Can Governance Help Boost Reputation?

Among the things I am most proud of is my co-founding of The Directors College in Canada, a joint program of the DeGroote School of Business at McMaster University and the Conference Board of Canada. This is the only program in the world that rewards successful graduates with a diploma as a certified corporate director. To attain the diploma, students must complete four modules (two-days each) and then take (or write as they refer to it in Canada) a rigorous exam. Not all pass, but hundreds have.

From the more than 10-years I lived in Canada, I was able to see the difference that exists between the U.S. view of governance and that adopted by most of the rest of the world. The U.S. has taken a "rules based" approach, led by the Sarbanes-Oxley legislation that dictates certain accounting standards to build greater transparency for shareholders. The rest of the world has adopted a "principles based" approach, which sets few legislative regulations, but rather provides for guidelines for companies seeking to enhance their governance. Each works well. The U.S. approach works best for those who break the law. There are clear ways to punish those people with fines and jail time. The non-U.S. approach is best for companies that seek to do better than the legal standards.

As an example, many governance experts in both the U.S. and in other countries have encouraged companies to split the role of chairman and CEO. Few U.S. companies have done this; many companies outside of the U.S. have. It is fairly typical in Canada to have a non-executive CEO, and this advances governance because the CEO is regularly reviewed by the board rather than running the board.

The resistance to separate chair and CEO roles is just one examples of how many companies in the U.S. will only adopt governance standards that are within the legal guidelines and will not adopt a more principles-based approach that might raise the bar for themselves and others.

In my teaching in The Directors College, I found directors in Canada much more willing to look at areas like reputation and human resources where they might want to get involved in monitoring and reviewing how management is handling things. We encouraged directors to ask the CEO for regular reviews of the management team, so that board is comfortable that the senior leaders of the company are exhibiting the right leadership ethics and responsibility. I find this a difficult issue to get directors in the U.S. to care about.

I wonder at times if the rules-based approach just keeps companies "on the road", while the principles-based approach "makes them better, performance drivers". A good driver knows the rules of the road, how to stay in his/her lane, the speed limits, etc. In contrast, someone who goes on to be a better driver, knows a bit more, including how to maintain one's car, deal with unexpected occurrences, etc.

Simply meeting Sarbanes-Oxley standards in critical but doesn't make one company better than any other. I think that the goal of companies is to be "disproportionately valued". To get to this goal, companies must do things disproportionately better than their competitors. Going beyond the rules-based governance standards may be one more way for companies to be better than others.