THE BUSINESS VALUE OF GOOD

CORPORATE GOVERNANCE
Companies that take a strategic approach to the challenge of complying
with tough new corporate governance requirements can create
opportunities to strengthen their internal processes and enhance their
business.
This article is one in a series from the Microsoft Ofce System that
eplores issues and perspectives facing !nance eecutives.
Making
Sense of the
Go!a
Reg"ato#$
Pat%h&o#k
"or the global economic system
to function as it should#
investors# employees#
consumers# and the general
public must have con!dence
that they will bene!t from it$
and from the work of
corporations that support it.
%ecently# that con!dence has
been severely shaken.
&s the names of several top
corporations have become
synonymous with corporate
misconduct and !nancial
scandal# a call for more
e'ective corporate governance
has been raised worldwide$
from !nancial reporting and
internal controls to how a
corporation selects# trains# and
evaluates its board of directors.
This article is not a legal
analysis of corporate
governance# but rather a look at
a range of issues associated
with it and how some
companies are responding to
those issues and using
compliance e'orts to build
greater business value.
&lthough corporate governance
has largely been portrayed as
an issue of compliance# analysts
and business leaders
increasingly are seeing good
governance as good business.
"inance organi(ations will see
the cost of compliance increase
in the coming years as !rms
move from the investigational
phase to implementation.
)ence# !nance eecutives are
looking carefully at the cost*
bene!t of compliance. +n the
end# sound corporate
governance can reduce market
volatility# encourage investment
and promote sustainable
productivity and growth. The
push today is toward putting
into place a combination of
internal controls# eplicit
businesses processes and
systems for corporate
governance that can also build
business value.
Microsoft The ,usiness -alue of .ood Corporate .overnance /
0The push today is
toward putting into
place a combination of
internal controls#
eplicit business
processes# and systems
for corporate
governance that can
also build business
value.1
One of the most sweeping
recent attempts to enact
corporate governance reform is
the Sarbanes*Oley &ct# passed
by the 2.S. Congress and signed
into law on 3uly 45# 6556.
Sarbanes*Oley# the most far*
reaching 2nited States
legislation dealing with
securities since the /745s# has
etraordinary implications for
public
Microsoft The ,usiness -alue of .ood Corporate .overnance 6
companies in terms of legal
liability and public perception.
&s a result# the need for
stronger corporate governance#
better internal controls# and
increased !nancial transparency
are now ma8or topics of
discussion from the eecutive
board room to the employee
water cooler.
&nd governance reform is far
from 8ust an issue in the 2nited
States. .overnments and
regulatory bodies from the
9uropean 2nion to the :aci!c
%im have issued strict new laws
and regulations intended to
increase corporate
accountability and guide many
aspects of corporate behavior.
The 9uropean Commission
recently launched two
important new 9uropean 2nion
policies$ one on corporate
governance and the other on
audit reform. Simultaneously#
member nations# for eample
+reland# have created their own
legislation. ;ew governance
regulations set by the ,asel
Committee on ,anking
Supervision# which have
implications for 9urope in
addition to the &sia*:aci!c
region# are now creating
additional compleity and
uncertainty for organi(ations in
the capital markets that must
comply with them. This <urry of
activity prompted the Irish
Times to write that# 0the year
6554 should be one of audit
reform in 9urope.1
The issue at hand is not simply
one of avoiding the costs of
government regulation and
compliance. & company=s
integrity# and the level of public
trust it en8oys# can have a
dramatic e'ect on core
business issue$ from the <ow
of investment capital# to
consumer buying decisions# to
the company=s ability to attract
and retain the most talented
employees. &ccording to %a8a
&rshad# eecutive chairman of
:ricewaterhouseCoopers >:wC?#
a global accounting !rm#
institutional investors have
indicated their willingness to
pay a premium of /5 to @5
percent for companies with
ecellent corporate governance
practices.
Small wonder# then# that many
corporations are scrambling to
institute visible changes in the
way they govern themselves.
The B"siness
of Co'(ian%e
The rise of corporate
governance as a business
priority has created a growing
industry of eperts peddling
advice. The analysis and
counsel runs the gamut from
how to put business processes
into place to the board=s new
role to understanding the
increasingly comple
international patchwork of rules#
policies and guidelines related
to corporate governance.
+n racing to understand and
comply with the new
regulations# many companies
have complained that they lack
the time necessary to develop a
cohesive strategy to ensure
their compliance e'orts will also
bene!t their business in other
ways. %ecently# they got some
good news when they were
noti!ed that compliance with
section A5A of Sarbanes*Oley
was delayed until 3une# 655A.
This spurred many C"Os and
C+Os in particular to take
advantage of the delay and use
the additional time to partner
more closely in building
business value within the
contet of compliance.
