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Reforming Company Boards
Senior executives have taken most of the heat for the headline-grabbing scandals that have rocked corporate America over the past few years. Scott C. Newquist (MBA 75), president of Board Governance Services, wants to shift some of that scrutiny to company boards. Putting Investors First: Real Solutions for Better Corporate Governance (Bloomberg Press) emphasizes accountability, transparency, performance measurement, and a strong system of checks and balances in its practical approach to reform.
Why did you write this book?
After 25 years of advising companies and their boards on financial structuring and M&A transactions, it was obvious that the focus was not on building shareholder value but on reporting predictable, double-digit earnings growth to achieve temporarily high stock market valuations. The truth has been stretched to exaggerate smooth earnings growth and to minimize risks taken to achieve them, and there was a need for new and practical solutions to improve governance and increase accountability.
How can you tell when a company is playing the share price game?
The biggest warning sign is when companies consistently report quarterly earnings that just beat or exceed analyst expectations. Businesses do not grow that way. If theyre managed well, they grow incrementally, with minor setbacks. The model that we have come to rely on that companies earnings grow smoothly is just not right.
Do you think earnings should be reported less frequently biannually or annually?
I think it will go the other way. We will get to a point where some performance measures like sales or orders are reported daily. Many people argue that this will increase volatility. I suggest the opposite. Once the market gets used to the fact that companies dont grow in a straight line, it will reduce the huge valuation swings that weve seen in the last three years. Greater transparency does not mean that all issues can or should be disclosed otherwise a company could forfeit competitive advantage.
Is a cultural shift needed in how boards think about earnings, investments, and their responsibility to investors?
Legislation mandating reform can be passed quickly compared with the time needed to change peoples behavior. Some believe that things wont really change until we have a new generation of directors. The problem is that directors who accept accountability are ostracized by directors enjoying the status quo, so theres a social aspect inhibiting progress. That said, the culture will change. If directors do not raise self-standards of performance, shareholders, regulators, and the courts will continue to force the issue.
Where do we stand now?
Theres been a lot of good talk by directors about what should be done. Charters and guidelines have been published on corporate Web sites about all the things that boards and companies are going to do to improve governance. But theyre not doing them. Most directors hope this issue will go away. I personally give it less than fifty-fifty odds. Lack of oversight and governance is still in the news on a daily basis. And too many people have been burned.
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