In the aftermath of Enron, WorldCom, Global Crossing, et al, what once was a management backwater has suddenly become recognized for its true importance—and even kind of sexy. I am talking, of course, about corporate governance. Numerous groups, including Harvard Business School (this initiative led by Jay Lorsch) and the law firm of Sidley Austin Brown and Wood (led by Tom Cole), have weighed in on this issue. This article benefits heavily from both of these.

In the past, corporate governance was one of those things that was viewed as a necessary evil, but not something which necessarily demanded a lot of time or attention by Directors or management. Over the past year, it has become clear just how crucial it is to have good systems in place.

The public’s perception is that the watchdogs—auditors, Boards, securities analysts, rating agencies, attorneys, the SEC—have failed; that the risk-reward dynamic has been out of balance, with too much money being made through bad behavior with little perceived downside; and that other behavior—including loans to executive officers and Board members, executive compensation levels, and executive trading during 401(k) blackout periods--is “outrageous.”

What should be done? The SEC, as we all know, has been ineffectual in much of this. Harvey Pitt, the outgoing chairman who was hailed by most when he was appointed to the position in 2001, came to symbolize the conflicts of interest which contributed to many of the corporate debacles of the past year. Hence, Congress stepped in with the Sarbanes-Oxley Act (SOA). In addition, the New York Stock Exhange (NYSE) has proposed a number of changes to ensure the companies listing stock on this exchange are acting in the best interests of shareholders.

SOA offers solutions for the issues that have surfaced with each of the corporate scandals. With respect to auditors, it bans most non-audit services for audit clients, requires engagement partner rotation, requires CEO and CFO certification of financial statements for the 1,000 largest companies, and creates a new oversight body. Note that the process of appointing the chair of this group was what finally did Mr. Pitt in. Boards must become more independent, and loans can no longer be made to Board members or executive officers. Conflicts of interest relating to securities analysts will be studied and addressed. Likewise, rating agencies will be studied to ensure appropriate independence. Responsibilities of corporate counsel will be clarified. The SEC will require new corporate disclosures, such as off-balance sheet transactions, waivers of code of ethics provisions, and “pro forma” earnings. Other behaviors including insider trading and foreign reincorporation also warrant changes.

In light of SOA, the NYSE, and other regulatory changes and oversight, most corporations—both public and private—are working to adopt new standards and ensure that they are complying with the letter as well as the spirit of these changes. Perception, as they say, is reality, and the perception of honest dealing and working in the best interests of shareholders is crucial in the market place. Those who choose to disregard this do so at their own peril: capital markets and customers will speak loudly.

Molly began her career in the late seventies with Ernst & Whinney, where her audit clients included financial institutions, high technology companies, and consumer products. Next, she spent six years in various financial roles with Coca-Cola followed by six years with the Bank of Montreal. A graduate of Wellesley College and The Harvard Business School, Ms. Baskin brings a diversified financial and multi-industry background to our practice. A resident of Chicago, she freely gives much of her time to a number of charitable causes and is a member of the Board of Directors of Nasdaq-traded American Capital Strategies, Inc.