Issue link: http://www.e-digitaleditions.com/i/61383
Rules Are Made to Be Broken Brait South Africa, which has offices in Cape Town, Johannesburg, and locations worldwide. A legislative approach to governance, King maintains, will inevitably backfire. Last year, I spoke in Las Vegas to about 2,000 delegates at Mervyn King has been a leading force in South Africa's corporate governance develop- ment. As chairman of the South Africa's King Committee on Corporate Govern- ance, he helped write the recommendations of the King I Report in 1994 and its update,King IIReport, in 2002.He serves as chairman of financial services group quality called "intellectual honesty." You can have all the bloody rules in the world, but you cannot legislate honesty. And I'll tell you, as a corporate lawyer, I've found it's much easier to get around a rule than a principle. It's Time for Legislation the Institute of Internal Auditors. At the time, Sarbanes- Oxley was still hot off the press. I asked, "Is it better to 'com- ply or else' or 'comply or explain'?" That is, is it better to have rules or principles of governance? I said, facetiously, that Moses tried it and failed, and Sarbanes-Oxley wasn't going to succeed either. Letme explain. The world has really caught corporate gov- explain, as in King II, business success is not assured. All busi- nesses will have failure. In business, you're dealing with risk- reward, and none of us is prescient enough to get it right 100 percent of the time. But when you have that business failure and you have practiced good governance, society will accept that because they've invested theirmoney in a risk industry. But if you practice bad governance and you fail, you have scandal. Moreover, if you had looked at Enron at the time, you ernance fever, which has resulted in this kind of quantitative approach to governance. Sarbanes-Oxley is only one exam- ple—there's the OECD, the New York Stock Exchange, the Global Reporting Initiative. Malaysia, Kenya, Hong Kong, every country is establishing its own guidelines. And it's cor- rect that each country needs its own guidelines because each has its own special circumstances. But the question is, is quan- titative governance the answer? Whether you legislate, as in Sarbanes-Oxley, or comply or A prominent author and lecturer in the corporate governance debate, Ira Millstein is a senior partner at the international law firm Weil, Gotshal & Manges, and Eugene F. Williams Jr. Visiting Professor in Competitive Enterprise and Strategy at the Yale School of Management in New Haven, Connecticut. Millstein hasworked closelywith theOECDand theWorld Bank to develop codes of governance in developing countries. In an opposing view to King's, Millstein believes that viewing governance as an ethical choice has led to far too many wrong choices. He maintains that the Sarbanes-Oxley legislation was neces- sary to tell corporate boards that "enough is enough." I don't agree thatwe shouldn't leg- would have thought, "What awell-governed company." It had an audit committee, a compensation committee, a nomination committee. The audit committee was chaired by a chartered accountant in theUnited Kingdom. It had a preponderance of nonexecutive directors, and it had 100 percent board atten- dance. But Enron executives were just "box-ticking," so they could say, "Yes, we are in compliance with the rules." The Enron board was not applying what I call quality of followed rules of best practices. So, instead of suggesting that a company should have a majority of independent directors, we require that it has a majority. Instead of suggesting audit com- mittees, we now require audit committees. Sarbanes-Oxley simply turned what you should do into what you must do. Now, I no longer have to plead with and cajole people into compliance.We have written codes of conduct and lists of best practices. If you look back over the years you'll find hundreds of them, promulgated by every corporate society in the world. And they didn't work. With those informal codes, we've had Enron, we've hadWorldCom, and we've had 200 or 300 com- panies issuing restatements of their financial reports. Congress passed Sarbanes-Oxley because so few companies plies with a particular guideline should be the choice of its board—when a board chooses not to comply, it needs only to explain its reasons to its stakeholders. If the stakeholders accept that, then so be it. What is quality of governance? I think it's that immutable islate governance.We've had plenty of time to develop softer methods of governance. It did not accept the idea that the market is the ultimate compliance officer.Whether or not a company com- following codes of governance. I can just point to the law and listing requirements.We all now have very assigned responsi- bilities. What Sarbanes-Oxley did, besides laying down rules, was to turn the paradigm back to the way it should be. It placed total responsibility for good corporate behavior and good fiscal reporting back to the board of directors. It makes BizEd MARCH/APRIL 2004 35