Monday, June 16, 2008

Why care about Corporate Governance?

I am spending today and tomorrow at an ISS accredited Director training course UC Berkeley Haas School of Business. This is part of my ongoing education as a CEO, a director of FirstRain and to make sure I stay current as a director of Rambus, and it's the type of education I need to do every couple of years.

And I expect to learn some, and be bored in some of it. But so far - at the first break - so good.

In addition to the usual ramp up topics like what a director's responsibilities are, the impact of Sarbannes Oxley, education from a law professor on agency costs and what they really mean, the area I found interesting was the discussion about why it is so important to care about CG: corporate governance (not computer generated).

In a nutshell the teaching professor, Dr Eric Talley, outlined four reasons to care
1. It's responsible organizational design (it's a key ingredient like any other process)
2. Value creation (there is direct evidence that "good" corporate governance correlates to improved financial performance and reduced litigation risk)
3. Others care (like institutional investors and the SEC so you'd better care as a director)
4. and finally RiskMetrics (formerly ISS) measures it with the CGQ - measuring the influential factors in corporate governance.

#2 makes the most sense to me and is the best reason to care. If you do a good job of setting up internal control processes it gives you the visibility you need to drive strategy and take the right risks to grow your business. The dominating responsibility of a director is to "maximize shareholder value" - it far outshadows the other responsibilities like requiring transparency, succession planning, strategy etc. - and so in my mind that makes the growth aspect of corporate governance the interesting one.

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