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 Microsoft Office System that explores issues and perspectives facing finance executives.
Making Sense of the Global Regulatory Patchwork
Even For the global economic system to function as it should, investors, employees, consumers and the general public must have confidence that they will benefit from it — and from the work of corporations that support it. Recently, that confidence has been severely shaken.
As the names of several top corporations have become synony-mous with corporate misconduct and financial scandal, a call for more effective corporate governance has been raised worldwide — from finan-cial 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 efforts to build greater business value.)
While corporate governance has largely been portrayed as an issue of compliance, analysts and business leaders increasingly are seeing good governance as good business. Finance organizations will see the cost of compliance increase in the coming years as firms move from the investigational phase to implement-ation. Hence, finance executives are looking carefully at the cost-benefit of compliance. In the end, sound corporate governance can reduce market volatility, encourage invest-ment and promote sustainable productivity and growth. The push today is toward putting into place a combination of internal controls, explicit businesses processes and systems for corporate governance that can also build business value. “The push today is toward putting into place a combination of internal controls, explicit business processes and systems for corporate governance that can also build business value.”
One of the most sweeping recent attempts to enact corporate governance reform is the Sarbanes-Oxley Act, passed by the U.S. Congress and signed into law on July 30, 2002. Sarbanes-Oxley, the most far-reaching U.S. legislation dealing with securities since the 1930s, has extraordinary implications for public companies in terms of legal liability and public perception. As a result, the need for stronger corporate governance, better internal controls and increased financial transparency are now major topics of discussion from the executive board room to the employee water cooler.
And governance reform is far from just an American issue. Governments and regulatory bodies from the European Union to the Pacific Rim have issued strict new laws and regulations intended to increase corporate accountability and guide many aspects of corporate behavior.
The European Commission this year launched two important new EU policies — one on corporate governance and the other on audit reform. Simultaneously, member nations such as Ireland have created their own legislation. New governance regulations set by the Basel Committee on Banking Supervision, which have implications for Europe as well as the Asia-Pacific region, are now creating additional complexity and uncertainty for organizations in the capital markets that must comply with them. This flurry of activity prompted the Irish Times to write that, “the year 2003 should be one of audit reform in Europe.”
The issue at hand is not simply one of avoiding the costs of government regulation and compliance. A com-pany’s integrity, and the level of public trust it enjoys, can have a dramatic effect on core business issues — from the flow of investment capital, to consumer buying decisions, to the company’s ability to attract and retain the...