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The hidden dangers of governance reform; among the perils: compulsive conservatism, and a corrosive dissolution of trust at the senior levels of management. (Guest Column).

CORPORATE AMERICA is hurting, and governance reform is the cure du jour. That would be fine, if we were all ingesting reform in measured doses targeted at specific ailments. But we're not.

Instead, we're inoculating one business after another with a massive, all-purpose dose of good governance that carries both the false promise of prevention and some very real hidden dangers. We're already starting to see the unintended consequences of a good idea pushed too far.

The first is that cosmetic compliance with the mandates of corporate reform merely creates a false sense of security. Lots of companies, armed with the best of intentions and aided by herds of lawyers, are scrambling to meet the new legal requirements. But it's all too easy to have good governance on paper and bad governance in practice, as Enron made clear. Just because directors meet the test of economic independence doesn't make them qualified or competent. Just because independent directors meet a couple of times a year without the CEO doesn't mean they're doing anything worthwhile. Just because boards rewrite their charters doesn't mean they're fully informed, or open to dissent, or engaged in meaningful work. The danger is that far too many companies will spend way too many dollars to convince themselves and their shareholders that they have created good governance when, in fact, they've done little to either substantially reduce the risk of meltdowns or improve their leadership and governance.

The second danger is misdirected management effort. In some quarters, governance reform has come to be seen as a valuable end in itself. That can easily lead to a massive waste of time, energy, and focus. A director of a major energy firm tells us that the audit committee on which he sits has gone from having two meetings each year to 11 and now gets involved in details that add little value but lots of work. That sort of thing is happening everywhere. One frustrated CEO, a longtime advocate of better governance, recently told us that every proposed governance change should be challenged to demonstrate how it would help leaders run the company better for the benefit of shareholders. The procedural checklists that are the window dressing of corporate reform are distracting companies from the behavioral issues that lie at the core of good governance. As one CEO puts it, "We're leading with governance when we should be leading with leadership'

A third peril is the corrosive dissolution of trust among people at the senior levels of major companies. It wasn't so long ago that the members of a senior executive team would look to the company's lawyers for legal advice on a touchy situation. Today, many CEOs look around the table and know that each of their direct reports has retained their own legal counsel to look out for their own interests, which might not coincide somewhere down the road. In fact, lawyers, litigation, and investigations are on everyone's mind; you just don't know if the guy sitting next to you might show up in the next chapter of your life as a whistleblower, plaintiff, or state's witness. There is a creeping but well-founded paranoia that could well poison business relationships for years to come.

Finally, there is the danger of compulsive conservatism. In some companies, we're already seeing an attempt to eliminate any risk of error by not taking any risks at all. Executives are scared and reluctant to formally commit to ambitious goals that might someday be construed in a courtroom as misleading predictions. We're seeing evidence of a general dulling down of objectives and aspirations; instead, there's a growing inclination to hunker down, play it safe, and wait for the storm to blow over. Taken to the extreme -- and it's not as extreme as you might think -- we risk creating companies that look disturbingly like the federal bureaucracy: generally honest and well-meaning, but sluggish, unimaginative, and largely ineffective. In this risk-averse environment, we run the greatest risk of all -- of killing, perhaps for a generation, the tremendous innovation and entrepreneurial spirit that have made the U.S. economy a marvel for decades.

As disturbing as all this is, there's no turning back the clock. Let's just remember that legal mandates and regulatory requirements don't really get to the heart of the governance issue; charters and checklists are no substitute for effective leadership. And in the end, better governance is really about boards helping leaders become more effective. It's about the nature of the relationships and quality of the interactions between boards and CEOs. And that's something no lawyers or regulators can fix for us.

David A. Nadler is chairman and CEO of Mercer Delta Consulting, which works with CEOs, senior executives, and boards of directors on organizational change. Mark B. Nadler is partner and head of the firm's strategic communications practice.
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Author:Nadler, David A.; Nadler, Mark B.
Publication:Directors & Boards
Geographic Code:1USA
Date:Mar 22, 2003
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