Dr. Earl R. Smith II

Dr. Earl R. Smith II
DrSmith@Dr-Smith.com
www.Dr-Smith.com

Work with boards of directors can bring up some complex issues and delicate balancing acts. One of the most challenging is the conflict between the drive for increasing profits and the social responsibility of the company – particularly if corporate activity produces negative impact on society or the environment. These challenges frequently present dilemmas for directors who have to make a fairly complex calculation in order to decide what is in the best interest of the shareholders.

Corporate boards no longer operate in smoke-filled backrooms. The names of the members of a board of directors are often just a mouse click away. Boards can no longer consider only bottom-line issues in developing corporate strategy. Profits, once the only measure of a board’s performance, are being challenged based on societal cost. Boards need to develop governance strategies to not only deliver economic value but also social value.

Financial performance expectations for companies are higher than ever. The internet has made the earnings cycle easier for shareholders to follow and reach their own assessments regarding corporate financial results. Shareholders are quick to make a judgment and just as quick to adjust their portfolio strategy when financial results do not deliver the return on investment demanded by shareholders.

Shareholders are also now composed of pension funds, institutional investors, labor unions, environmental activists, government regulators and other special interests groups all with issues and demands on corporate resources. Good governance demands that boards find ways to profit on social issues – issues that are often championed by these special interest groups. Conflicts over these ‘social profits’ can sometimes arise among the shareholders. Individual shareholders can effectively demand that directors take an active leadership role on environmental and humanitarian issues. Institutional investors are risk adverse to strategies failing to add to the company’s bottom line. Advisory boards are often established to assess social issues affecting the corporation’s activities and to determine how best to comply with the public relations issue without damaging the company’s earning potential.

Director’s face the complex and often competing issues of enhancing shareholder value and meeting their social responsibilities. No director wants a shareholder’s meeting to become a political or social activism news story. A board may choose to establish and advisory board composed of shareholders with leadership experience on social issues. The executive committee may be charged with assessment duties and reporting back to the board on the company’s social responsibility performance.

Compliance issues are often difficult enough for a board to establish policies and strategies to ensure success. However, many special interests groups act as watch dogs – demanding corporate boards to establish strategies far exceeding regulations such as Sarbanes-Oxley. Corporate ethics should be posted on company websites and included in the prospectus of a company. This serves to demonstrate the corporate board’s commitment to transparency in financial matter regarding director’s governance.

Corporate ethics are determined by corporate culture and by the ethics of the directors. Directors have a responsibility to the shareholders for increasing the value of the company, however occasionally directors bring into the boardroom agendas of their own. Many directors, just like other shareholders, have backgrounds as environmentalist, union leaders, and in government. Corporate ethics usually require directors to adhere to corporate charters in carrying out their responsibilities as a corporate director. Good governance demands the CEO and Chairman of the board to conduct assessments to ensure sound policies are being promoted by the board, and not the policies of a special interest group.

Leadership development and professional governance rules can provide guidelines for social issues. Rules establishing an advisory committee to consider and make recommendations to the board as a whole on all social and environmental issues can decongest the board meetings. The CEO and Chairman of the board must conduct leadership assessments of all directors to ensure the right mix on the environmental committee. The board should also develop and post an environmental and social responsibility statement on the company’s website and as a part of the company’s annual report.

Corporate governance is a balancing act between competing issues. A governance structure must satisfy compliance issues, regulatory issues, financial issues and social, environmental and human rights issues. Failing to address adequately any one of these issues can have a negative effect on the board’s ultimate financial responsibility to enhancing shareholder value.

In today’s complex legal and regulatory environment, the drive for profits at any cost can have a massively negative impact on shareholder value. Management that cuts corners or ignores regulations in order to maximize short-term performance may end up increasing their bonuses but damaging the long-term interests of the shareholders. The board is in the middle of this tense situation and needs to act decisively to chart a course that balances a diverse set of issues – profits, regulatory compliance and social cost.

© Dr. Earl R. Smith II

Related Articles:

• Visionary Boards of Directors
• Leadership Development – Good Board Governance
• Board of Directors – Major Legal and Moral Responsibilities
• Lessons of Complacent Boards

Dr. Smith is a proven senior executive, successful entrepreneur, published author and public speaker. He serves on boards of directors and advisory boards or as a strategic adviser to CEOs. Dr. Smith specializes in turnaround management, strategic planning, leadership development and executive coaching. He also works as an executive and/or life coach in the areas of personal growth and spirituality. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.

This entry was posted on Tuesday, October 14th, 2008 at 9:57 AM and is filed under Governance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.