Corporate governance is part of a complex process involving regulations, guidelines and industry practices designed to monitor and manage the operations of organisations.
It affords a sense of control and predictability to a range of stakeholders, being governments, investors, management, consumers, clients or the community at large.
However, current governance or control mechanisms in isolation essentially only provide a thin veil of control in a highly complex operating environment.
There are a large number of organisations globally that have managed to maintain apparently robust governance structures, right up to the precipice of their own destruction.
Whilst the need for strong corporate governance is recognised by regulators worldwide, there is a growing view that corporate governance practice is not simply about a battle between contending stakeholders, greedy management and ineffectual boards of directors; but extends to the ethos of the organisation and culture of the company and its board.
This emerging view puts as much focus on the performance of the board in terms of culture and character as the traditional reliance on conformance involving governance and control measures.
Corporate governance and control mechanisms tend to focus on the relationship between the owners of capital and the operators of that capital; essentially shareholders and managers, although other stakeholders can also be highly influential.
For governments, corporate governance is about monitoring and managing the relationship between a more complex set of stakeholders in terms of clients, the general community, various government agencies and interest groups. Similarly, Not-for-Profit organisations have a broad constituency of stakeholders including sponsors, the community and clients.
The other important point to note about most governance, compliance or control structures is that they are historical and based on static data recorded at a point in time and thus, are therefore more analogous to driving a car by reference to the rear vision mirror.
Governance sets minimum standards of behaviour that stakeholders would expect should they become involved with an organisation.
The traditional view is that corporate governance arises due to the separation of ownership and control that often occurs in companies, organisations and governments.
Fundamentally, corporate governance is about ensuring the owners of a company – the investors / shareholders – are protected from the potential opportunistic behaviour of managers that can erode the owner’s wealth or deviate from the organisation’s stated purpose.
Governance and control mechanisms are also about maintaining the trust of stakeholders. If stakeholders perceive there to be a robust control structure, they may offer more support and are less inclined to intervene in the operations of the firm.
Apart from the regulatory requirements pertaining to Corporate Governance, an organisation can benefit from a strong foundation via the fostering of a resilient organisational culture, enhancement of a corporation’s public image and via a dramatic reduction in the costs of capital for the business.
The world is littered with public sector and corporate examples where governance structures have failed dramatically.
A recent US study on the impact of Sarbanes Oxley, arguably the world’s most stringent and costly governance regime, concluded that of 400 accounting scandals in the US in 2002, every single firm was Sarbanes Oxley compliant.
This point can be further illustrated by questioning whether firms like Enron, HIH, Babcock and Brown, Lehman Brothers and Bear Stearns had compliant programs, audited operations and accounts and risk management structures. They did and these systems ultimately did not protect them.
Clearly, a world without governance and control structures would not bear thinking about, but a total reliance on their ability to provide comfort over organisational operations is simplistic and perilous.
Governance and control structures are necessary and beneficial when applied properly. However, they are essentially only one part of an overall solution.
Corporate Governance, within the developed world, has come to be recognised as an important component of business, and regulators within Australia, the US, Canada and the UK have all developed standards, regulations and best practice guides.
Whilst some jurisdictions, such as the US, have favoured a legislative approach; within Australia regulatory bodies have favoured a principles-based, comply or explain approach. Whilst specifics vary between countries, and for different organisational forms (e.g. Public vs. Private companies), the fundamental recommendations of each body are essentially the same.
The following are a collection of principles of good corporate governance and associated practices, as outlined by the Australian Stock Exchange (ASX), which constitute a practical guide to meet many of the recommendations and principles outlined by regulators, with the aim of enhancing investor confidence in a firm’s governance practices.
The following 8 ASX principles are also reflected in a host of legislation, guidelines and practices throughout the developed world and serve as a guide to current best practice. Moreover, while these principles relate specifically to listed firms, the general thinking is and should be reflected in government departments and Not-for-Profit organisations.
Principle 1: Lay solid foundations for management and oversight
Companies should establish and disclose the respective roles and responsibilities of board and management.
Principle 2 – Structure the board to add value
Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.
Principle 3 – Promote ethical and responsible decision-making
Companies should actively promote ethical and responsible decision-making.
Principle 4 – Safeguard integrity in financial reporting
Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.
Principle 5 – Make timely and balanced disclosure
Companies should promote timely and balanced disclosure of all material matters concerning the company.
Principle 6 – Respect the rights of shareholders
Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.
Principle 7- Recognise and manage risk
Companies should establish a sound system of risk oversight and management and internal control.
Principle 8- Remunerate fairly and responsibly
Companies should ensure that the level and composition of remuneration is sufficient and reasonable, and that its relationship to performance is clear.
It would it be difficult for any group to argue against the principles and what they are seeking to achieve. However, the ability to comply with these principles and the direct correlation with an ethical well managed firm is tenuous.
Whilst the need for strong corporate governance is recognised by regulators worldwide, many now believe corporate governance practice is not simply about a battle between contending stakeholders, greedy management and ineffectual boards of directors; but extends to the ethos of the organisation, the culture of the company and its board.
This emerging view puts as much focus on the performance of the board in terms of culture and character as the traditional reliance on conformance, involving governance and control measures.