Creating effective oversight.

 
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There is a need for effective corporate oversight. Regulators and the investing public have lost faith in the lassez-faire system upon which they place blame for Enron and the other recent corporate scandals. Companies are struggling to regain public trust while balancing the increasing resource demands of compliance and corporate governance with the human and financial capital needs of innovation and entrepreneurship. Although the goals of the parties involved may differ dramatically, all concerned face the challenges of creating a system of oversight that is robust enough to deter corporate wrongdoing but malleable enough to be effective in all types of corporate culture. And the debate that has yet to completely play out remains front and center: Are general principles or prescriptive rules the best way to shape corporate behavior?

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"Legislating" an Ethical Culture: Principles versus Rules

New regulations have not slowed innovation.

Has the new corporate governance paradigm helped or harmed business? The jury is still out. Corporations are being more methodical and detailed in disclosure, but significant effort and expense is going toward complying with the new regulations and laws. Even those companies with historically solid governance practices are finding minor issues when they apply the new regulations in test runs. Some feel that the enforcement of the laws existing prior to the scandals could have alleviated many concerns, but public opinion demanded more. The general consensus is that these governance reforms have not prevented companies from continuing to pursue entrepreneurship and innovation. Indeed, some companies and boards have adopted a more aggressive innovation strategy to preserve forward momentum in a time of rising compliance costs.

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But, regulators cannot legislate good ethics. Principles must come before regulation. Without the proper ethical culture to serve as an anchor, regulation ultimately will be ineffective.

Ethical behavior grows out of an ethical culture. A regulatory atmosphere that requires businesses to "check the box" does not encourage executives and management to consider the outcomes and consequences of their actions. It often backfires, as a system that emphasizes rules encourages individuals to look for loopholes in the system. By setting the correct tone at the top, with a culture of strong ethical principles, the vast majority of today's businesses operate at the highest levels of compliance. But creating and maintaining an ethical, compliance-oriented culture requires commitment from senior management and dedicated resources for implementation. One often discussed example of success has established four basic principles to measure employee conduct. These...

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