The model for corporate governance is broken. Despite having boards crammed with eminent independent directors following detailed procedures, many of the world's largest financial institutions had to be rescued from insolvency in 2008. Insufficient board oversight is a problem that was supposedly solved in 2002, with the passage of the famous Sarbanes-Oxley Act. Yet all the firms that failed in 2008 were SOX compliant. The reforms did little to improve the quality of people serving on boards or change their behavioral dynamics.
To improve governance, companies need to move to a model of professional directorship: Board service would be the primary occupation of independent directors, and not an ancillary avocation.
A further development in the establishment of a corporate governance framework for the public sector has come through the work of the Committee on Standards of Conduct in Public Life: Nolan 1995. Its aim was to examine concerns about the standards of conduct of holders of public office and to make recommendations so that the highest standards of propriety in public life are ensured.
Corporate governance refers to the way a corporation is directed under applicable laws and norms. It includes the laws governing the formation of firms, the bylaws established by the firm itself and the structure of the firm. Issues of fiduciary duty and accountability are within the framework of corporate governance.
The basic governance model in the United States is the unitary board with a predominance of independent outside directors. The SEC and stock exchange listing requirements also call for mandatory board audit, nomination, and remuneration committees, as in the UK/Commonwealth model. In the United States, shareholders have little influence on board membership, other than expressing dissatisfaction by not voting, selling their shares or resorting to litigation. By contrast, in the United Kingdom/Commonwealth shareholders with 10 percent of the voting rights in a public company can force an extraordinary meeting and vote on strategic decisions or the removal of a director. Even though that seldom occurs, the possibility can affect board actions.
Reliance on standardized structure and formal features...such as terms of reference are unlikely to deliver uniform governance contribution. The effects of the [Audit Committee] do not result solely from the existence of formal structures and processes (as tend to be specified in governance codes) but are additionally dependent on informal voluntary interaction with (senior) management and (internal and external) auditors.
In thinking about these incidences of corporate failure, several features stand out. First, some cases are clearly related to bad business plans...and to poor managerial decisions. In some instances, government policy or informal pressure and regulatory forbearance have also been a contributing factor. Poor business plans and risk management have usually become apparent as macroeconomic conditions have tightened.
To assist in implementation and oversight of SOX, the act also created the Public Company Accounting Oversight Board (PCAOB). The role of PCAOB is to oversee and guide auditors as they assess a company's compliance with SOX. One aspect of this guidance is the creation of Proposed Auditing Standards that provide more detailed guidance for assessing compliance with the intent of SOX.
Stewardship theory reflects the classical ideas of corporate governance. Directors' legal duty is to their shareholders not to themselves, or to other interest groups. Contrary to agency theory, stewardship theory believes that directors do not always act in a way that maximizes their own personal interests: they can and do act responsibly with independence and integrity.
The U. S. Congress refused to address the issue of companies accounting for stock options issued to executives as expenses in corporate financial statements. This has led to a sharp divergence and conflict between companies that will expense such options and other who say that they will not. There is evidence and there are good reasons to believe that pressure is mounting and that we are seeing more companies voluntarily move in this direction.
Good corporate governance can help a company or financial institution to: 1) enhance its performance, operations, efficiency, profitability and long-term value grow in a sustainable manner; 2)
establish clear roles, responsibilities and accountabilities; 3) define and implement corporate strategy and direction; 4) identify and manage risks; 5) become more competitive; 6) attract capital, investment and business partners; 7) build reputation and trust, through the strengthening of relationships with relevant stakeholders