New York lawyer Jeremy Goldstein has a unique perspective on its significance in the highly competitive business world. His firm, Jeremy L. Goldstein & Associates LLC, advises compensation committees and management teams as well as CEOs on executive compensation to ensure an optimal motivation for corporate officers. With experience as a partner at a large law firm in New York before he opened his boutique firm, Jeremy Goldstein founded his practice to specialize in corporate governance and executive compensation. In this article, we explore corporate governance from his unique perspective.
Understanding Corporate Governance
Governance at the corporate level provides a system of rules, regulations and processes that enables businesses to function efficiently and effectively. A framework that underlies almost all aspects of management, it identifies the power structure that ensures ethical decision making and the accountability that comes with it. Corporate governance delineates lines of authority and balances the interests of a company’s many stakeholders.
Groups that hold a vested interest in the operation of a company include its customers, the community that it serves and the government at large. Integral to the functioning of a corporation, the senior management executives hold critical positions of influence that governance helps clarify and support. Suppliers, financiers and shareholders have vital responsibilities that contribute directly to a company’s performance. Corporate governance enables processes that set objectives and ensure an active pursuit to achieve them.
Considering the Basics
Profit-seeking organizations seek to maximize shareholders’ wealth as a primary goal, and corporate governance affects sustainability as well as long-term value. Given its role as the structure that ensures a company of a system of rules, practices and processes, the essential nature of corporate governance becomes clear. As the guiding force that provides direction and management, it dictates organizational behavior. While stakeholders affect governance tangentially, they do not contribute to corporate governance itself. With the pivotal position that the board of directors occupies, it exerts considerable influence over a company’s equity valuation.
The responsibility for communicating a company’s corporate governance lies with the departments that handle community and investor relations. A feature of a firm’s investor relations website needs to outline its organizational leadership by identifying its executive team and its board of directors. The site must include a full description of corporate governance by describing its committee charters, guidelines for stock ownership and a copy of the articles of incorporation.
The full disclosure of a firm’s corporate governance helps instill confidence in the market. By demonstrating the systems, principles and processes that run the company and the checks that ensure ethical management and prevent conflict of interest, a company can help investors gain confidence. Most companies tend to establish a significantly high level of corporate governance to provide the transparency that engenders high-quality investor relations.
Many shareholders look for more than profitability however, and evidence of corporate citizenship means a lot to them. Some qualities that discerning investors may use as qualifying factors include environmental awareness, sound evidence of the adoption and practice of outstanding corporate governance and demonstration of ethical behavior. With clarity of definition and transparency in a set of rules, a firm can present a composite picture of an organization that aligns the incentives for its shareholders, officers and directors.
Examining the Role of a Board of Directors in Good Corporate Governance
Stakeholders look to the board of directors as the primary influence on corporate governance. Whether elected or appointed, the members of the board make crucial decisions that have far-reaching effects. Appointments of corporate officers, the company’s policy on dividends and executive compensation as matters of financial optimization face challenges for attention when shareholder resolutions demand priority consideration of environmental or social concerns.
The makeup of a board of directors provides the most efficient operation when it includes independent and inside members. Founders, executives and major shareholders comprise the insider representation while independents bring experience in managing or leading other large companies. As impartial members who have no ties to a firm, independents help lessen the powerful influences of the inside contingent.
The interests of shareholders can better align with those of the insiders through the participation of independent board members. With a blend of talents from different viewpoints and experiences, the board can better meet its obligation to provide oversight and planning. Diversity can broaden the effectiveness of corporate governance and gain approval from regulators and investors. Boards can benefit from the diversity of members who bring not only skills and experiences but also a range of differences in age, ethnicity, gender, religion and race.
Coping with the Impact of Bad Corporate Governance
The consequences of bad corporate governance can lead to lax internal controls, poor risk management, improper accounting and irregularities in financial reporting. Some serious consequences of bad corporate governance prevent investors from gaining knowledge of inappropriate practices or the existence of inadequate financial controls. Misleading financial statements and the failure of external audits to detect caution signs can produce catastrophic results. Even more damaging in some situations, a hint of substandard business ethics can make it nearly impossible for a company to recover lost trust. The practice of bad corporate governance can create impacts on a company’s financial health, its reliability, transparency and integrity.
The news informs the public of scandalous activities that can produce severe impacts on a company’s sales and stock value. With the revelation that Volkswagen AG had manipulated pollution test results by rigging the emission equipment on its engines, the company’s stock price drop by almost half. Vehicle sales fell by 4.5 percent in the first full month after the announcement. Businesses that put growth ahead of corporate governance may increase profit margins temporarily, but it may lead to a lack of investment in risk management. The power to maximize profits can motivate a company until a reconsideration of priorities provides an emphasis on good corporate governance.
Practices that Destroy Confidence
By allowing a slow and gradual erosion of good corporate governance, companies risk losing the transparency, integrity and reliability that lead to financial health. When companies fail to provide adequate cooperation with auditors or choose those with poor qualifications, the publication of false or non-compliant documentation can occur with devastating effects. Boards that offer insufficient compensation packages for executives may do so without realizing the impact that it has in the reduction of incentive for dedicated and productive corporate officers. Without a diversified and well-structured board of directors, shareholders may find the process of removing ineffective incumbents too problematical.
Reassuring the Public
Punishment for transgressions in corporate governance can have a long-lasting effect when publicity informs the American public of dishonorable practices. In the dawn of the 21st century, fraudulent activities by Enron and Worldcom led to their declaration of bankruptcy and corrective action by the Congress of the United States. The passage of the Sarbanes-Oxley Act strengthened the recordkeeping guidelines for companies, and it stiffened criminal penalties for violations. A sense of outrage created a need to restore confidence in public companies and helped establish credibility in the reliable operation of some of America’s highest-profile companies.
About Jeremy Goldstein
With degrees from some of America’s finest institutions of higher learning, Mr. Goldstein has accumulated an outstanding academic record. At Cornell he graduated cum laude before continuing his education by earning an M.A. from the University of Chicago. His juris doctor degree from the New York University School of Law allowed him to enter the legal community where his expertise in corporate governance has guided some of the decade’s most significant corporate transactions.
Mr. Goldstein serves as chair of the Mergers & Acquisition Subcommittee for the American Bar Association Business Section’s Executive Compensation Committee. He has a reputation as an accomplished executive compensation attorney. The Legal 500 and Chambers USA Guide to Americas Leading Lawyers for Business include him in their listings. He shares his expertise by writing and speaking on corporate governance matters and executive compensation issues as well. His civic duties call him to serve as a member of the Fountain House board of directors. Mr. Goldstein contributes his time to aid in the welfare and recovery of men and women who have a mental illness. He has hosted charity events that benefit the work of the organization.
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