Good governance or cheap makeover?

New legislation aims to keep the business scandals of 2002 from repeating. But network vendors may still be glossing over the need for better corporate governance.

Corporate governance is becoming the business phrase that defines early 2003, just as the Internet bubble buzzed 2001; New Economy, 2000; and pre-IPO, 1999.

Prodded by federal legislation and new rules from the Securities and Exchange Commission (SEC) and its financial arm, the Financial Accounting Standards Board, corporations have scrambled to remake themselves in the image of honesty. One such trend is the creation - or revitalization - of a board-level corporate governance committee, a tactic of such Network World 200 companies as Computer Associates, Microsoft, Sprint and Sun.

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Corporate governance is becoming the business phrase that defines early 2003, just as the Internet bubble buzzed 2001; New Economy, 2000; and pre-IPO, 1999.

Prodded by federal legislation and new rules from the Securities and Exchange Commission (SEC) and its financial arm, the Financial Accounting Standards Board, corporations have scrambled to remake themselves in the image of honesty. One such trend is the creation - or revitalization - of a board-level corporate governance committee, a tactic of such Network World 200 companies as Computer Associates, Microsoft, Sprint and Sun.

The idea of a board-level governance committee is not new. IBM formed one in 1998. But such committees are gaining teeth as nearly all companies scramble to resculpt their boards to comply with the Sarbanes-Oxley Act, pushed through Congress and signed into law July 30, 2002, in response to last year's billion-dollar accounting scandals and bankruptcies. This law's sprawling attempt to establish good corporate governance covers everything from the definition of independence for independent directors to rules for auditing quality.

Governance committees theoretically are being handed the reins of honesty, although each might have different goals. While Microsoft's governance committee directs compliance with the legal orders that the antitrust judgement has imposed, CA and IBM governance committees oversee board structure itself. CA's committee is tasked with finding directors, reviewing board performance and coordinating the CEO evaluation process, largely in an attempt to clean up the company's longtime bad-boy image. (A separate committee oversees the CEO compensation plan, an area that landed CA in trouble in 2000.) Likewise, IBM's governance committee reviews the qualifications of potential directors and compensation for outside directors, and handles the significant issues pertaining to corporate or public responsibility, such as workforce diversity or environmental impact. Best practices require that governance committees be staffed with a majority of independent directors.

The question remains whether any of this activity is making IT companies more honest. Board-level corporate governance changes are useful to the extent that they provide obstacles to abuses, says Warren Dennis, litigating partner in the corporate governance group for New York law firm Proskauer Rose. But that alone might not be enough, he adds. "The mythology says boards run the company, and management is accountable to the board. But the practical day-to-day operations are run by management, and, consequently, management runs the board," he says.

Loud proclamations of new governance practices could be nothing more than an act. Governance experts agree that badly governed companies, while perhaps complying with the letter of the law, likely will stay badly governed. Conversely, well-governed companies likely will remain so.