Trust Enabled™ Corporate Governance



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27th McMaster World Congress
Enhancing Corporate Governance
Hamilton, Ontario, Canada

January 25-27, 2006


Trust Enabled™ Corporate Governance



Alex Todd

President & CEO, Trust Enabling Strategies

16 Rosewell Ave., Toronto, Ontario CANADA M4R 1Z7

http://www.trustenablement.com


Tel. +1 416.487.1497, Fax. +1 416.487.9646
AlexTodd@TrustEnablement.com

This paper is suitable for either oral or poster presentation.




Biographical Notes

Alex Todd is Founder and CEO of Trust Enabling Strategies; a management-consulting firm that specializes in improving business performance by defining business processes that build stakeholder trust and confidence.


Mr. Todd's Trust Enablement™ methods derive from his thought-leadership work that contributed one of the ‘deeper plays’ to IBM's Enterprise of the Future Initiative, a strategic innovation process with a two to fiver year horizon for defining innovative services in support of the company’s Business On Demand strategy.
Mr. Todd holds a Bachelor of Commerce Degree from the University of Toronto and is an IBM Certified Consultant [1].

Trust Enabled™ Corporate Governance



Abstract


This paper introduces the Trust Enablement™ approach to corporate governance, as a natural and harmonizing counterbalance to prevailing risk management practices.

Recent attempts to restore confidence in capital markets have been based largely on risk management practices that place greater emphasis on protecting organizations from further erosion of trust than on establishing higher levels of trust and confidence. Efforts focused on proactively building trust yield better results than recent risk management reactions to mistrust. A complementary, offensive trust and confidence-building strategy is therefore proposed as more effective for reducing director and officer liability exposures and enhancing business value than a prevailing defensive, risk management strategy.

Comparative examples of current governance practices and proposed initiatives when mapped to the Trust Enablement™ model reveal a deficiency in trust and confidence-building governance mechanisms. Trust Enablement™, therefore, serves as a novel framework for defining Corporate Trust Enabling™ Polices that govern reliance by key corporate stakeholders.

Keywords: trust, risk management, corporate governance, governance mechanisms, comparative governance practices, Trust Enablement™ Framework, Trust Enabling™ Policies, Directors and Officers (D&O) liability, confidence in capital markets, implications of Sarbanes-Oxley (SOX) Act


1. Introduction

The purpose of this paper is to propose a novel mechanism for restoring balance in corporate governance, and more broadly management practices, between protecting corporate assets and building corporate value, namely Corporate Trust Enablement™ Policies. Regulatory interventions and our business leaders’ recent, highly publicized inability to protect relying parties from malfeasance have brought into question the validity of generally accepted best practices, based on risk management conventions. Innovative strategies are, therefore, needed to successfully counterbalance[2] controls-oriented, reactive solutions that derive from risk management thinking and serve to confine and conceal business activity, with trust-oriented solutions. The latter empower businesses to proactively and openly collaborate[3] with shareholders, and other stakeholders, to enhance the intrinsic value of the corporation[4].

Summary of content:



  1. Good corporate governance is defined by its ability to build trust with shareholders[5];

  2. Trust is good for business, while low levels of trust are harmful;

  3. Trust for business is tangible; both the conditions for trust and outcomes of trust are measurable;

  4. Trust Enablement™ provides a framework to establish and maintain trust within, and at the frontiers of, a corporate structure;

  5. Trust Enablement™ is consistent with fiduciary law and agency theory, as they apply to corporate governance;

  6. Trust Enablement™ complements and counterbalances prevailing risk management practices in corporate governance, by emphasizing the value of building trust, beyond protecting from a loss of trust;

  7. Trust Enablement™ is directly supported by analysis of how a failure on the ‘demand-side’ of capital markets contributed to recent corporate governance scandals, indicating that an improved system of intermediaries is required to establish required levels of trust and confidence;

  8. Directors and Officers Liability and Indemnity insurance providers are starting to recognize the value of good corporate governance for reducing liability exposures. The future may lie in providing greater incentives for businesses to build higher levels of trust with shareholders and other stakeholders;

  9. Corporations should make specific and tangible commitments to rebuilding shareholder trust and confidence;
  10. Trust Enablement™ provides the framework for enhanced management commitment to shareholder (and even stakeholder) trust and confidence. A cohesive, enterprise-wide suite of Corporate Trust Enabling™ Policies can be directly implemented into business processes and management practices, making trust objectives tangible and practical, beyond simply being desirable.

2. Good Corporate Governance


Good corporate governance[6] is all about trust[7]; shareholders must trust that the board of directors will exercise their fiduciary duties of care and loyalty[8] to the corporation when monitoring, ratifying and sanctioning (reward and punishment)[9] management (the agents of shareholders) decisions. As well, directors must trust that corporate officers are managing the affairs of the corporation competently and with integrity[10]. Investor confidence in capital markets depends on the soundness of this chain of trust. The sole measure, and the definition for 'good corporate governance'[11], should be the level of trust and confidence shareholder have in the board's effectiveness to establish and maintain this chain of trust. Recent evidence suggests that good corporate governance is correlated positively with financial performance[12].




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