Moderator: William G. Parrett

Panellists: Robert E. Diamond  · Orit Gadiesh  · Donald J. Johnston · Florencio Lopez-de-Silanes  · Jaap Winter

A summary of the corporate governance session that took place on Wednesday 21st January, at the World Economic Forum Annual Meeting at Davos.

Corporations have struggled to govern themselves ever since investors forced the Dutch East India Company to disclose profits, pay dividends and establish a non-executive board. That was in 1612. The struggle isn't likely to end soon, agreed participants, as new pressures, laws, markets and risks continue to unfold.

But today's gravest unfolding risk hinges on how to respond to the relentlessly publicized corporate scandals. "We have an environment in which fraud and malfeasance have destroyed jobs and assets while chief executive pay goes up year after year," suggested William G. Parrett, Chief Executive Officer, Deloitte Touche Tohmatsu, USA. "People have begun to question the structure of free enterprise: they are wondering where were the directors, the auditors, the lenders? And they are asking: is regulation the answer?"

"Frankly, no," answered Orit Gadiesh, Chairman, Bain & Company, USA. The effort of "ticking off boxes of compliance" can cloud the focus and stifle entrepreneurial incentives that create wealth in the first place. "It turns coaches into watchdogs," she said. Gadiesh drew a sharp distinction, echoed by other panellists, between two very different types of corporate failures:

1. The first involves "moral and ethical failure, where executives can't keep their hands out of the cookie jar, resulting in lost money and jobs". Last year this failure resulted in US$ 205 billion in destroyed wealth, she estimated. A considerable sum, to be sure.
2. But the second involves "performance failure", where the executives lose sight of the priorities, changes, markets, and fail to respond. Though less visible than the Parmalat variety, such failures result in US$ 2.5 trillion in losses. "The second type has twelve times the impact, so we can't simply react to the first."

What's more, specific regulations spread confusion across borders; only principles can clarify, argued Donald J. Johnston, Secretary-General, Organisation for Economic Co-operation and Development (OECD), Paris. "Crooks are crooks everywhere. But while you can wiggle around a rule, you can't wiggle around principles."

There was one dissent to the anti-regulatory chorus. "Clearly, there is evidence that some regulation works, and works to the benefit of corporations because it assures investors," argued Florencio Lopez-de-Silanes, Professor of Finance and Economics and Director, International Institute for Corporate Governance, Yale School of Management, USA; Global Leader for Tomorrow 2003. "Look across countries and markets where the top 50 companies like to operate or relocate to. Not all regulation works, but these are places where government has broad powers against corruption to

1. disclose conflicts of interest and
2. attach liabilities to those who go against the rules.

The goal of regulation helps markets help themselves."

That is also the goal for corporations seeking to dramatically improve self-governance. But how? asked Parrett. And by whom? "The CEO has to be the owner of the corporate culture: a good, open, honest confrontational style that pervades the company," asserted Robert E. Diamond, Chief Executive, Barclays Capital, United Kingdom. Conversely, ethical failures stem from a breakdown of the culture at the top.

When a sceptical participant challenged that this might "overload" board members and drive them off, panellists disagreed. "Too often their load is not high enough," responded Jaap Winter, Chairman, High Level Group of Company Law Experts, European Union, Brussels. Their role is rarely written down, so expectations remain too vague. If the goal is not to put people in jail but rather to keep people out of jail, he said, that can't continue. "Members can't just show up at quarterly meetings, sit down and then start to open their briefing envelopes. By increasing load and putting expectations in writing, their remuneration will go up. So be it. That may be the price we have to pay."