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Corporate Governance 101

Publication Date: 
August 28, 2008
Markets Media
Karla L. Yeh

Markets Media interviews Professor of Business and Law Michael Klausner:

Markets Media asks Professor Klausner how corporate governance might affect a company's overall performance?

Michael Klausner says: Ideally, good corporate governance will involve the board in strategy development and in oversight of strategy implementation, so that good or bad performance is observed early. If the board sees poor performance early enough, it can make changes. In the extreme, it can replace the CEO, which is one of the most important functions of the board. So in this respect, good governance can enhance performance.

In addition, good governance arrangements will identify potential legal problems early, such as questionable accounting practices and other disclosure problems. By avoiding these sorts of problems, a company can focus on strategy development and implementation.

Asked "when does good corporate governance become too much of a good thing?" Professor Klausner answers:

Bolstering corporate governance is a good thing to the extent it is effective. Holding executives and risk managers accountable is good as well. Corporate governance consists of process - generally board process - and the distribution of information - generally from management to the board. It also consists of structures, such the creation of board committees. Governance processes and structures should be well-tailored to a company's needs. Too much information or too much process or unneeded committees can impeded a board's work and needless tax those in management that are feeding the board process. In addition, the board ordinarily should not get involved in day to day management or second guessing of management.

As to the question "how does corporate governance and corporate law shift with the health of the economy?" Professor Klausner answers:

This is a good question. When a company is doing poorly, the temptation to cut corners with respect to accounting practices and disclosure seem to be greatest. Some of the worst business failures in recent years were the result of firms reacting to poor performance by hiding it-probably expecting that the problems would soon pass and all would be well. Corporate governance structures, such as an effective audit committee, can make it more difficult for management to do this.

Also, a change in the economy could give rise to the need for a different type of CEO. A good board will make that determination early and implement the change needed.

And "How does risk management affect corporate governance, if at all?"

Professor Klausner: To the extent one wants to think about governance and risk management together, then it would go something like this: The board is responsible for setting up and overseeing the corporate governance structure and processes. Those processes include risk management processes. Top management is responsible for implementing those processes and conveying to the board key information that is generated by those who implement the risk management process. The board is then responsible for making decisions and advising top management on responses. So when a company does poorly as a result of poor risk management, all parties share the blame. It is also important to keep in mind that companies will struggle despite excellent risk management, excellent corporate governance, and excellent management generally. Companies take risk and by definition taking risk entails some bad outcomes. The goal of risk management is to be aware of the risk you are taking and to be confident that the expected payout is worth the risk. And again, one goal of corporate governance is to oversee the risk management process.

To Market Media's last question is: "Should risk management and corporate governance be consistent across global markets? What are major risk management issues that should be held constant in any market?" Professor Klausner responds:

The concept of risk management is the same for any company anywhere. But the risks are obviously different. For a U.S. company operating internationally, corporate governance is also the same in concept, but there is more to oversee. One unique area of concern internationally is compliance with the Foreign Corrupt Practices Act. A company operating abroad needs to have internal controls that are well-designed to prevent these payments and the board must ensure that such controls are in place. Another area that global operation introduces is heightened currency risk. Here too, structures must be put in place to manage that risk.