The dictionary defines principle as a fundamental truth that serves as the foundation for a larger system of belief or behavior--a sturdy, versatile thing that, when used correctly, can address a wide range of issues. So it's welcome news that The IIA and the Neel Corporate Governance Center at the University of Tennessee in Knoxville have developed a set of Guiding Principles of Corporate Governance. After all, corporations have a lot of issues that need addressing.
Shareholders want better returns, even as they preach about long-term stability over short-term results. Regulators want compliance with standards for financial reporting, cybersecurity, business conduct, sanctions, and more. Consumers want low prices, prompt service, and environmentally friendly products, or else they'll flay the company on social media. Employees want a raise and a viable career path, or else they'll quit.
Those are a lot of constituencies and demands that corporations have to juggle somehow, with a heap of legal liability if boards steer the organization wrong. So, yes, sound principles of corporate governance are a vital tool for directors to have.
"It's not like you can read a book and then say, 'Oh yeah, I know exactly what my corporate governance should look like,'" says Steve Albrecht, a longtime business professor at Brigham Young University and elsewhere who has served on the boards of SkyWest Airlines, Cypress Semiconductor, and numerous other public and private companies over the years. He sees the governance principles as a mechanism to help boards hold themselves and their organizations accountable to the various objectives (financial, operational, legal, ethical) they might have.
Sure, companies also can be held accountable by law enforcement, activist investors, or social media campaigns--but if matters have reached that point, the board is already losing. "All those ways to hold corporations accountable are from the outside, except for corporate governance, which is from the inside," Albrecht says. "And they all have negative consequences except for corporate governance." In other words, good corporate governance is about an organization's self-discipline before outsiders decide to intervene.
What Governance Principles Entail
The Guiding Principles of Corporate Governance were developed to serve as a foundation for a new American Corporate Governance Index on U.S. publicly held companies released this month. The index is based on a survey of...