Protect the value proposition: if most directors are earnestly at work on behalf of the shareholders, why are there so many reform proposals that could potentially diminish the effectiveness of boards?

• Author: Aquila, Frank
• Position: ENDNOTE

IN THE WAKE of the fallout from the financial crisis, pressure is mounting for further corporate governance reform.

Corporate governance is not just designed to avert the next disaster. In modern capitalism there is a distinct separation of ownership, the shareholders, from control, the board of directors and senior management. The cornerstone of U.S. corporate governance, indeed its core principle, is reliance upon the board of directors to act on behalf of the shareholders.

The willingness of investors to purchase a corporation's shares is based not only on the performance of the business but also on the trust in that corporation created by effective governance. Studies have shown that over time, companies with independent boards of directors produce greater returns on shareholder equity, achieve higher profit margins, and return more capital to their investors than competitors without independent boards. For us, that is the value proposition in good corporate governance.

Although some corporate governance proposals focus on measures designed to increase shareholder influence, many proposals go well beyond traditional governance concepts. Corporate proxies and Congressional bills are replete with proposals on executive compensation, social responsibility, global warming, sustainability, and political contributions.

It has long been the premise of American capitalism that profit and return on investment to shareholders are the primary indicia of business success. With that premise as a guide, corporate governance mechanisms should be designed to increase, rather than decrease, the likelihood that directors will be able to enhance the corporation's capacity to create value for its owners.

What the best do

What many reform proposals fail to recognize is that adherence to rules alone does not equate to effective corporate governance. Adding value requires qualitative, as well as quantitative, actions by directors.

As anyone who has spent time in a boardroom knows, the characteristics of a good director and an effective board are both readily apparent and rather illusive. Most directors are serious and dedicated individuals who seek to do a good job for the corporation and its shareholders. Independence, personal integrity, and commitment to board service are essential for any director. While these characteristics may be the irreducible minimum, the best directors bring much more to the boardroom.

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The best directors...