Improving the governance system by delegating this job to regulatory authorities is not sufficient. In 2002, the U.S. witnessed its biggest modern-day corporate governance reform with the passage of the Sarbanes-Oxley Act. These rules, which are onerous and expensive to comply with, and are enforced by the SEC and an agency that oversees the auditors called the Public Company Accounting Oversight Board, appear to have done little to prevent the 2008–09 crisis.
The Sarbanes-Oxley regime forced U.S. corporations to provide more information to shareholders (with the intent of allowing them to make more informed decisions), but some executives continued to collectively mislead shareholders (and employees as well). If they did this knowingly, they ought to be pursued in the courts for fraudulent behavior; the trouble is that such judicial action typically comes too late and does not cure the larger problem. Sarbanes-Oxley has the flavor of providing forensic evidence once a governance crime has taken place. The justification for stateholding is to allow preventive intervention when larger economic interests are at play — actions that can be put in place sooner and increased gradually as needed.
The first preemptive step is for governments to hold corporate boards responsible not just for financial results and for providing information to shareholders, but more generally for proper governance, which reduces the risk that any corporate crime will occur at all. Too many boards, particularly in the U.S., have been obsessed with short-term execution and results (even at the risk of survival), and have not been attentive enough to longer-term value creation and sustainability. Boards must be required to embrace their fiduciary responsibility to the company as well as to the share price, and to ensure that good governance becomes an integral part of the corporate culture. This should be enforced through legislation, regular prodding, and — crucially — through the threat of stateholder intervention. Governments and regulatory authorities ought to have the means to regularly audit companies to ensure that governance standards are being upheld.
It is no coincidence that certain countries have come out of the recent crisis relatively unscathed, such as Canada, Denmark, and Australia. These countries have reinforced the role of the board chairman by giving that position an explicit responsibility for good governance. The chairman has a primary duty of ensuring that clear responsibilities are established for both managers and their supervisors, so that the firm follows and can benefit from a robust system of checks and balances.
In countries where the chairman and CEO roles can still be held by a single individual, the separation of roles must be encouraged, if not required for companies of a certain size. It is one more safeguard to help us avoid many of the abuses that have led to the current crisis. One person ought to be primarily responsible for execution, and the other for effective governance; when there is a conflict, the chairman should rule — because that is the only way to restore an effective balance between these two corporate functions.
Stateholder representatives on boards will have to be exemplary representatives of the company’s long-term interests. They must insist on training board members (including themselves) in governance capability, as well as improving board processes, including succession. The real lack of capability on many boards has become a blight in the wake of the recent meltdown; the presence of stateholders provides the corporate world with an unparalleled opportunity for systemic improvement in this domain. To be sure, there will be cries of government interference, and for that reason there should be frameworks and processes that establish restraint. The very fact that the stateholder has intervened should be seen as a signal of corporate malfunction. It should be triggered only by predefined parameters and initiated by a government agency.