CED Statement Aims to Focus Directors and Executives on Governance Essentials in this Time of Economic Turmoil and Change
WASHINGTON, Jan. 25 /PRNewswire-USNewswire/ -- If American business leaders are to restore public confidence in how companies are run, boards of directors must discharge six essential, closely interrelated tasks. That is the message of a new policy brief, Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders, from the Committee for Economic Development (CED). The brief was written by Ben W. Heineman, Jr., CED Trustee and former Vice President and General Counsel for General Electric Corporation, with the consultation and advice from the CED's Subcommittee on Corporate Governance.
"These tasks require a redefinition of corporate mission and CEO role," said Heineman, "to make fundamental the balance of risk-taking with risk management and the fusion of high performance with high integrity. They are essential to restoration of trust in corporate governance but, more importantly, to make credible corporate accountability -- the profound issue underlying corporate governance. This is not a "nice to do." Regardless of the outcomes of regulatory debates, it is profoundly in the self-interest of private sector leadership to energetically implement the six "must do's" in order to answer powerfully the legitimate criticisms of board and senior executive decision-making in recent years. The six tasks are:
1) A redefinition of the mission of the company—and the role of the board of directors and the CEO to create durable value for shareholders and other stakeholders through sustained economic performance, sound risk management and high integrity. The most basic purpose of the corporation is for leaders to find a sound balance between risk-taking (innovation and creativity) and risk-management (financial and operational discipline) and to fuse this high performance with high integrity. High integrity means a commitment to law, ethics and values in order to attain affirmative benefits inside the company, in the marketplace and in global society, but also to reduce legal, ethical, reputational, public policy and country risk. The emphasis on short-term maximization of shareholder value should be reduced significantly.
2) A revamped internal leadership training process.
Such a process should be built on these integrated essentials of performance, risk and integrity—and on a culture in which all are honored and exemplified. Corporate education and training for potential leaders must be broadened and transformed; growth assignments must include diverse roles involving risk and integrity issues, not just making the numbers in different environments.
3) A refocused CEO selection process.
This most important board function should flow from a revised leadership development process and seek a broader set of skills appropriate to a redefined mission. The board of directors should explicitly articulate a redefined role when seeking a new CEO.
4) A restatement of fundamental but operational measurements for performance, risk and integrity.
These metrics should express the near, medium and long-term corporate goals across all three dimensions in both financial and non-financial terms—with primary focus on clear steps that create of sustainable value for shareholders and other stakeholders, such as employees and customers, essential to the company's well-being. These performance, risk and integrity operational goals not only should guide internal actions but should be articulated annually in a public and transparent way so that external constituencies can assess accountability against clear standards.
5) A revision of compensation for the CEO and other senior executives.
Such a revision for top business leaders—and for other employees with significant impact on the corporation—must be based on real actions measured against those restated operational performance, risk and integrity objectives. Although top business leadership will receive substantial annual cash compensation, a significant proportion of compensation in any particular year will be variable cash and variable equity which will be paid out or held back over time as objectives are met, exceeded or missed.
6) A re-alignment of the board's fundamental oversight function.
Boards often complain of two much complexity in their jobs. They should cut through the clutter and focus primarily on those high priority performance, risk and integrity operational objectives which are central to attainment of corporate mission and to assessing the fundamental actions on which executive compensation, over time, is based.
This Policy Brief seeks to address the crisis in confidence about business' ability to govern itself and to be accountable in the wake of the Great Recession which was caused, in part, by poor business decision-making and excessive and poorly structured corporate compensation. These developments, combined with a constant media barrage of stories about business problems, have driven public confidence in business to a very low ebb. Cries for more regulation of business are coming from many quarters.
This Policy Brief is released when necessary, spirited and extensive regulatory debates are taking place on the safety and soundness of the financial system and on governance issues applicable to all publicly held companies (e.g. disclosure on compensation and risk; enhanced shareholder role). But the Policy Brief purposely focuses exclusively on private sector self-determination, not public sector regulation. The reason for this approach is straightforward: a deep-seated belief that, whatever the outcome of the many public inquiries and varied public policy debates, only the leadership of corporations—boards of directors and senior executives—can make the complex decisions that will yield sustainable, durable creation of value with sound risk management and high integrity. Because this role of corporate decision-making is enduring and critical to our nation's economic well-being, the Policy Brief encourages corporations to focus on these essentials, which are fundamental regardless of policy outcomes, as we move across the business landscape altered by the Great Recession.
Directors in particular should put highest priority on these six tasks in defining a "right-sized" board role going forward. This will require focused intensity. But, the CEO and other senior company executives must also make these tasks the core of their leadership and management efforts as they "govern" the company on a day-to-day basis. If boards do their most fundamental tasks--define the mission of the corporation to include risk and integrity and choose the right CEO and senior executives according to that mission--then directors should be able to act as constructive critics with business leaders and forge a powerful board/executive partnership to direct the destiny of publicly held corporations.
A PDF of Restoring Trust in Corporate Governance: The Six Essential Tasks of Boards of Directors and Business Leaders and more information about CED's work on corporate governance issues can be found at: www.ced.org.
Morgan Broman (202)-296-5860 ext. 14
SOURCE Committee for Economic Development