governance standards are still rife here and we don't need another wine box to prove it.

One parallel between large-scale US accounting scandals and local corporate performance is the degree to which boards get their hands dirty. While many US boards try to run the entire show, a "hands off" approach by local boards produces similar shortcomings--companies operating without adequate director input.

A report by Enron board member, William C Powers Jr, revealed an almost total collapse in that company's board oversight. Board controls were inadequate, its committees carried out "only cursory reviews", and the board failed to appreciate the significance of "specific information that came before it".

And before we snigger, the performance of many local boards suggests they are equally asleep at the wheel. Being generous about interpretation, this might have more to do with local naivety over the real implications of being a director rather than any overt moral turpitude.

Implementation--biggest downfall

Ian Taylor, Sheffield CEO, thinks we need to fix the implementation, rather than the substance of our director/board model, particularly as we move from the era of professional manager to professional director. …

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