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December 20, 2002
Social Investment Forum Outlines "Next Wave" of Corporate Governance Reforms
    by William Baue

Additional reforms besides those already on the table will be necessary to create meaningful corporate governance reforms, according to the U.S. Social Investment Forum.

In order to prevent future corporate governance abuses such as those exemplified by Enron and WorldCom, systematic reforms are necessary. Some of these reforms have been mandated by the Sarbanes-Oxley Act and proposed by the New York Stock Exchange (NYSE) to the U.S. Securities and Exchange Commission (SEC). However, these reforms alone will not be sufficient, according to an 11-page statement issued last week by the U.S. Social Investment Forum (SIF), the 500-member national socially responsible investment (SRI) organization. After outlining the reforms mandated by the Sarbanes-Oxley Act and proposed by NYSE and the SEC, the statement makes of series of 26 suggestions that could initiate "the next wave of reform."

"The corporate governance reforms included in the Sarbanes-Oxley legislation and those under review by the NYSE and SEC are good beginnings, but are hardly enough," reads the statement, entitled Statement on Corporate Scandals and Proposals for Reform: The Perspective of Socially Responsible Investors and Proposals for Reform. NewCircle Communications President Joseph Keefe authored the document. "Tougher criminal penalties aimed at punishing a few "bad apples" will not be enough; the fundamental problems are systemic in nature. Nor will accounting and audit reform be sufficient."

The statement advocates the replacement of a business model that benefits a mere handful of shareholders to one that prioritizes all stakeholders. In order to facilitate such a transformation, the document promotes several categories of reforms. These categories include proxy voting disclosure, executive compensation, pension protections, audit reforms, improved corporate governance, and social and environmental disclosure.

For example, requiring real time disclosure to shareholder of all company stock sold by top executive is one of five recommendations in the executive compensation category. There are eight recommendations in the improved corporate governance category, one of which calls for creating corporate governance committees to oversee corporate ethics, corporate governance and corporate social responsibility (CSR).

SIF President and Walden Asset Management Senior Vice President Tim Smith anticipates that some companies may balk at such recommendations, characterizing them as meddling with issues that should be under management's purview. Mr. Smith does not agree; he characterizes such recommendations as democratizing the corporate governance system, a necessary reform.

"I see this statement as a call to action with a specific reform agenda that will be used as a platform for the ongoing public policy debate, but I also believe it is useful to present to companies, as many of them are now setting up corporate governance committees that will be focusing on new agenda items," Mr. Smith told "If we present these recommended reforms to a corporate governance committee of a board, they might say, 'Well we're going to work on some of these issues for short term implementation, and others for long-term implementation, and others we're just going to see as on the horizon as something maybe we don't want to do at all but we need to be aware people are talking about it."

Governance and Public Policy ArticlesThe statement ends with an acknowledgment of the efficacy of free-market mechanics.

"Many of the reforms necessary to prevent further corporate abuses will not require more government programs or increased government funding," the document states. "What is really required is better disclosure so that markets are allowed to work efficiently and regulate themselves the way they are supposed to. Rather than mandating practices, the disclosure model encourages the adoption of specific corporate governance practices and holds companies accountable. Ultimately, shareholders can determine the extent to which company management is properly managing risk and promoting long-term shareholder value, and whether the company is meeting its obligations to its shareholders and to the various publics it serves."


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