From the November 2002 issue of Investment Advisor • Subscribe!

Good Reading

Worried about market scandals and the condition of

Concerned about the fate of corporations that have behaved not only irresponsibly but criminally, and worried that that's the way it always will be? Concerned about the fate of the planet, and worried that things will never get better? If so, it's time to sit up with a good book. Change is possible, and this month we look at titles that offer suggestions on how and why corporations should change their attitudes and their practices.

Building Public Trust: The Future of Corporate Reporting, by Samuel A. DiPiazza Jr. and Robert G. Eccles (Wiley, 2002), is a call for change in the way corporations divulge information about themselves and the challenges they face. DiPiazza, CEO of PriceWaterhouseCoopers, and Eccles, president of Florida-based Advisory Capital Partners, a provider of advisory services to businesses, offer their analyses on the current state of corporate reporting and its hazards. But they don't stop there. They also offer a detailed plan for reporting corporate data in a way that will give consumers and industry analysts alike a better understanding of companies' challenges and achievements.

The authors argue that transparency, consistency, and even the proper format of reporting have become vital to restoring confidence in the marketplace. They also argue in favor of the use of an Internet-enabled platform for that reporting--Extensible Business Reporting Language (XBRL). This platform, they say, will enable businesses to better meet the challenges of global reporting following consistent standards. In addition, they propose a design for reporting information on a much wider range of topics. In order to accommodate such a diverse collection of data, they have also devised a new reporting system to handle it, divided into three separate tiers: Tier One is classified as global generally accepted accounting principles (GAAP); Tier Two, industry-based standards; and Tier Three, company-specific information.

Each area is handled in depth, with a look at the shortcomings of the current system and how the proposed system can remedy those faults. The authors forcefully address the arguments against implementing a new system. Their suggestions are clear and practical, and their arguments sound. The book also relates cases where regulatory bodies abroad are requiring more transparent reporting and the use of different standards.

Anyone with a stake in corporate reporting, whether as members of a corporation or board of directors, advisors with fiduciary responsibility, or consumers with an eye toward the balance sheet, should be aware of proposed changes such as these and their potential to restore the integrity of the system. Savvy readers in a position to do so may even be able to effect some changes of their own.

Board Governance

Corporate Boards to Create Value: Governing Company Performance from the Boardroom, by John Carver with Caroline Oliver (Jossey-Bass, 2002), is another book designed to effect change in the way companies are run, in order to forestall future catastrophes ? la Enron. The authors assert that it is the board of directors that holds responsibility for how a corporation behaves, and that there has been precious little attention devoted to board governance despite the corporate scandals and the bear market. In fact, they say, boards focus inwardly entirely too much, on achieving results for management, and fail to focus outwardly on behalf of their true focus of accountability: the corporation's owners. The very "nature of board work," they say, is "not management one step up but ownership one step down."

Based on this principle, the authors have devised a system of board governance called "Policy Governance." The system offers new insights into how boards can add value to the corporations they serve, but in order to do that, there is a need to redefine and recast traditional concepts, such as "owner." While such an idea may seem simplistic, they point out that the definition of ownership can vary from place to place and from corporation to corporation. There is the matter of shareholders, but there is also the matter of employees--which in some countries are counted in the category of ownership. They point out, as well, that to some even that definition is considered too narrow, and that stakeholders of all kinds such as communities, creditors, customers, and suppliers must also be counted within the definition of "owner."

Defining a board's job and then designing it to function as an "accountable and effective" leader for a corporation are integral to making that board into a force majeure that can guide a corporation into right-minded business practices and maintain its in fiscal health. The authors point out that boards whose membership has been "decided or significantly influenced by management" are often ineffective in the kinds of hard issues that have faced many corporations of late. Boards must be independent in order to do what they must: govern.

Business and Sustainability

Walking the Talk: The Business Case for Sustainable Development, by Charles O. Holliday, Jr., Stephan Schmidheiny, and Philip Watts (Berrett-Koehler, 2002), is another look at how business can effect social change. While in a way this book has more to do with protecting the environment than with corporate governance, it also has much to do with how a corporation conducts itself in order to create business.

Holliday, chairman and CEO of DuPont, Schmidheiny, chairman of Anova Holding AG, and Watts, chairman of the committee of managing directors of the Royal Dutch/Shell Group of Companies, argue convincingly that business should and indeed must consider sustainability in its plans for the future. Sustainability, as defined by the World Council for Economic Development, is "a process of change in which the exploitation of resources, the direction of investments, the orientation of technological development, and institutional change are made consistent with future as well as present needs." While they acknowledge that their own corporations are not perfect, all say that the consideration of environmental issues and social change is essential to the well-being of future corporate growth. As these issues rise to the fore in other nations, if not the United States, there will be ripple effects on all businesses. Sustainable development, say the authors, is "partly about social justice." But it is also about meeting "the needs and aspirations of the present without compromising the ability to meet those of the future." In a world that has come only gradually to a grudging acknowledgement of the finite resources of the Earth, business must change in tandem with government and civil society. This book offers guidance on how to do just that, through case studies and examples that show strategies that work.

Case studies run the business gamut from detergents and forestry certification to drinking water and carbon fibers as raw materials. Changes in the generation of power, the fit of a company within a community, and the provision of health care to the poor in areas of political unrest all offer opportunities for sustainable development. Marketing the idea of sustainability to consumers is a separate issue; while surveys show that most people want to "buy green," many do not do so consistently. For instance, they may go out of their way to buy clothes not made in sweatshops, but may fail to realize the ecological impact that ordinary automobile antifreeze can have. This provides many opportunities for companies to simultaneously provide that education and enhance their contribution to the welfare of the planet at the same time.

Take Allianz AG, whose Allianz Insurance Company property and casualty arm introduced in 2001 an 'eco-package' into its real estate insurance. Under such policies, when the owner of a commercial property decides to rebuild the premises after a fire, the cost of using more expensive insulated glass units for the windows is covered. Allianz also provides the option to use compensation for a roof damaged in a storm to "partially finance a solar installation." Such measures, unlike the usual policies that guarantee compensation only to restore a building to its original condition, acknowledge that modernization and enhancement of energy efficiency can have an effect far greater than on a single building.

The way that education and transportation have been combined in a project in Brazil is a fascinating example of thinking outside the box to provide education to a growing population. The Caraj?s Railroad, run by Companhia Vale do Rio Doce (CVRD), covers 900 kilometers in the Brazilian states of Par? and Maranh?o, transporting over 800,000 passengers a year. These passengers typically arrive at the train station before their journey anywhere up to two hours ahead of time for trips that can take from four to 16 hours. CVRD has developed an Education on Rails program that begins in the stations and continues in the cars on a wide range of subjects.

The authors also discuss the difficulty of "putting a price on nature." Those in favor of sustainable development argue that the cost of depleting raw materials and natural resources must be considered in pricing products and processes; otherwise, prices are inaccurate and fail to warn the marketplace of approaching critical shortages and inefficient practices. In a chapter titled "Reflecting the Worth of the Earth," the authors address the difficulties inherent in changing from a system that has hitherto largely ignored the values of "environmental assets and services such as a stable climate or rich biodiversity and forest cover." Tactics include trading in emissions credits, developing technologies that would eliminate carbon footprints, and the development of clean energy sources such as solar and wind power. Ensuring that natural resources are properly valued in the manufacture of goods and services helps ensure that poorer countries and population segments are not disenfranchised from the basic necessities of life: clean water and air, and arable land.

Tough times call for tough measures. The actions proposed within the pages of these books are filled with imagination and creativity, and offer solutions to some of the toughest problems we face today.

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