The hidden dangers of governance reform; among the perils: compulsive conservatism, and a corrosive dissolution of trust at the senior levels of management.

Author:Nadler, David A.
Position:Guest Column

CORPORATE AMERICA is hurting, and governance reform is the cure du jour. That would be fine, if we were all ingesting reform in measured doses targeted at specific ailments. But we're not.

Instead, we're inoculating one business after another with a massive, all-purpose dose of good governance that carries both the false promise of prevention and some very real hidden dangers. We're already starting to see the unintended consequences of a good idea pushed too far.

The first is that cosmetic compliance with the mandates of corporate reform merely creates a false sense of security. Lots of companies, armed with the best of intentions and aided by herds of lawyers, are scrambling to meet the new legal requirements. But it's all too easy to have good governance on paper and bad governance in practice, as Enron made clear. Just because directors meet the test of economic independence doesn't make them qualified or competent. Just because independent directors meet a couple of times a year without the CEO doesn't mean they're doing anything worthwhile. Just because boards rewrite their charters doesn't mean they're fully informed, or open to dissent, or engaged in meaningful work. The danger is that far too many companies will spend way too many dollars to convince themselves and their shareholders that they have created good governance when, in fact, they've done little to either substantially reduce the risk of meltdowns or improve their leadership and governance.

The second danger is misdirected management effort. In some quarters, governance reform has come to be seen as a valuable end in itself. That can easily lead to a massive waste of time, energy, and focus. A director of a major energy firm tells us that the audit committee on which he sits has gone from having two meetings each year to 11 and now gets involved in details that add little value but lots of work. That sort of thing is happening everywhere. One frustrated CEO, a longtime advocate of better governance, recently told us that every proposed governance change should be challenged to demonstrate how it would help leaders run the company better for the benefit of shareholders. The procedural checklists that are the window dressing of corporate reform are distracting companies from the behavioral issues that lie at the core of good governance. As one CEO puts it, "We're leading with governance when we should be leading with leadership'

A third peril is the corrosive dissolution...

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