The corporate governance and responsibilities of public companies have never been more important to our financial system. Today, more than half of American households own stocks, and while it takes years to build investor trust, as we learned during the crisis it takes only a short time to destroy it.
The role of corporate directors will be extremely important to restoring trust and protecting average investors in the post-crisis period. Transparency and accountability are more important than ever before. Board directors must invest a substantial amount of time to discussing and assessing various risks throughout the company. Directors must understand and deliberate on the company’s corporate strategy and medium to long-term goals. Furthermore, directors should be proactive about meeting a diverse group of employees and clients to get a complete understanding of what is going on within the company.
As we reassess aspects of corporate governance, we must emphasize the dangers of an over-reliance on short term profits, which often leads to too much risk-taking. An over-emphasis on producing short-term profits is at least partly responsible for getting us into the crisis. Short-term focus caused many firms to lever themselves to unprecedented levels, play speculatively in complex financial instruments and become less sensitive to risk-taking in general.
Managers and directors must think beyond quarterly earnings and balance the demand for visible short-term success with long-term value creation. A lot of money can be made or lost in an instant in today’s sophisticated financial market place. There is nothing wrong with that in principle: Short-term gains can spur long-term value. The problem occurs when long-term investment decisions are sacrificed in favor of short-term gains. Short-term goals should never loose sight of long-term strategy, and companies and their boards should work together to articulate and communicate their long-term vision.
Also, compensation practices should be aligned with long-term performance. We believe executive compensation is not something that should be legislated but instead is the responsibility of the full board of directors (and more specifically, the board’s independent compensation committees) who have fiduciary duties to represent the interests of shareholders.
There have been many proposals floated in Washington recently with regard to corporate governance reform. We think it is important to keep in mind that the financial crisis was not caused by a failure of corporate governance, and as we strive to learn the lessons of 2008 and fix what failed, we should avoid over-reacting and adopting a one-size-fits-all approach. Federalization of corporate governance is not the answer. Managers need sufficient flexibility to run their companies, and neither investors nor directors want the same set of detailed rules to apply across the board. For instance, a chairman/CEO split does not make sense for all companies and not all companies need a risk committee.
We have found that many of our listed companies are very concerned about federal legislation reaching too far into the boardroom. As a result, we have launched a new advisory commission to demonstrate that there can be private-sector alternatives to federal legislation. Last fall, we announced the formation of an independent commission to examine U.S. corporate governance and the proxy process. This commission is taking a comprehensive look at strengthening U.S. best practices for corporate governance. We will look forward to reporting the results of their hard work.
For directors new to your roles, congratulations, and I hope to meet you at the New Directors’ Summit on June 7th at the Exchange.
To meet Duncan Niederauer, the CEO and a director of NYSE Euronext, at The New Director Summit on June 7th at the NYSE, please email firstname.lastname@example.org.
ADDITIONAL COVERAGE IN THE BOARDROOM GUIDE FOR THE NEW DIRECTOR: