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Corporate governance may not be mandated by state statutes, but it is being demanded by shareholders, said Jeff King, ’01, partner with KPMG International’s advisory services practice. “In a McKinsey and Company study from 2000, 80 percent of investors said they would pay a premium for a company that has good governance in place,” King said during a panel presented by the student-led Accounting and Audit Club and student-led Chicago Consulting Club at Gleacher Center on July 21.
Although much negative press has focused on the unwieldy requirements for internal controls under the Sarbanes-Oxley Act, many other sections of the act have improved corporate governance, he said. “Companies now have to disclose around what their ethics in governance principles are,” King said. “There are real strict requirements for independence of directors. CEOs and CFOs are required to certify the correctness of their statements.”
Empirical evidence shows that good governance makes a difference in the performance of corporations over the intermediate and long-term, said Eileen Kamerick, MBA ’93, JD ’84, executive vice president and CAO of Heidrick & Struggles. “A fair number of investment funds are now using governance ratings as a means of determining whether or not they want to invest in a stock,” Kamerick said.
The current emphasis on corporate governance will continue to moderate in coming years and eventually be impounded into a corporation’s annual costs, she said. “I don’t think there is any percentage of Congress that wants to repeal Sarbanes-Oxley,” Kamerick said. “But I think federal officials are trying to focus on how to make these requirements practical, so that frankly the capital markets here aren’t at risk and don’t lose out. London is clearly taking over New York as the center of the financial world, and that’s something people in this country should be concerned about.”
In a study of one large Indonesian telecommunications company faced with the high cost of complying with Sarbanes-Oxley in order to remain on the New York Stock Exchange, Telkom decided that delisting would prove more costly to the company in the long run, said Phillip Braun, PhD ’93, visiting professor of finance.
“Even though the costs of being listed in the U.S. are very high, by delisting, Telkom’s market value is going to decline because institutional investors are going to dump their stock because they don’t believe there is corporate governance at Telkom,” Braun said. “You balance those two off, and the conclusion is you don’t want to delist.”
With growing scrutiny of accounting and officers at public companies, students must understand the impact of government regulations on corporations, said evening student Michael Sun, vice president of the Accounting and Audit Club. “Many companies are spending a lot of money in reaction to recent changes in corporate regulations,” Sun said. “Officers are impacted and getting questioned on how they make sure their financial statements and internal controls are in place. We learned a lot today from a senior executive standpoint about what is being changed, why it’s important for companies to have good boards of directors, and how corporate governance is important.”
-Phil Rockrohr
For a related story about efforts to improve the competitiveness of U.S. capital markets, you might wish to read: Identifying the Causes of Wall Street’s Loss of Competitiveness