Chairmans ReportPreserving your most valuable asset AICD Review

Is reputation more valuable than money? A distinguished panel of directors this question at our recent Company Director Conference 2003.

Preserving your most valuable asset

Is reputation more valuable than money? A distinguished panel of directors this question at our recent Company Director Conference 2003.

Panelists Mervyn King, Alan Cameron and Charles Macek agreed that reputation was invaluable. It is "a long-term asset" and its destruction is "irreparable". Essentially, consumers wish to deal with reputable companies and employees wish to work for reputable companies.

How then can such a valuable asset be preserved? The answer, summarised by Mervyn King, was through "intellectual honesty". The practice of intellectual honesty or qualitative governance was judged far more important than quantitative governance: the ticking of procedural checklists.

All agreed that a review of existing regulation was a necessary part of the healing process in regaining public confidence in the markets. Indeed Charles Macek said that in his 34-year career in the finance sector he could not remember a time of so little trust in directors and financial market operators.

However, the practice of quantitative governance did not translate to good corporate governance. It was "only an aid" as no amount of regulation would prevent fraud. The textbook quantitative corporate governance practices of Enron were used as an example.

Intellectual honesty took centre stage. To use Alan Cameron's words, "openness, integrity and accountability are the hallmarks of a well-governed company".

So what practices should boards implement to further qualitative governance? Incorporating elements of the conference discussion, I put forward the following guidance:

• The quality of the chairman is crucial. The position involves superior communication skills – feeding the hard messages from the board to the CEO on performance, acting as a sounding board on executive proposals, and ensuring the directors work together in a constructive way to deliver on superior strategy and performance.

• As the interface between board and company, it is vital that both the chairman and CEO have a good working relationship.

• The chairman needs to understand their role, being careful not to try to run the company.

• A chairman's performance – and that of all board members – should be assessed annually.

• The board agenda should be a "living" document. Any urgent board meetings with no agenda papers should be treated with suspicion.

• Directors must have experience in and a deep understanding of the company's business. Boards are encouraged to undertake a skills audit allowing open board discussion on the skills required to fill vacant board positions.

• Directors must be willing to drill down into the business, and have a ready grasp of the key business drivers, the integrity of the business, its ethics in decision making, and its culture and values. This involves "walking the factory floor" and seeking to mentor executives where a director possesses a relevant skill. Each board member should be able to recite the company strategy, at a moment's notice!

• Directors must have the courage to ask both the "difficult" and "dumb" questions. They should not be intimidated by domineering CEOs and executives.

• Directors must come to the boardroom table with independent minds. Boards should set their own tests for assessing the independence of their directors in their corporate governance statements. Prescriptive definitions proscribed by regulation on what constitutes "independence" should be avoided.

• Boards need to ignore the dominant shareholders, professional fund managers, whose focus is on the short term not the long term.

• The issue of exorbitant executive remuneration needs to be addressed. Boards need to structure remun-eration to encourage better performance with appropriate incentives, all should be disclosed.

Take the time to continually examine the culture of your organisation. Weeding out those who fail to deliver on openness, integrity and accountability, and seeding initiatives for "intellectual honesty" will preserve your most valuable asset – your reputation.

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.