&ccording to Optimize# a
publication for C+Os# true
business value can be created
during this phase by
strengthening !nance#
accounting# and performance*
management processes.
&nalysts at &M% %esearch# an
independent research analyst
!rm that works with many of
the world=s leading
corporations# point out that
smart companies= reactions to
the current wave of corporate
governance reform is analogous
to reactions to the year 6555B
0Some put the bulk of their
process and control
documentation e'orts on key
accounts or areas of the
balance sheet# such as cash#
accounts receivable# or
accounts payable.
Others take a process*centered
approach concentrated on their
!rms= ma8or business processes#
including !nance and business
operations.1 There is no single
approach that works for all
companies.
+n its recent survey of
eecutives implementing ,asel
compliance programs# however#
C:M.# a global accounting !rm#
found that participants
highlighted the importance of
several key elements for
successB clarity of scope#
management of stakeholder
epectations# pro8ect
transparency# and regular
reporting.
More broadly# e'orts to reform
corporate governance often
focus on changing the
composition and structure of a
company=s board of directors#
such as requiring a certain
percentage of directors to be
recruited from outside the
company# appointing a lead
director separate from the
corporation chairman# and
requiring members of board
audit and nominating
committees to be outsiders. +n
the pro!le of Delphi that
follows# you also see how re*
imagining the role of the board
can strengthen corporate
governance# build business
value# and encourage
collaboration from top to
bottom.
+n the wake of Sarbanes*Oley
and other ma8or reforms# the
world is re*awakening to the
need for common global
corporate governance
standards.
%oger Davis# a partner with
:wC# makes the case for
common principles within
corporate governance as not
only a means of ensuring
compliance but also building
business value. 0The wider
importance of the 9uropean
proposals relates to the need
for global standards of
corporate governance#
accountability# auditing# and
capital market regulation. The
fact that aftershocks of the
corporate scandals in the 2nited
States reverberated around the
world is not surprising# given
the importance of the 2.S.
market. ,ut the panic reaction
in many countries showed 8ust
how interdependent are the
worldEs capital marketsF yet the
world lacks any mutually agreed
principles for their regulation.1
"elipe .on(ale(# former prime
minister of Spain# made a
similar point at an international
conference hosted by Corea and
the Gorld ,ank in 655/.
0;ational capital markets are no
longer isolated. Developing
countries must be able to meet
!scal reporting standards of
developed countries in order to
secure their place in the world
economy.1
Many eperts believe that
governance begins at home$
inside the boardroom# among
the directors. .ood governance
is woven into how# when# and
why directors work together and
interact with management and
the rest of the organi(ation.
+ncreasingly# many analysts are
advocating approaches that
combine 0soft1 qualitative
reforms$ which address the
behavior# relationships# and
ob8ectives of the directors and
the C9O$ with 0hard1
quantitative mechanisms# such
as performance criteria#
processes# and measurements.
&ccording to ,oo( &llen and
)amilton# a global business
strategy consultancy# this
combination of soft and hard
solutions can turn governance
from a vague concept into a
means to deliver organi(ational
resilience# robustness# and
continuously improved
corporate performance.
Rein)enting
Co#(o#ate
Go)e#nan%e
at De(hi
+n the summer 6554 issue of
,oo( &llen and )amilton=s
publication# Strategy +
Business, &ndrea .abor writes
about how Delphi Corporation#
the world=s largest automotive
supply company# reinvented
corporate governance with a
unique e'ort to make the !rm=s
board of directors serve more as
a resource than simply an
oversight body. 0The /6
directors$nine of whom are
outsiders$ have a rich body of
industry*speci!c knowledge to
support the company=s key
strategies.1
0The difculty
becomes creating
the proper tools and
business processes
that enable and
encourage greater
interaction$deeper
collaboration from
top to bottom.1
+n making that governance
choice# a company is really
making a bet that increased
collaboration between the board
and key managers will increase
productivity across the entire
organi(ation and drive growth
and pro!tability. More
transparent management
processes and an open
communications structure
shorten the time to business
insight for both directors and
managers# enabling timely and
e'ective decision making and
optimi(ing cross*group
collaboration. The difculty
becomes creating the proper
tools and business processes
that enable and encourage
greater interaction H deeper
collaboration from top to
bottom.
&s an eecutive vice president
at .eneral Motors in the early
/775s# 3.T. ,attenberg +++
learned some hard lessons as
the automaker ousted its C9O
and weathered a crisis in
corporate governance. Ghen
,attenberg became C9O of the
Delphi Corporation# he applied
those lessons to create what 3ay
Iorsch# a corporate governance
epert at the )arvard ,usiness
School# calls one of the most
e'ective and unusual boards in
the 2nited States.
