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Much Ado About Corporate Governance

When it comes to corporate governance, opinions differ. It has, of course, become a prerequisite to listing but who really owns it, within the corporate context?

When it comes to corporate governance, opinions differ. It has, of course, become a prerequisite to listing but who really owns it, within the corporate context? Ordinarily, the answer to that is “The Board” but realistically speaking, do Board members have the time and ability to make sure that everything is going as it is supposed to, and that everyone is behaving? And if it comes down to that, are said Board members holding themselves to the standards expected of them? Ironically, the need for corporate governance became urgent because Board members weren’t doing what they were supposed to.

A bit of history
A short recap of recent history may be useful: contemporary corporate governance started in 1992, in the wake of the Cadbury Report, and the Cadbury Report came about because several high-profile companies went under – a sure sign that all was not right in the corporate world. When these tanked, investors suffered, particularly the smaller ones. Larger entities such as pension funds and insurance companies were also affected. Corporate governance concepts were thus premised on protecting weaker parties, such as minority shareholders and stakeholders affected by the company’s operations, against the power wielded by Board members and company management, who were primarily concerned with the profitability of the business, often at the expense of others.

Quintessentially, corporate governance is intended to manage the relationships (and conflicting interests) among stakeholders, and to determine and control the strategic directions and performance of organisations. It can align strategic decisions with company values.

What CG is for
Corporate governance is primarily concerned with public listed companies; its main focus is the prevention of corporate collapses such as Enron, Barings, and the Maxwell companies. Indeed, in an environment where everything even remotely considered “corporate” comes under intense scrutiny, corporate governance is fast becoming the cornerstone of the market-oriented economy, and is being increasingly regarded as capable of promoting the efficient use of scarce resources, and the trust of investors. It has even been described as a process and structure for directing and managing a company to enhance its prosperity and corporate accountability, and realise long-term shareholder value without neglecting the interests of other stakeholders.

In recent years, existing corporate governance mechanisms have seen a decline in effectively monitoring and controlling top-level decisions. Corporate misbehaviour, corruption and fraud have eroded investors’ trust and decreased stakeholders’ confidence. When trust and confidence decline, share prices will follow. Investors will not be willing to invest in companies that are corrupt, prone to fraud, poorly managed and lack protection of their rights.

It’s good for business
The link between good corporate governance and positive, responsible economic development is strengthening, and shareholders and stakeholders alike are seeing it as integral to their firms’ success, competitiveness and sustainability. They are more likely to invest or continue investing in entities which are seen to have internationally-accepted standards of corporate governance. At its most effective, corporate governance ensures that the Board of Directors is doing its job; that the firm is operating in an accountable manner, with transparency and responsibility; thereby enhancing its value and justifying the investment of its shareholders.

In today’s business environment, the “noise” associated with corporate governance is growing; stakeholders are demanding more corporate responsibility. The reason for the “fuss” about corporate governance is that corporate activities inevitably create a ripple effect that can multiply consequences in ways never before thought possible, going even beyond the corporate world into the larger environment encompassing regions and other countries. Effective corporate governance can be a reflection of a country’s societal standards.(is this in the right place? Or should it be under the next section?)

Reasons for the fuss
Corporate governance is not new; it existed before legislation and certainly before it became imperative for businesses wanting to be seen as good corporate citizens – but companies grew in size and became more complex entities, giving rise to more complex problems. Human misbehaviour has played a pivotal role in substantially raising the profile of corporate governance in the past two or three decades, as seen in the increase in corporate fraud, management misconduct and corruption – Boards included. Corporate misbehaviour and corruption have brought about financial scandals and brought down companies.

Legal frameworks exist to deal with all this, but corporate governance supplements this framework. It is also a means of self-regulation and something that should be regarded as a concession; companies should see it as the chance to set things right before their power is taken away from them, and they suffer the consequences of all that entails. The list is long: loss of revenue, market position, reputation, public trust, and – particularly if you were in a decision-making role – diminished personal integrity.

Long, drawn-out consequences
While it may not appear obvious at first glance, lax corporate governance has severe consequences which, accumulated over time, can become toxic and destructive. When a company folds because of poor governance, its workforce suffers. Employees may find jobs elsewhere; the firm loses talent and skills while its competitors may benefit. It loses its market position, client base and investors, which it may never regain. All this has an impact on the industrial sector it is in, and this in turn affects the national economy, and affects the perception of investors and other countries, of the national economy.

Once a country is perceived as not having strong corporate governance practices, capital will flow elsewhere, and all enterprises in that country will suffer the consequences. How nations govern their corporations inevitably influences a foreign firm’s investment decisions; firms will invest in nations with good governance. Ultimately, corporate governance is not just about how a firm is run. It’s about running a business honestly; using resources efficiently and not losing talent; about having integrity and using power accountably. It’s about being responsible for what you do.