As part of McKinsey's efforts to exam this issue of managing in turbulent times, we invited web site visitors to submit questions. While we couldn't answer every question, Paul Coombes did provide insights into corporate governance.

Thank you to those who participated.

How does a company evaluate what corporate governance reforms are necessary? What is the best way to go about making them? Answer

Is new legislation the answer to providing sufficient incentives for companies to improve corporate governance and follow more ethical business practices? Answer

How does a company evaluate what corporate governance reforms are necessary? What is the best way to go about making them?

Paul Coombes: The governance context differs widely from one country to another, so it is difficult to make general prescriptions. However, here are four suggested steps: Take a look at the OECD (Organization for Economic Co-Operation and Development) principles of good corporate governance These cover such issues as disclosure, accountability, independence of directors, fairness to all classes of shareholders. The principles provide a bedrock foundation for good governance practice that is applicable globally. Assess the fit between your own company's approach and local best practice, as embodied in the advisory codes that are in place in many markets. Equally, ensure that your own practices are fully in accord with the spirit of local rules on compliance. Conduct discussions with outsiders, particularly leading institutional investors in your company, and possibly financial journalists, to gauge their level of satisfaction with your governance procedures. Embark on an evaluation of your own collective board effectiveness, and the performance of individual non-executive directors, either through self assessment or with support from outside counselors. In light of the above steps, the priorities for any changes to your governance procedures are likely to emerge quite clearly.

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Is new legislation the answer to providing sufficient incentives for companies to improve corporate governance and follow more ethical business practices?

Paul Coombes: The critical incentive for adopting good governance practices is to build trust and confidence on the part of investors. Good governance is valued by the market, as seen in our investor opinion surveys, and correspondingly helps reduce the cost of capital. So, enlightened corporations have a strong interest in building effective and convincing governance practices and constantly innovating in this area to enhance investor confidence and the trust of consumers, suppliers, and relevant local communities. Legislation has a role to play in establishing an acceptable base level of requirements, and a general framework for enforcing compliance of such basic safeguards. Beyond this, advisory codes of practice are much more desirable ways of raising the general level of corporate governance. With the requirement to "comply or explain" they lead to greater openness and yet offer a measure of flexibility to individual corporations. Securing good corporate governance is a never-ending journey; procedures need to evolve as circumstances change. Legislation is a very blunt tool for dealing with this, whereas codes can be more easily fine tuned. Learn more about corporate governance and McKinsey's global surveys on the topic.

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