It’s been more than 10 years since a series of corporate scandals prompted Congress to pass the Sarbanes-Oxley Act of 2002, making sweeping changes to the laws and regulations on financial reporting and corporate governance in public companies. Despite these reforms, however, fraud, accounting irregularities, conflicts of interest and other corporate malfeasance continue to make headlines.
To ensure that corporate governance matters get the attention they deserve, many companies are appointing chief governance officers (CGOs). Should your company become one of them?
Creating a central command
Formally designating a dedicated CGO isn’t the only way to achieve strong corporate governance, of course. What’s important is that governance receives board-level oversight, governance functions are integrated among departments across your company and good governance practices be embedded in its corporate culture. But centralizing corporate governance in one position can be a highly effective strategy for achieving these goals.
In addition, naming a CGO sends a powerful message to investors and other stakeholders that integrity, transparency and accountability matter to your company. Studies have shown that investors are willing to pay more for the stock of well-governed companies. (See the section “The good governance premium.”)
Roles and responsibilities
The CGO role varies from company to company depending on factors such as size, structure, complexity, risk profile and culture. A CGO might, for example, be asked to:
Assess and monitor the governance framework. The CGO provides an ongoing evaluation of the company’s board structure, governance practices and recommends modifications as the company’s circumstances or regulatory environment changes.
Ensure compliance. This involves working with various corporate departments — such as legal, internal audit, human resources and investor relations — to ensure that the company complies with laws and regulations related to corporate governance.
Set policy. The CGO helps the company develop conflict-of-interest standards and other governance policies.
Educate corporate leaders. The CGO keeps management and the board of directors up to date on the latest corporate governance trends, issues and best practices.
Recruit directors. A CGO can help companies recruit independent directors who have diverse skills and backgrounds and a familiarity with good governance practices.
Support the board. Here, a CGO assists the board in setting meeting agendas, preparing meeting materials, and drafting minutes and resolutions.
Enhance communications. A CGO’s responsibilities include serving as a liaison between management and the board as well as between the company and its shareholders and other stakeholders. For example, the CGO might develop relationships with institutional investors, auditors, consultants, rating agencies, employees, government regulators and industry watchdog groups and ensure that any governance-related concerns they express are brought to the attention of management and the board.
Also important is keeping shareholders abreast of governance developments — both positive and negative. If the news is good, a press release or e-mail ensures that it’s brought to the shareholders’ attention and not hidden in the company’s SEC filings or proxy materials. If the news is bad, shareholders appreciate hearing it directly from the company.
Right person for the job
If you decide that your company would benefit by designating a CGO, the next step is to identify the right person for the job. CGOs should have corporate governance experience and be familiar with securities laws and regulations as well as stock exchange listing requirements that affect governance issues.
Because the CGO will report directly to your CEO and board, he or she should have the background, skills and stature commensurate with such a position. The best candidate also should be personable and able to work well with officers and directors. A reputation for integrity, honesty and adherence to the highest ethical standards is an essential qualification.
Often, companies combine the CGO position with an existing role — typically the corporate secretary or general counsel. This makes sense, considering these officers already possess many of the skills and attributes needed to be an effective CGO. The question is whether your company’s secretary or general counsel is interested in taking on the role of CGO and has the time to perform new responsibilities. If not, consider hiring a full-time CGO.
Making governance a priority
Strong corporate governance can go a long way toward helping your company gain the trust of investors, government regulators, employees, customers and other stakeholders. Given the complexity of corporate laws and regulations today, naming a CGO will help you make governance a priority and improve the effectiveness of your governance efforts.
The Good Governance Premium
The benefits of adopting strong corporate governance policies and practices go beyond ensuring legal compliance and avoiding fraud and misconduct. Good governance also can enhance the value of your company’s stock.
For example, McKinsey & Company has found that, when evaluating investment decisions, investors ranked corporate governance on a par with more traditional financial indicators. A majority of investors in McKinsey’s 2002 Global Investor Opinion Survey expressed a willingness to pay a 12% to 14% premium for North American companies with high governance standards. In the past decade, shareholder pressure to adopt strong policies has only increased.
For more information about CGO's, or for answers to any related questions, please contact Scott Taylor at STaylor@bpmcpa.com or (650) 855-6882.
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