Restoring Trust in Corporate Governance

(page 3 of 3)

• the dangers of gaming any system of measurements, including new ones advocated here.

Some thoughts on how to overcome these obstacles are outlined in the more extensive Policy Brief.

Finally, boards and senior executives must strive to carry out these tasks in good faith in order to address the fundamental issue of corporate accountability.

The pricing signals from the stock market, an enhanced shareholder role in governance and increased government regulation all may have a role in accountability. But all have imperfections, and all are the subject of strenuous debate. For example, given the enormous diversity in objectives, strategies and fund manager incentives, are shareholders part of the problem or part of the solution? If the efficient market theory must be modified by actual bubbles and irrationality—and by critiques from other schools of economics—what is the role of shareholder value, and at what point in time, in assessing corporations' performance and holding them accountable?

The most direct accountability mechanism is sound stewardship by the CEO and senior executives under the direction and oversight of hard-working, independent-minded boards of directors who are best positioned to balance the many competing interests at play in all significant corporate decisions. However, critics argue, with some force in some instances, that this accountability mechanism is weak because boards can be passive, complacent and inward looking, incapable of asking CEOs hard questions and ignoring important shareholder or other stakeholder concerns.

But the other accountability mechanisms—regulation, the market, enhanced shareholder role—are, in many respects, all aimed at the fundamental goal of my argument: strong, energized boards and business leadership dedicated to the discharge, in good faith, of the six essential functions in order to create durable long-term value through sustained economic performance, sound risk management and high integrity—and through meaningful consultation with shareholders and other important stakeholders.

In many policy papers, the cry goes up for "better leadership" to address difficult problems, with deep structural roots. Too often that plea goes unanswered—or the problems are too intractable. But today, with business facing a crisis in confidence about governance, it is in the demonstrable interest of corporations and of capitalism itself for boards of directors and business leaders truly to address the governance problems of the era and provide a clear, credible and powerful private sector response.

Ben W. Heineman Jr. is GE's former senior vice-president for law and public affairs and is currently a senior fellow at Harvard Law School and at Harvard's Kennedy School of Government. He is the author of the book High Performance with High Integrity (Harvard Business Press, June, 2008).

Business Exchange

Track and share business topics across the Web.