Newswise — Corporate governance has been in the forefront of public debate lately, thanks to such high profile events as options backdating, inflated CEO compensation packages and efforts to augment shareholder empowerment. These larger scandals have implications that reach beyond the boardroom into every aspect of an enterprise. Ultimately, the transgressions take their toll on all of society, according to Stuart Greenbaum, former dean of the business school at Washington University in St. Louis.
"Corporate governance has to do, first of all, with values and integrity," Greenbaum said. "Most people have thought about in it a narrow frame and tend to focus on the more glamorous issues like executive compensation as if that were the only domain of corporate governance."
But corporate governance touches every aspect of a firm's operations from marketing and operations to logistics and global trade, Greenbaum said. Corporate governance also influences how labor relations are handled and what kind of investment decisions a company makes.
Greenbaum pointed to the flap over the Caremark-CVS merger as an example of how poor corporate governance can manifest itself.
"Caremark is seeking to benefit its managers at the alleged expense of the shareholders," Greenbaum said. "Various interested advisors have counseled against the CVS transaction and three shareholder class action lawsuits have charged Caremark's directors with dereliction of fiduciary duties."
While the Caremark-CVS deal represents one aspect of corporate malfeasance, the issue of executive compensation reveals another way the issue impacts a company and, ultimately, society as a whole.
One way that people think about executive compensation is in terms of the ratio of pay to the top executives relative to all the other workers. That gap has become wider and wider," Greenbaum said. "It's always been an article of faith that you have to win the hearts and minds of all employees — especially those who face your customers. If they interact with clientele with a sense of alienation to the company because of the disparity between their pay and the top executives, then you're going to lose."
Another outcome of executive compensation being disproportionately large is a deterioration of values within the company. This can result in poor service to the customer and self-serving management decisions on the part of the executives.
But what's interesting is that the pay gap doesn't only foment alienation within the company, Greenbaum said; it ends up spreading throughout society.
"When you get greater and greater concentrations of wealth and the disparities between rich and poor gets sufficiently wide, a slew of social repercussions emerge," he said. "The willingness to share values deteriorates. Just consider what's happening now in the United States, where you have 46 million people without health-care coverage. That's a manifestation of these wider disparities in income and wealth."
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