Consult shareholders more, boards urged

The economic crisis has underscored the need for company boards to consult
shareholders more closely on a wider range of issues, a corporate governance
expert has warned.

Any change in corporate governance standards would have a significant affect
on finance directors who, with the chief executives, play a key role in liaising
with shareholders.

Much consultation with shareholders focuses on executive remuneration and
financial performance, but according to Roger Barker, head of corporate
governance at the Institute of Directors, this form of corporate democracy is
too narrow.

Barker has called for some of the burden of governance to be lifted from FDs
and handled by independent non-executive directors.

‘If all the emphasis [for shareholder consultation] is placed on the finance
director, the relationship [with shareholders] is all about quarterly and
half-yearly results and not about the company’s performance as a whole or its
strategy,’ he said.

He added that the banking crisis ­ largely caused by banks pursuing a more
risky business strategy, often involving ‘collaterised debt obligations’ and
other toxic financial instruments ­ highlighted the need for a more
comprehensive scrutiny of company performance.

Corporate accountability could be improved if boards take internal audit
committees ‘more seriously’, Barker said, describing these committees as an
‘increasingly essential’ part of corporate governance.

Pressure on companies to improve corporate governance is likely to increase
as the economic crisis exposes more flaws in corporate strategy and fraud

In January, a recently-formed independent group of big investors and
accounting experts called for beefed-up corporate governance guidelines in order
to make companies more accountable to investors.

The Enhanced Disclosure Working Group — whose members include Isabelle
Santenac, head of global assurance at Ernst & Young, and Kenneth Bertsch,
executive director, corporate governance at Morgan Stanley Investment Management
­ has made a series of recommendations. One relates to the controversial fair
value rule, which requires companies to value their assets at current market

The EDWG wants audit committees to provide ‘reasonable assurance’ that they
have scrutinised and, where appropriate, challenged, the valuation of corporate
assets based on fair value accounting rules.

It also wants boards and audit committees to disclose steps taken to check
that ‘risk and control’ frameworks are operating properly.

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