As World Finance has drawn up the winners of the Corporate Governance Awards 2012, it’s apparent that some businesses have thought that tough financial conditions mean they can slacken their standards. This is a short-lived illusion that has caught out a plethora of high profile companies and individuals, whose apparent lapses in standards and ‘profits at any cost’ attitude has lead to financial damage and public embarrassment.

The Leveson enquiry, being conducted by the UK Government into press standards, has been a powerful example of how an entire industry can come to be scrutinised for a decline in moral standards. The enquiry was instigated by allegations of criminal activity by the News of the World newspaper, through the interception of various private messages from mobile phones. Though the News of World was closed upon confirmation of the accusations, the enquiry has probed the activities of those involved and the wider press industry, turning the microscope around on an industry more used to doing the examining.

Pressing matters
Leading proprietors, editors and media figures have been summoned to appear in front of the enquiry, ranging from local newspapers to media moguls such as Rupert Murdoch, CEO of the News of the World’s parent company News Corporation, to explain their activities. For some, this has required them to explain their compliance with unethical – and occasionally criminal – press conduct. Under pressure of questioning, even the highest ranking media figures have been exposed as either naïve to the operations of their companies or lacking in the area of ethical practice when in the pursuit of profit.

The enquiry has painted a devastating picture of leading media figures enjoying corporate lifestyles from their businesses without the corporate governance or responsibilities to accompany them. Striking comments from the enquiry include those of made by Richard Desmond, owner of the Star and Express groups of newspapers. When pressed on how his papers considered their ethical standards he answered “We do not talk about ethics or morals because it’s a very fine line and everybody’s ethics are different”. Clearly this is symbolic of the avoidance of important issues by a major newspaper operator because, one may imply, it gets in the way of profits.

The effect of the enquiry has been a trial by fire form of corporate governance. James Murdoch’s appearance at the enquiry, where he heavily denied knowledge of ethical lapses and failed to recollect improper payments by newspapers under his control, was perceived as so poor by the public that it resulted in significant pressure from the shareholders for him to resign the various directorships he held, with the result of him leaving the boards of newspapers The Sun and The Times.

What the Leveson Enquiry has exposed has been the shocking lack of transparency that exists within some media operations. Once shareholders have become aware – and often in a very public manner – how newspaper and media companies operate they have often exercised their rights to instigate change.  As the UK press organisations have revelled in reporting each others’ ethical failings, a far more extravagant breech of corporate governance has been taking place on the other side of the world.

Shareholder fury
Japan has been rocked by the unfolding story at Olympus Corporation, where $1.7bn in losses has been discovered in the company accounts, having been concealed for as much as two decades. The scale of the losses has only been surpassed by the audacity of Olympus’ board in dealing with the revelation. When irregularities in payments by the company were brought to prominence by then-CEO Michael Woodford, he was quickly sacked by the Olympus president and board, citing a ‘culture clash’. Share prices dropped by a fifth as a result, increasing pressure to examine the allegations further. The Olympus directors meanwhile attempted to fight Mr Woodford’s attempts to lobby shareholders to regain control of the company, even threatening to sell off parts of the company to prevent Woodford getting control. Before this could happen, the authorities moved in.

What came to light was the revelation of various bogus payments to advisors that attempted to cover the trail of the losses. The investigations implicated the management core of the company, with current and ex-directors, as well as company, presidents facing allegations of involvement. Olympus has since lost half of its share value, with the threat of delisting raised as a strong possibility if it failed to cooperate. It has complied with this and at present stands to sue 19 members of senior management.

With the implication of management made clear, major shareholders are now pushing for a new board to be elected. Woodford, who abandoned his attempt to regain control of the company and is now suing for unfair dismissal, has also argued that the slate must be wiped clean if Olympus is to survive. “If corporate governance is to mean anything in Japan, and for those who care about the future of Olympus, the only way forward is an entirely new board of directors untainted by the past scandal”. Such a tremendous change in management is a fitting end to such incredible deception.

