To promote Governance with
Respect Ethics Accountability and Transparency (GREAT)
By H. D. Vinod, January 24, 2001
We focus on good governance to prevent chief executive officers and other high level managers from acting in ways that are detrimental to long-term shareholder interests. The points included in the acronym GREAT apply to a private corporation as well as to a political entity. The long-run prosperity of a corporation is strongly related to how well it is governed. The governance problems for a large corporation are not much different from the problems for political government entities. Accordingly the following note lists some goals and tools for achieving them.
GOALS:
1) The auditors are truly independent.
2) The Boards of Directors are truly independent.
3) The chief executive officers (CEOs) are competent and compensated reasonably.
4) Discourage collecting of private benefits to managers at the cost of shareholders.
5) Prevent managers from empire building and entrenching themselves.
6) Prevent Insider trading.
7) Prevent stealing of corporate property or services.
8) Prevent inflated or deflated transfer prices for property or services owned by other units under a common corporate umbrella.
9) Prevent excessive or inadequate risk-taking.
10) Encourage diversification of product mix. For example, cater to the high end as well as low end if possible.
11) Proper training of employees to ensure that they understand methods of avoiding conflicts of interest.
12) Encourage ethical governance and prevent abuse of power.
13) Discourage managers from spending too much time at effort in extra-curricular activities unrelated to corporation’s business.
14) Discourage overstaffing.
15) Encourage internal controls, accountability and prevent bribery.
16) Encourage respect for subordinates.
17) Prevent nepotism. If the CEO is chosen by genetics, competent managers leave.
18) Avoid Not Invented Here (NIH) complex, or a tendency to not use any technology or idea that is not invented in-house.
19) Avoid competing with your own customers. If the company goes after the business of major customers, it can create governance problems.
20) Keep an eye on new technology and prevent thinking that improved horse and buggy operation is the way to go in an era of automobiles (e.g., Motorola corporation stuck to analog phones after digital cell phones became popular).
21) Encourage selling off subsidiaries, which are able to sell to competitors if they are separate entities.
22) Encourage proper evaluation of assets including assets in the form of brand names.
23) Prevent Inadequate attention to the interests of other stakeholders such as employees and local governments.
TOOLs for achieving the GOALS:
There should be a written code of conduct similar to a constitution,
which should be “alive” and respected in day-to-day work of the corporation.
Regular reports on the time spent by managers on various activities.
Regular reports comparing staffing levels with other corporations.
Regular internal audits and listing of complaints by employees, customers and others, perhaps on the Internet.
Permit reporting including anonymous reporting of any wrongdoing by anyone in the corporation in complaint boxes at various locations, surveys of customers.
Provide toll-free numbers and Internet locations in independent agencies outside the corporation for reporting any criminal activity by any employee.
Provision of surveillance cameras and other devices and judicious use of private investigators.
Along with the traditional audit reports of accounting performance, there should be a report of compliance with the “GREAT” principles by an independent agency reporting directly to shareholders and chosen directly by the shareholders by annual proxy voting.
If corporations are to fight bribe demands by corrupt government officials it is necessary to form collective body for such actions and not to expect too much at the beginning. Perhaps a Chamber of Commerce or Rotary Club or Lion’s Club type organizations can sign a convention that they will not give or accept bribes. Then, if the corrupt government officials ask for bribes they can point to the signed convention to the extent possible. This can serve as a deterrent and save the corporations the bribe money, which can amount to large sums in developing countries.
LINKS to Ethics Related
Information and Internet Training Sites
Ethics Links from AAA Respondnet
NEW DEVELOPMENTS:
FIVE BASIC PRINCIPLES FOR A WORLDWIDE CODE OF BUSINESS ETHICS. Today most companies have internal codes against bribing government officials. The OECD has published guidelines for multinational enterprises, and many nongovernmental organizations have publicized sets of global principles that, unfortunately, "lack teeth". According to an article of Mr. E.B.Kapstein (Instead business school, Fontainebleau, France) the World Economic Forum or the International Chamber of Commerce might usefully serve to help develop best practices for corporate conduct. According to Mr. Kapstein, some basic principles that could help the effort could be the following: 1) Companies should ensure the safety of their products and services. They should test their products in cooperation with consumer organizations. 2) Companies should encourage transparency in public tenders, in order to minimize incentives for corruption. 3) Multinational companies should pay their workers in every country a wage that is sufficient for maintaining a life of dignity. In hiring workers, they should not practice any form of discrimination and they should accept the principle of equal pay for equal work. 4) Companies should seek to minimize environmental damage from their activities and should report annually on the progress they have made in this field. 5) Companies should not conduct business with governments that refuse to support these ethical principles and they should report to the international media any efforts by public officials to subvert or undermine them. (Source: International Herald Tribune, January 24, 2001, summary by Pavlidis George).
WEAK CORPORATE GOVERNANCE BLAMED FOR ECONOMIC ILLS IN JAPAN. See Michael E. Porter’s article in Wall Street Journal entitled Japan: What Went Wrong, March 21, 2001, page A22.
DEMOCRATIZATION OF STOCK OWNERSHIP WILL HELP ACHIEVE BETTER CORPORATE GOVERNANCE. See H. W. Jenkins’ article in WSJ entitled Easy Come Easy Go. March 21, 2001, page A23.
FORENSIC ACCOUNTING is a new specialty in accounting profession, which tries to find where money is gone in an organization. It is also useful for fighting corruption. Recent users include Xerox. (NY Times, May 27, 2001, p.4).
SOME LINKS AND OTHER SOURCES OF INFORMATION:
http://www.corpmon.com is a useful site where they have a corporate monitoring project. They seek to make corporate management accountable to the shareowners. More specifically they try to increase stock returns, control CEO pay, and balance profits with social goals.
Journal articles from Journals like American Economic Review, Review of Industrial Organization, Econometrica, etc. on corporate governance issues including CEO pay, etc.
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