ViewPoint: Corporate Reform -The Bigger Picture

aroncramerCorporation 20/20, an organization promoting alternative corporate structures, just announced the Second Summit on the Future of the Corporation, slated for this June in Boston.  Discussion amongst those who attended the first Summit in November 2007 was abuzz about the future of boards of directors. In the broader press, fingers are pointing, primarily at the banking industry as the culprit and at outrageous executive pay.  As accurate as these points may be, the troubles run deeper and wider, according to  Aron Cramer.  He’s CEO of Business for Social Responsibility (BSR), a  global nonprofit network of businesses focused on sustainability, and he’s on the convening committee for the Future of the Corporation Summit.  In this week’s Sea Change ViewPoint, Cramer calls for more structural reforms.

It seems everyone needs symbols of our generation’s economic meltdown. It’s easy–and tempting–to focus on how GM’s Rick Wagoner traveled from Detroit to Washington, or how much of an allowance Bank of America’s John Thain got for remodeling his office. But these stories are more useful as fodder for late-night comedy than for serious policymaking. 

These days, many people are treating executive pay as the litmus test of how serious we are in re-ordering the priorities of business. But the brou-haha over compensation is missing the bigger picture: the need to revamp the models that structure how  companies run. It’s called “corporate governance” — and the way it’s done now lies at the root of many of today’s problems.

It’s time for Washington to focus on lasting reforms that may prevent a crisis next time. Reforming corporate governance could send some scurrying for the door. They remember the unhappy experience with Sarbanes-Oxley — once considered the answer to the wave of accounting scandals exemplified by Enron. It required companies to jump through hoops without really improving the situation. But this crisis may give us a second chance to get it right — to respond to a collapse of trust in business by making more effective changes in the way companies are governed.

Three reforms will help business avoid the next crisis. 

First, it’s time to reconsider corporate purpose. There’s been a lot of thinking in recent years about whether our current definition of fiduciary duty serves business or society. Right now, the idea is that corporations should consider only the interests of shareholders in making decisions.  In the US, some companies are employing hybrid business forms such as the “B Corporation,”  and elsewhere, companies like Novo Nordisk are governed by foundations with a broader purpose.  These models redefine what a business is for by including the interests not only of shareholders but of employees, communities, and the environment in its charter.

Second, more attention should be given to how well directors really know their companies’ activities, products and services. While it seems ludicrous to ask whether directors have the core knowledge needed to perform their duties, recent months’ events suggest otherwise. The increase of exotic financial instruments raises the question of whether directors have the basic knowledge to exercise effective oversight. When I was in China last summer, an advisor to several Asian boards told me that he observed many directors who simply didn’t understand their company’s activities. He said this was a ticking time bomb. The bomb now appears to have gone off.

Third, it’s time to  consider the inclusion of Directors who can help companies consider the interests of stakeholders, like workers and communities as well as the environment in guiding corporate decisions. The gap between the needs and expectations of society and those of many businesses has widened dramatically in the past decade or more. It’s hard to see how trust in business will be restored, or complex questions like climate change will be tackled, if the same voices are heard in the same boardrooms where the current problems developed. Opening the door wider will help companies hear signals that we now know business overlooks at its-and our-peril.

For the Sea Change ViewPoint, I’m Aron Cramer, CEO of Business for Social Responsibility.

About Bill Baue

Bill Baue is Co-Director of Sea Change Media, a non-profit that makes connections in the shift to social, environmental, and economic sustainability. He co-hosts/produces Sea Change Radio, a nationally syndicated show that podcasts globally.