London, Sept. 9 (Reuters): What price are investors prepared to pay to ensure corporate probity, accountability and the transparency of company finances'
In the wake of corporate accounting scandals which engulfed energy trader Enron, telecom firm WorldCom and other mainly US firms sending markets tumbling, regulators world wide are scratching their heads over how to ensure proper external oversight and internal controls to monitor company behaviour.
The US has been the swiftest to act, forcing chief executives to swear their companies’ accounts are accurate and setting up a new task force to root out corporate skullduggery. The EU and others are also mulling bolstering corporate governance rules. But a new report sponsored by consultants KPMG questions whether the corporate governance pendulum has swung too far with over-zealous regulators and risk-shy executives in danger of smothering corporate growth.
“CEOs have to bear in mind the potential trade-off between polishing the corporate reputation and delivering growth,” the report by the Economist Intelligence Unit said. “Tight governance can protect firms and investors from fraud, error and undue risk, but it can also threaten agility and innovation.”
Executives at the top 10 firms by market capitalisation in the US, the UK, France, Japan and Germany expressed concern that tougher corporate governance rules would negatively affect merger and acquisition deals because of lengthening due-diligence procedures.
A majority of company bosses also believed that the ability of their firm to make effective decisions would be compromised by closer scrutiny and tighter legislation, the survey said.
And while corporate governance was seen as a leading issue by the vast majority of those polled, it ranked relatively low in a list of dangers executives saw threatening their firms’ share price.
Adverse markets, a shortage of top-quality management, reputation risk and a lack of innovation all beat out concerns over poor financial reporting and lack of transparency.
The report also called into question the ability of regulators to set more than a broad framework for good corporate governance.
“Ultimately, rules are no substitute for ethics or how trust operates in business,” said the report's author, Victor Smart. “There is no one set of regulations which is going to stop an Enron.” Knee-jerk reactions by regulators risk being unhelpful or at worst damaging, he added.
Executives identified several measures that would help prevent a repeat of Enron: the full disclosure of all off-balance sheet transactions, greater powers for companies’ audit committees and the regular rotation of external auditors.
But while regulators could make these mandatory, it is the culture of the organisation which determines whether these measures are successful in exposing malpractice not the model itself, Smart said. “It is a misconception that to think that corporate governance models have failed,” he said.