Such outlandish abuses of corporate governance are, thankfully, still rare. Company executives though continue to make decisions contrary to the interest of both companies and shareholders. In particular, the area of executive pay remains a huge stumbling point for many large organisations, where executives still seem to want rewarding even when performance has been lacking.

Banking
The Royal Bank of Scotland has been a very public target of hate in this area. The bank is now majority owned by the British Government following near collapse in 2008 after huge debt levels required a bailout loan of more than £45bn. In spite of this, the former CEO Fred Goodwin walked away from the disaster with a pension of over £8m, though half of this was eventually handed back. The bank has since struggled to recover, only recently posting profits of £2bn. Its executives have continued to demand large salaries and remuneration deals despite the share price falling by around 40 percent over the past year.

RBS CEO Stephen Hester was offered a bonus in excess of £1m but turned it down after a period of sustained media scrutiny. This followed news that 3,500 staff were to lose their jobs in a fresh round of redundancies as a result of the bank’s financial situation.

It’s not only poor performing companies that are facing criticism for executive pay. Profitable companies have also come under fire for decisions that appear to benefit the board but not the workers. Unilever’s decision to end the company’s final salary pension scheme faced extreme criticism from staff and the press. Unilever had already raised the amount workers had to contribute to their pensions to deliver final salary pensions, despite the company itself having taken a taken a ‘holiday’ from making staff pension contributions for the seven years up to 2002.

The closure occurred as Unilever’s CEO Paul Polman was set to receive a £1.45m bonus along with a separate £300,000 contribution to his pension. Even if profits are rising, the best operators in corporate governance reward employees at all levels for the success of companies as a manner to spur a company on to continue strong performance, as opposed to just those on the top rung.

The distaste for excessive executive pay has been recognised by large and major shareholders who are showing increasing appetite to intervene at a senior level when it is perceived that corporate governance policies are not up to standard. Norges Bank Investment Management (NBIM), the manager of the $550bn Norweigan Government Pension Fund, took the step of filing for proxy access at six US companies in which it invests to increase its shareholder rights to influence corporate governance proceedings by directly putting forward its own candidate to the board.

The companies NBIM aims to increase influence on are predominantly focused in the area of financial services and banking, though the specifics of how it is felt these companies have failed in their corporate governance responsibilities are not known. The fact that a large shareholder has very publicly implemented its own investment is bold. Its one that NBIM has promised it will stay committed to even if its action is unsuccessful. Anne Kvam, global head of ownership policy at NBIM, said: “We will continue to identify companies with unsatisfactory performance”.

Other sizable investors have also demonstrated their commitment to ensuring good corporate governance. In January of this year, BlackRock Inc, which has assets of $3.5tr invested in over 2,400 companies and sent a letter to 600 companies in which it invests requesting the adoption of policies that favour and engage shareholders. The group also announced the creation of a 20 strong team to monitor the corporate governance situation of its investments. Michelle Edkins, head of the global corporate governance and responsible investments team, reiterated the importance of corporate governance in generating profits upon the announcement of the news: “Good quality leadership by boards and good quality execution by management leads to better performance by companies over time”, she said. Edkins also downplayed the importance the role of remuneration has in achieving results, targeting better decisions at board level as a way of ensuring better results. This quality of strong board leadership was also an attribute that was assessed when deciding the winners of the Corporate Governance Awards and is crucial in ensuring sustainable profits.

If the propensity for large investors who have formerly taken a passive role to now show an active interest in board level activity has caused concern at some companies, then it is long overdue. The global economy is still recovering from a banking crisis created by poor investment decisions from which many of the leading actors walked away without incident. The message is that their action is now further under scrutiny and failure will not be rewarded. Rewards should however be given to those who engage with corporate governance principles, making intelligent decisions at board level that considers both shareholders and staff. The Corporate Governance Awards provide recognition to the companies who have shown these principles to be a tenet of their operations already. Those that can’t demonstrate this should be wary; scrutiny will come.