The Buck Starts Here: GCs should be advocates for good corporate governance.

Even a casual glance at recent business news makes one thing abundantly clear: Corporate governance is back under the microscope. With that attention come new challenges and opportunities for corporate legal departments.

In some ways, we're ending the decade much as we started it. As Enron and other companies collapsed in 2001 and 2002, the corporate legal community adapted to Sarbanes-Oxley and similar legal changes. To the extent it appeared during the past couple of years that a respite was emerging, the events of recent months have laid that thought to rest. Confidence in the business community has tumbled once again, and a new wave of governance issues is quickly emerging.

Like it or not, the business community needs to address these issues quickly and proactively. Doing so is an important part of a new test we must pass to help restore public confidence and solidify the foundation for economic recovery. If we fail, it's likely that less balanced requirements will emerge through legislation.

Many of the substantive issues fall into two categories. One is executive compensation. At Microsoft, we've increased obligations for executives to own company stock. We've added stronger policies to claw back executive compensation in circumstances that involve restated financial or nonfinancial metrics, even if no improper conduct was involved. We've ensured the independence of the consultant to the board's compensation committee. And we're considering proactive steps relating to shareholder "say on pay."

Overall the goal is to align executive compensation with steps that best promote long-term shareholder value. At one level this is challenging. Capital markets are prone to unforeseen fluctuations, especially in the short term. But shareholders will likely benefit in the long run from policies that reward executives for acting with integrity to generate long-term revenue and operating income growth.

The other big topic relates to shareholder rights more generally. Microsoft has adopted majority voting standards for director elections. We're proposing amendments to our articles of incorporation to enable shareholders to call special meetings. And we're promoting greater transparency and engagement with shareholders, both by meeting proactively with some of our largest shareholders on governance issues and by addressing governance issues on our blog.

Our goal is to be both deliberate and proactive in pursuing good governance. At the same time, we don't believe it's sensible to adopt new policies or practices simply because a particular set of shareholders favors them or our peers have implemented them. Our board looks carefully at company circumstances and shareholder needs to tailor governance practices for Microsoft.

There are more than 12,000 public companies in the U.S. Each is different in its stage of existence, its competitive position and the strategies it pursues to maximize shareholder value. Boards need flexibility to tailor arrangements so they can be the most beneficial to a company and its shareholders.

Ultimately, it will be up to Congress, the president and federal regulators to determine how much flexibility the business community will retain. Only time will tell. But the business community will likely have a stronger voice in Washington if it takes proactive and responsible steps now to address reasonable governance needs.

When it comes to the governance of public companies, the buck stops with the board of directors. But the board frequently looks to the general counsel and the legal department to generate ideas and to assess and refine specific proposals. We serve the company and shareholders best when we are advocates for good corporate governance. In that sense, the buck starts with us, and it's important for us to keep moving forward.

Contributing Author

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Brad Smith

Brad Smith has nearly 20 years of leadership experience in the web consumer, enterprise software and communication service provider industries, spanning sales and marketing, product...

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