Call for change in corporate culture

•  Corporate boards must take long-term steps to manage risk, restore investor confidence
• CFA Institute report offers ‘checklist’ for visionary boards

The string of recent news concerning global companies such as Barclays, JPMorgan Chase, Olympus, Sino-Forest, and Duke Energy, underscores the immediate need to change the corporate culture perpetuated by some corporate boards.

One way to accomplish this is to build visionary boards and leaders, according to a newly released report from CFA Institute, Visionary Board Leadership: Stewardship for the Long Term. The report aims to change the historically short-term thinking of publicly traded companies and to identify tangible ways in which visionary boards can foster and promote longer-term thinking that restores the trust and confidence of investors globally.

“Recent events have clearly shown us that better board leadership is needed,” said Matt Orsagh, CFA, CIPM, Director for Capital Markets Policy at CFA Institute. “Visionary boards must have the leadership and foresight necessary to combat the short-term thinking that has dominated our markets for too many years and that has exacerbated the effects of the current global financial crisis. These boards must be stewards of not only the long-term interests of the corporations they serve, but also of their shareowners.”

CFA Institute, which interviewed current and former directors, investors, issuer representatives and corporate secretaries to gain valuable insights on effective corporate governance, urges visionary boards and visionary directors to be accountable for their role in actively eliminating corporate malfeasance. Ethical behaviour starts at the top, Orsagh added, and boards should proactively use Visionary Board Leadership as a checklist on how to truly serve as stewards of the company.

Steps to building a visionary board include:

•  Executive/Director Compe-nsation: A visionary board understands a company’s compensation policies and ensures underlying objectives consistently support the long-term strategy and performance of the company, as well as an appropriate company risk profile.
• Strategic direction: A visionary board actively oversees and understands the corporate strategy, and regularly monitors – with management – the implementation and effectiveness of the strategic plans. A visionary board also commits focus and attention to the relationship between corporate strategy and any risks inherent in the strategy.
• Quarterly earnings practices: A visionary board expects management to deliver investor guidance with a longer-term bias and in greater detail by identifying long-term value drivers for the company. This helps to incent share “ownership” among the investors the board represents.
• Shareowner communication: A visionary board listens to the concerns of its shareowners, and consistently communicates on long-term vision and strategy.
• Risk oversight: A visionary board proactively and continually sees risk as a board-level responsibility, overseeing robust processes for identifying, managing, and when necessary, mitigating risks to the operations, strategy, assets, and reputation of the company. At the same time, a Visionary Board understands that companies generate profits by taking risks, and encourages intelligent risk-taking that aligns with a company’s strategy.
• Corporate and board culture: A visionary board thoroughly understands not just the business and industry in which a company operates, but also recognises that strong corporate and board cultures are essential to the achievement and sustainability of a company’s long-term value, and therefore diligently seeks to reinforce and build such cultures.

The report serves as a guide for corporate boards to break free from the short-termism that has had a stranglehold on the financial markets. Proactively taking the initiative to become ‘visionary’ is crucial toward repairing the trust and restoring the vitality of markets around the world.

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials.

The organisation is a champion for ethical behaviour in investment markets and a respected source of knowledge in the global financial community.   The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 113,000 members in 140 countries and territories, including 102,000 CFA charterholders, and 137 member societies.

For more information, visit www.cfainstitute.org.