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Boardroom Showdown

Investors are revolting against poor corporate governance, demanding tighter controls that will boost earnings and stock price.
Fortnightly Magazine - June 2004

that the scandals that made front page news were outliers, and the problems with some companies were not as dramatic as newspapers and market pundits claim. Skeptics of the new rules also claim that these requirements will do little to prevent future problems; corrupt individuals will always get around laws and regulations.

In addition, the new compliance requirements have significant costs for corporate America. There is a price associated with having a well-informed independent board. More consultants, lawyers, and financial advisors are being retained to help educate and advise the independent board members. This increased compliance burden, critics also argue, only will make doing business in America more challenging. They point to a drop-off in foreign companies listing in the United States, attribute this to a perception that the new requirements are simply too onerous, and conclude that the United States has now become a less attractive place to raise capital.

Other critics of the new regulations claim that this prescriptive regulatory approach does not get to the heart of the problem. They assert that more should have been done to implement change at the top of corporate America. Requirements should have been implemented to separate the CEO and chairman roles, or at the very least, to require a designated lead director.

Finally, many in management fear that we have entered into an era of risk avoidance. By empowering boards to rein in management, executives will be forced to undercut their corporate vision and may be prevented from risk-taking that can create value. Utilities, in general, had always been considered a relatively conservative group. Some argue that that the good governance movement may slow down important strategic efforts, such as restructuring, consolidation and creative financing efforts. With risk aversion as the new mantra, innovation then is at risk.

Supporters of Corporate Reform Respond

Supporters of the good-governance movement argue that the dramatic loss in shareholder value and trust required a comprehensive response. The problems were not confined to one industry or company, but were widespread enough to fundamentally challenge our markets. Trust, they would argue, is absolutely essential for free markets to work, and these regulations are essential steps to restoring investors' confidence. With regard to the reactions of foreign companies, they believe U.S. public companies are setting what will become the global standard. The United States always has been an important leader in setting good corporate practices, and the rest of the world will come to understand the merits of this approach.

Moreover, by the nature of the industry, utilities have a long history of adapting their business practices to comply with the latest regulatory requirements and of implementing the letter of the law. The question that should be considered by utility board members and management is whether more can be done to embrace the spirit versus the requirements of good corporate governance.

Looking first within the board itself, utility boards should evaluate whether their members have an educated view of the company's strategy and can monitor the business and management properly. Are there members on the board that understand how