Knee-jerk regulation is damaging corporate governance, global study warns
New Delhi, April 19th, 2012: Attempts by governments to regulate how companies are run in the wake of the credit crunch are misguided and potentially counterproductive. This is the warning from a new international study of executive pay and corporate governance from global management consultancy, Hay Group.
The study portrays government intervention in corporate governance as a knee-jerk response to popular concerns about executive pay, rather than a considered attempt to reduce the systemic risk of future corporate or market failures.
The research also suggests that regulation is being formed in a vacuum, as governments have a near non-existent dialogue with companies and investors.
The global study is based on in-depth interviews with senior representatives of companies, investors and regulators in 17 countries around the world.
Carl Sjostrom, regional director of reward services at Hay Group comments: "Many of the parties in the governance equation are concerned about the undue focus on executive pay, when there are more critical issues at stake, such as how the board works and cultural impact."
"Instead of considering how best to support effective, sustainable corporate governance, politicians and regulators are focusing on minor tactical issues, with minimal consultation with companies or investors."
"Executive compensation is a delicious subject for an emotional debate, but the governance of the organisations that build wealth in society needs to be driven by more than easy political point-scoring."
Tick box governance shifts responsibility onto shareholders
Rather than encouraging more effective corporate governance, the burden of compliance is forcing many companies into a tick box mentality, according to Hay Group.
For many, this means shifting accountability away from management and the company board and onto shareholders â indeed, investors, regulators and companies alike expressed concerns that governments are shifting governance responsibilities away from the board and onto shareholders and governments themselves.
Carl Sjostrom warns: "In reality, the typical institutional investor in listed companies rarely act as a true 'owner' and cannot be expected to do so. The primary concern is to maximise return on investment, not to run the company. Regulators need to engage to understand how corporations should be governed. And you do not discover that through simply sending out a consultation document."
Participants in the study identified the introduction of a binding 'say on pay' vote in some countries as an example of the lack of regulators' understanding. Many investors specifically stated that they were less likely to query executive pay under such rules, to avoid an adverse market reaction.
Complex regulatory burden drives companies to drastic measures
Companies involved in the study warn of having to deal with codes, guidance and regulation at national and regional levels, which overlap and even contradict each other.
Carl Sjostrom comments: "This is not just sabre-rattling by disgruntled organisations, but serious responses to civil law changes of a sort that are more commonly seen in criminal law."
Culture key to responsible governance
Encouragingly, however, all respondent groups expressed a general belief that companies need the freedom to determine how best to apply governance guidelines. But such freedom, warn investors, requires competent boards that are composed to serve broad interests.
Companies say they need to be able to adapt their governance as their markets and business needs change, and even regulators recognise the difficulty of regulating across different sectors or business models.
Carl Sjostrom concludes: "There is no single oracle to determine what is 'good governance'. A common theme that arose in the course of our interviews was the importance of having the right culture within the company."
"Governments and regulators need to drop their current focus on the symptoms of poor governance, and look at how they can support companies and their owners to develop a culture that builds sustainable and responsible performance in the context of each organisation."
Please note: this study should be credited to 'global management consultancy, Hay Group', and not 'Hay' or 'Hays', which are separate and unrelated organizations.
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Miss Nidhi Mehra
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