Corporate governance

Corporate governance has attracted a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. The structure of corporate governance specifies how the rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders are to be distributed and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set

Why should I be aware of this?

Corporate governance aims to protect shareholder rights, enhance disclosure and transparency, facilitate effective functioning of the board and provide an efficient legal and regulatory enforcement framework.

In countries where most companies have dispersed shareholding there can be conflicts between the owners of companies (as ‘Principals’) and boards of directors who have effective control over companies and may allow self-interest to influence decision making.

Countries which have companies with more concentrated ownership structures, majority shareholders may significantly influence the board. Consequently, an ‘agency’ conflict arises between controlling ‘majority’ shareholders who may extract private benefits at the expense of minority owners.

How does this affect me?

Poor corporate governance can lead to miscalculation of our business resources and corporate scandals resulting from executive greed. Taking into account the expected fallout from the current turbulent financial markets it is important to retain shareholder confidence. Corporate Governance done in a proper way can bring back focus to this aspect of our business.

All about corporate governance

A number of countries in continental Europe adopt an inclusive ‘stakeholder’ approach in which companies are considered ‘social institutions’ with responsibilities and accountability – not just to shareholders – but to employees and the wider community in general. In the UK and US there is an emphasis on creating wealth for shareholders But in spite of different approaches there is global appreciation of the OECD’s generic corporate governance principles of responsibility, accountability, transparency and fairness.

OECD principles

• Responsibility of directors who approve the strategic direction of the organisation within a framework of prudent controls and who employ, monitor and reward management.
• Accountability of the board to shareholders who have the right to receive information on the financial stewardship of their investment and exercise power to reward or remove the directors entrusted to run the company.
• Transparency of clear information with which meaningful analysis of a company and its actions can be made. The disclosure of financial and operational information and internal processes of management oversight and control enable outsiders to understand the organisation.
• Fairness that all shareholders are treated equally and have the opportunity for redress for violation of their rights.

What can I do?

As a CEO or a part of the senor management of the company you can do the following to improve corporate governance in your organization:

• Schedule regular meetings of the non-executive board members to allow them to exercise “constructive dissatisfaction” with the management team. Collect their views about the performance of the executives and the strategic direction of the company.
• Don’t hide details about the subtle judgments made which may be off the balance sheet. Disclosure can win trust.
• If you are planning any radical shifts in policy, initiate a risk-appetite review among non-executives. They need to understand what the company’s appetite for risk is—and accept, or reject, any radical shifts.
• Check that non-executive directors are independent. Weed out members of the controlling family or former employees who still have links to people in the company.
• Audit non-executives’ performance and that of the board. Keep attendance records and carry out appraisals of the skills of the non-executives.
• In your website include a corporate governance section containing information such as procedures for getting a motion into a proxy ballot.
• Maintain a balance between senior and cautious employee alongside the youthful and visionary ones.
• Accept risks as part of the game.

References:

• What is corporate governance?
• Time to take a hard look at corporate governance
• The new strategic imperative