The critical difference: business leaders and investors more than ever believe that companies with the best governance will be the best-performing companies. The foundation for corporate governance is a commitment to ethical behavior.

• Author: Odland, Steve
• Position: ORGANIZATIONAL LEADERSHIP

I'M TOLD THAT when the Lord was driving Adam and Eve out of paradise into the brutal world before them, Adam turned to his mate and observed, "Eve, I think things are going to change." And things have been changing ever since.

Because of constant change and dynamism, the American corporation is alive and well, although we need few reminders that we've been through a difficult period of business history. But it's interesting to note that this same period was also accompanied by ethical scandals by political leaders, lawyers, journalists, and even the clergy. What does it say about our whole society when few of our hallowed institutions are free from scandal? The corporate ethics lapses seem to correlate with an ethics shift in our society as a whole.

The financial frauds shook the trust and confidence of Americans who rely on business for their jobs, their savings, and their retirement security. Public outrage followed sensationalized stories of misdeeds, and federal and state officials followed in turn with new regulations on corporations. All responsible business leaders were embarrassed by these scandals. We could not content ourselves with blaming a few bad apples, assuring the public that the rest of us were just fine, and going back to business as usual. Given an appreciation of how corporations came to play such a strong role in the human experience (see sidebar on page 20), let's review where the American business corporation and its system of governance stand today.

It was clear that our governance processes needed improvements and that we needed to demonstrate a commitment to reform and a commitment to restoring investor confidence.

Taking the initiative

My company, AutoZone, a Fortune 500 company, is committed to corporate governance, customer service, and profitable growth. With my strong personal interest in corporate governance, I was delighted to become chair of the Business Round-table's Corporate Governance Task Force. I was proud that the Business Roundtable took the initiative to strengthen corporate governance guidelines for the rights and responsibilities shared among the various corporate participants, especially the management, the board, and the shareholders.

The Roundtable also supported the landmark Public Company Accounting Reform and Investor Protection Act--better known as the Sarbanes-Oxley Act. This is the most far-reaching corporate reform legislation in 60 years. It was a moment of rare bipartisan action in response to the breakdown in corporate checks and balances that cost investors hundreds of billions of dollars in losses.

Two years after its passage, we can say that the reforms are taking hold. Many Roundtable member corporations had already adopted reforms in advance of regulations or since have gone beyond required standards--to fundamentally change how we govern ourselves and conduct business. For example, in a survey of its members the Roundtable found that:

* Eight in 10 of our members have boards that are three-quarters or more independent.

* Virtually all of them have closed meetings of independent directors without the CEO present. More than half expect to have five or more closed meetings a year of independent directors.

* Nine out of 10 members reported increased involvement by the board of directors, especially by directors on audit, compensation, and nominating committees.

* Two out of three have a process for nominating new board members that responds to shareholder proposals and nominations.

* And, even though not required by law, more than half our members have an independent chairman, lead director, or presiding outside director.

In other words, corporate leaders are responding to and going beyond the letter and the spirit of the new laws and regulations.

Danger of collateral damage

But we must be careful. Policymakers run the risk of not knowing when enough is enough--and of falling victim to unintended consequences. We cannot strive so hard to legislate away every last problem that we ignore the very real possibility of collateral damage to our corporations, and, more important, economic prospects.

For example, we have to be careful not to criminalize honest mistakes. Everybody makes mistakes--and I've made my share--but that's inherent in risk-taking. And risk-taking is vital to winning the competition in world markets. We would harm ourselves greatly if the threat of criminal sanctions became so pervasive that corporations simply stopped taking risks. Without risks we wouldn't have innovation, new products, or scientific breakthroughs. Other countries like China could overtake the U.S. in terms of economic growth and job creation. Capital investment flows could go to other parts of the world. We must be careful not to overreact.

It's also important to remember that corporate decision-making is not a sort of corporate New England town meeting--a legal democracy in which shareholders put up candidates and raise issues and vote on them whenever they want. Instead, shareholders are represented by boards of directors. Those directors now are independent from management but must work in more of a team with management to ensure shareholder value is created.

The new regulatory requirements don't come cheap. The average large corporation expects to spend more than $6 million to reach and maintain compliance, with all the laws and regulations passed in just the last two years. But in the long term, the costs of not complying--and losing the...