July 13, 2005
Transition from Rules Based Governance to Principles Based is Important
In the rules based world of US law, we have become accustomed to asking for rules and then hiring massive numbers of experts to help find the loopholes. But in this new world of principles based governance, it is a new landscape. This is partly due to Sarbanes-Oxley but also the harmonization of accounting rules between US GAAP and European accounting standards.
We are now moving to a world where the spirit of the law is more important than dissecting and parsing every word to support the position we want to take. The new world order is both simpler and more challenging. Simpler because there are fewer rules when it comes to ethics but more challenging because executives and boards must now exercise judgement around ethics and not just hide behind loopholes.
This is a good change. Everyone complains about the oppressive number of regulations in the US but in the same breath, these same people ask for more rules to clarify what they are supposed to do. You cannot have it both ways. We need to move to more principle based governance with a measured number of rules.
The reason Sarbanes-Oxley has caused so much heart ache is that a rules based society is trying to comply with a principles based set of legislation. The change will happen. It is already happening.
An excerpt from a Forbes article on this topic, is here:
"No longer is it sufficient to design and implement programs that allow executives to report that the company is complying with all applicable laws and regulations. What is now required is an "organizational culture that encourages ethical conduct and a commitment to compliance with the law." Moreover, the "governing authority" (i.e., board) of an organization must oversee this requirement and is responsible for how ethically the company acts.
Some may believe that overseeing an ethical corporate culture is like measuring fog. Precise metrics to measure cultural health have not yet been standardized, but there is plenty of evidence from previously "unquantifiable" aspects of business that it can be done and that substantial benefits accrue to companies that get it right.
Quality has moved from a subjective measure, manifested in discarding defective merchandise at the end of the assembly line, to a rigorous process that begins in the design phase. Likewise, safety is now something that is not the responsibility of managers or inspectors but of every employee. Step on a construction site without a hard hat, and the nearest worker will insist that you put one on, no matter who you are. Companies that learned how to embrace quality and safety have benefited from better products and lower insurance rates, not to mention knowing that they make products they can be proud of, while also ensuring the health and well-being of their workforce and customers.
Creating a culture of ethics offers similar benefits, and leading companies are already building business processes around it. They are training their workers in the principles that animate the corporate code of conduct, and employees no longer enter a dangerous ethical gray area without a guide. They are measuring the feedback they are getting through anonymous help lines to determine where their risks are. They are infusing discussions of ethics into business communications to correlate the principles they espouse with the business that they practice. Finally, they are driving home the message that ethics is additive to the business, not a cost.
Recent studies have shown that good ethical reputations are linked to an ability to attract and retain customers, suppliers and employees and that companies that effectively manage governance can expect percent-point gains in their market valuations. Ultimately, however, insisting on the fostering and strengthening of ethical corporate cultures is how board members can bring real value to the shareholders they represent and protect and strengthen their company's reputation.Dov Seidman, chairman and chief executive of LRN..." for the complete article, click here.
To learn more how your company can comply with Sarbanes-Oxley, both the rules and the principles, see www.issuescentral.com and find out more about the Compliance Playbook(tm) - the cost effective way to comply with the spirit and the rules of SOX.
We are now moving to a world where the spirit of the law is more important than dissecting and parsing every word to support the position we want to take. The new world order is both simpler and more challenging. Simpler because there are fewer rules when it comes to ethics but more challenging because executives and boards must now exercise judgement around ethics and not just hide behind loopholes.
This is a good change. Everyone complains about the oppressive number of regulations in the US but in the same breath, these same people ask for more rules to clarify what they are supposed to do. You cannot have it both ways. We need to move to more principle based governance with a measured number of rules.
The reason Sarbanes-Oxley has caused so much heart ache is that a rules based society is trying to comply with a principles based set of legislation. The change will happen. It is already happening.
An excerpt from a Forbes article on this topic, is here:
"No longer is it sufficient to design and implement programs that allow executives to report that the company is complying with all applicable laws and regulations. What is now required is an "organizational culture that encourages ethical conduct and a commitment to compliance with the law." Moreover, the "governing authority" (i.e., board) of an organization must oversee this requirement and is responsible for how ethically the company acts.
Some may believe that overseeing an ethical corporate culture is like measuring fog. Precise metrics to measure cultural health have not yet been standardized, but there is plenty of evidence from previously "unquantifiable" aspects of business that it can be done and that substantial benefits accrue to companies that get it right.
Quality has moved from a subjective measure, manifested in discarding defective merchandise at the end of the assembly line, to a rigorous process that begins in the design phase. Likewise, safety is now something that is not the responsibility of managers or inspectors but of every employee. Step on a construction site without a hard hat, and the nearest worker will insist that you put one on, no matter who you are. Companies that learned how to embrace quality and safety have benefited from better products and lower insurance rates, not to mention knowing that they make products they can be proud of, while also ensuring the health and well-being of their workforce and customers.
Creating a culture of ethics offers similar benefits, and leading companies are already building business processes around it. They are training their workers in the principles that animate the corporate code of conduct, and employees no longer enter a dangerous ethical gray area without a guide. They are measuring the feedback they are getting through anonymous help lines to determine where their risks are. They are infusing discussions of ethics into business communications to correlate the principles they espouse with the business that they practice. Finally, they are driving home the message that ethics is additive to the business, not a cost.
Recent studies have shown that good ethical reputations are linked to an ability to attract and retain customers, suppliers and employees and that companies that effectively manage governance can expect percent-point gains in their market valuations. Ultimately, however, insisting on the fostering and strengthening of ethical corporate cultures is how board members can bring real value to the shareholders they represent and protect and strengthen their company's reputation.Dov Seidman, chairman and chief executive of LRN..." for the complete article, click here.
To learn more how your company can comply with Sarbanes-Oxley, both the rules and the principles, see www.issuescentral.com and find out more about the Compliance Playbook(tm) - the cost effective way to comply with the spirit and the rules of SOX.