,y design# Delphi=s board is
positioned not only to advise#
but also to be fully engaged in
company strategy.
+ndividual board members are
chosen for skills that will be
useful to the
company $ many are
considered leading industry
eperts $ and for their ability to
help Delphi overcome its
strategic and managerial
challenges. Delphi=s governance
structure is designed to
facilitate directors= eposure to
employees and company
processes# and to make
maimum use of their skills.
&ccording to :rofessor 3ay
Iorsch# most boards !nd it hard
to truly help shape company
strategy# which he de!nes as
the goals a company will pursue
and how it will pursue them. &t
Delphi# things are di'erent.
0The board at Delphi is engaged
in a constant dialogue1 with key
leaders throughout the
organi(ation# says Iorsch. "or
companies who may follow suit#
that dialogue can be enhanced
through tools and solutions that
promote e'ective leadership
and stronger business
alignment within the
organi(ation# leading to both
increased corporate
accountability and enhanced
shareholder value.
O"#
Assess'ent*
B"i+
Ca(a%it$ No&
&lthough few corporations ever
eperience the kind of problems
that have inspired tougher rules
for corporate governance# all
must comply with the new
requirements. &t times#
companies might feel as though
they are paying unfairly for
others= mistakes# but
compliance does not have to be
all burden and no bene!t.
9ven Sarbanes*Oley# with its
etensive reforms# can be a
boon to corporations that take a
strategic approach to the
challenge of compliance. "or
eample# Section A5A of the
new law requires companies to
rigorously maintain and monitor
their internal controls. &lthough
setting up or improving those
systems and processes can
create short*term epense and
frustration# it can also help
some companies enhance their
internal control mechanisms for
long*
term productivity and
substantial !nancial gains. See
0The ,usiness of Compliance1
on page 6.
&ccording to an online survey
conducted by &M% %esearch#
"ortune /555 companies have
earmarked J6.@ billion in 6554
for work related to investigation
of and initial compliance with
Sarbanes*Oley. 9ighty*!ve
percent of those companies
predicted that complying with
the new law would require
changes in +T infrastructure#
and K/ percent epected to
upgrade their internal controls#
automate records management
and reporting# and overhaul
their business processes to
improve risk assessment and
!nancial visibility. Deloitte and
Touche estimates the average
"ortune @55 corporation will
spend J4 to J@ million annually
to redesign their internal
controls.
-iewed as an opportunity#
however# Sarbanes*Oley
compliance could be a
compelling event to inspire
speci!c system and process
improvements. The investments
corporations often must make
to ensure their compliance with
new laws aimed at
strengthening corporate
governance can also help them
create better business
processes# increase employee
satisfaction# boost investor
con!dence# and deepen
management=s understanding
of the business.
Debra Iogan of .artner
%esearch sums it upB LMost
enterprises should take a step
further than E8ust complyingE
with Sarbanes*Oley. +f you
must keep certain records for
the purposes of Sarbanes*
Oley# donEt stop there. Most
enterprises have huge content
management problems#
uncontrolled eplosions of e*
mail and lack of policy and
procedure around many
document based processes.
Take advantage of this forced
opportunity to roll out
document and records
management software and
procedures to gain business
efciency as well# rather than
8ust using it to reduce the risk of
noncompliance.L
&s Iogan suggests# compliance
discussions may ultimately drive
key infrastructure decisions as
companies strive to enable
better decisions by improving
business processes and
strengthening internal controls.
To meet the rigorous new
reporting requirements# such as
real*time reporting of material
information# companies must
have systems that can talk to
each other# share data easily#
and increase information
visibility at every level of the
organi(ation.
+n working to ensure compliance
with Sarbanes*Oley and other
corporate governance laws#
regulations and policies
worldwide# companies should
focus on building business
processes and infrastructures
that not only ensure compliance
but also increase their
company=s capacity for
efciency# agility# and
responsive management.
The Microsoft Ofce System Can )elp
I+entif$ing the #ight !"siness a((i%ations to 'eet $o"#
o#gani,ation-s nee+s so'eti'es %an !e o)e#&he'ing.
Mi%#osoft is e/(e#ien%e+ in he(ing %o'(anies a++#ess thei#
%#iti%a !"siness nee+s s"%h as %"tting %osts &hie
si'"taneo"s$ (anning fo# g#o&th an+ inno)ation. The
Mi%#osoft O0%e S$ste' is a #eia!e !"siness (atfo#' that
ao&s $o" to 'anage !"siness insight1 a+a(t (#o%esses to
a++#ess e)e#2%hanging %"sto'e# nee+s1 an+ e)e#age $o"#
o#gani,ation-s st#ategi% assets &hie i'(#o)ing
(#o+"%ti)it$1 )isi!iit$1 an+ integ#it$.
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