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Wimping out on corporate governance

JDS Uniphase's newly appointed CEO, Kevin Kennedy, says it's time for boards of directors to stop acting like rubber stamps and begin acting as if they had real backbones.

Last year bore witness to the failure of corporate governance. You've doubtless heard about what happened at Enron, Global Crossing and WorldCom. These were some of the more publicized examples of companies where internal controls were not good enough to protect stockholders and employees, and board oversight was too weak to prevent cataclysmic results.

Since then, many boards of directors and executive management teams have taken steps to fortify corporate governance. The government played its part by legislating the Sarbanes-Oxley Act to help address accounting issues.

But externally driven solutions are blunt instruments that time and time again have proven to be ineffective. In order to take root, governance improvements must be rigorous and come from within a company as well as from its board.

We can't continue to wait until companies with weak governance get caught bending the rules and then again wait for the government to issue decrees to which we all must conform. We need to stop blaming others and solve these problems ourselves. And the only way the technology industry can do that is by taking greater responsibility for governance within our own companies.

The first step along the path to good governance is to ensure independent oversight at the board of directors level. Boards can no longer function as if they were passive fraternities of tourists. Its members must actively engage in understanding the business so that they can debate critical issues. Only with a renewed sense of accountability will boards then embrace controls that enable disclosures to be beyond reproach.

In some cases--especially in European companies--the role of chairperson is now separate from that of the CEO. In the United States, some boards increasingly are bulking up or forming corporate governance committees while establishing a role of a lead independent director (LID).

When the two positions are both occupied by the same individual, vision and strategic planning may get created in a vacuum. However, in cases where institutional history makes it difficult to separate the two jobs, the LID's role can work. But more important than debating which model is best is the system of checks and balances that goes along with greater board independence.

We need to stop blaming others and solve these problems ourselves.
An independent board can also prove its mettle by stepping in to make the tough calls when management goes astray. All too often, however, boards deliver weak oversight by becoming a rubber stamp to the CEO or failing to examine data carefully enough to realize when crises are brewing.

Effective boards should support their CEO but still be able to operate independently. They must get their hands on relevant data needed to assess the company's vital signs. And they must be willing to frankly discuss issues among themselves as well as with top officers of the company.

The bigger goal here is to influence management to make the right decisions and guide it to make appropriate disclosures. To be sure, effective board oversight can identify and prevent weak internal governance. But the hard work doesn't stop there; if a CEO can't demonstrate rigorous internal governance, it's time for a new CEO. You don't build good governance systems by allowing autocratic control.

Instead, you put fresh information into the hands of the right decision makers. There must be clear accountability so that no one has any doubts about who's responsible for a particular decision or result. At the same time, there must be timely reporting, and decisions must be based on facts, whether the news is good or bad.

If a CEO can't demonstrate rigorous internal governance, it's time for a new CEO.
People also need to be empowered to make decisions at the local level while ensuring that organizationwide goals are met. The idea is to neutralize complexity, provide checks and balances and make it easy to see where the true problems lie. The system should cultivate a spirit of open dialogue where conflict is valued, diverse opinions are welcome and creative tension is pursued with the goal of finding better solutions.

At first blush, all this may sound like a tall order. But if the technology industry doesn't handle governance well now, then there will be more scandal and failures in our future. Ten years from now, we will remember this era for the tough times, when leaders returned to basics. If we do it right, we'll all reap the benefits.