Best practices, or just best people?

• Author: Sweetbaum, Henry A.

Over the past decade, scandals have occurred in most of the major industrialized countries as a result of which individuals, financial institutions, and major companies have lost large amounts of money. All of these countries have highly developed processes of corporate governance, yet none have escaped. Does this mean that the processes of governance are flawed and that further strictures are needed? Or should we accept that no system of regulation can be foolproof and seek to eliminate the circumstances in which poor ethical standards can survive?

I would argue that in focusing on regulation and constraint rather than on creating environments in which boards can apply their skills and experience to maximizing shareholder value, we run the risk of stifling business and stunting growth. This is in nobody's interest, least of all the shareholder. As illustrated below, the only enduring source of good corporate governance rests with people, rather than structure. Boards must attract "quality" directors and incentivize them appropriately.

High-profile scandals, such as the savings and loans crisis, Drexel Burnham, and RJR Nabisco, have put the spotlight on management practices and particularly upon remuneration. The American business community has suffered from more than its fair share of problems resulting from business failures, whether as a result of normal business risk (undesirable, but acceptable) or mismanagement (unacceptable).

A clamor for a higher standard of corporate governance has gone up from the media, some politicians, and various bodies - some with credentials and a few self-appointed. Where it is genuinely held, this belief in change cannot be faulted; but, as with many good causes, the tumult from a minority of its most uncompromising advocates may alienate the majority, whose support is required to change the long-term reality.

This majority comprises the banks and institutional investors. Together, they are the major stakeholders in most of the industrialized world's corporations. Between them they provide the capital base that drives the economies. As they control the means for expansion, growth, and occasionally survival, they hold the real weapons for good corporate governance.

However, as the case of Robert Maxwell illustrates, they can also be the agents of their own downfall. The bubble which burst upon Maxwell's death in 1991 had been inflated with billions of dollars of bank and institutional finance. Yet Maxwell...