What's So Good about Good Corporate Governance?
Does "going the extra mile" drive value? CEOs aren't so sure.
Over the years, various organizations have claimed companies with a better governance structure have a better share price rating than their competitors. But Dennis Shaughnessy, chairman of FTI Consulting, doesn't buy it. "Personally, I haven't seen it. I think the trap is that when you do an analysis, you're starting with companies that tend to do well to begin with," he told participants in a Chief Executive roundtable discussion held in partnership with FTI. "And how much of it is excellent strategy and management, with governance going along for the ride?"
Moreover, when the media seizes on an issue like the backdating of options, governance issues appear more prevalent than they actually are. "We're dealing with a tiny percentage-maybe 150 to 250 stock option backdating issues," pointed out Shaughnessy. "Two, it's not even normally material. And, finally, in all the road shows with institutional investors that we've been on, we have never had a question on corporate governance. Not even one."
In the long run, though, good governance may prove its value. "We can be hard on the U.S. for its stance on corporate governance, but when things start to unravel abroad, the chickens will come home to roost-not only in the pedagogical sense that foreign companies will get what they deserve," added Jack Dunn, president and CEO of FTI Consulting. "Come the next Parmalat, our Sarbanes-Oxley regulations and even some of the plaintiffs' lawyers will start to look good, and the capital will come home."
For companies like AIG, which revamped its board in the wake of regulatory scrutiny, the pursuit of improved governance can prove therapeutic. "From a CEO perspective, reconfiguring your board lets you fill what you believe the needs are around the boardroom table," said Martin Sullivan, CEO of the company, which added eight new independent directors to a board of 15. "It becomes a much more operating type of environment, where you can get feedback from executives who have run major businesses."
At What Cost?
For a $6 billion company, the average Sarbanes-Oxley compliance cost is about $3.8 million. But the real cost, according to Dunn, is the dynamic in the boardroom. "It's a we/they mentality between inside and outside directors. On my board and the three that I sit on, it's not [a challenge to] find another attorney, accountant or risk manager, it's finding another CEO so that our CEO can have someone to talk to about all the horrible paces we put him or her through. …