Corporate Governance: How to Improve?
Corporate Governance (CG) generally refers to the system of rules, practices and processes by which companies are governed. This includes the rights and responsibilities of all the entity’s stakeholders, and is aimed at ensuring that the interests of everyone – shareholders, management, employees, suppliers, customers etc – are protected. The board is responsible for ensuring that the company is guided by the appropriate CG rules and policies; these are based on four principles: accountability, transparency, fairness and responsibility. In today’s business environment, however, CG has become more about balancing economic and social goals, rather than making a profit.
The scope of CG is quite broad and generally encourages a trustworthy, moral, ethical environment in which to carry on business. It simultaneously guides the conduct of the organisation’s people, including board members, while providing direction to the firm. It is the responsibility of the board to ensure that the firm holds to ethical practices while it operates, and creates value in a sustainable manner. In an environment that is at best uncertain, and at worst volatile, this can be very challenging as CG needs to be immersed in organisational culture and accepted across the organisation for it to be truly effective and not just another tick-the-box exercise.
But what constitutes good CG, and why should organisations be concerned about it? Each of the four principles of corporate governance have an impact on board decisions, and each requires the right data and application to be effective. Accountability, for instance, means being proactive about making good decisions, understanding and taking ownership of risks. Transparent processes support decision-making with accurate and reliable information. Dealing with stakeholders fairly also makes good business sense; people will think twice about investing in a company which treats some people better than others.
Good CG is carefully planned, audited and implemented in a manner which is transparent, accountable, fair and responsible, and in the best interests of all stakeholders. Being able to present good governance and accountability improves investors’ confidence in the firm and supports a more positive public profile. Bad CG, on the other hand, causes companies to fail. The 2008 Financial Crisis and the Enron Scandal are two examples of how bad CG created unnecessary and uncontrolled risk and, ultimately, systems failure. The 2008 Financial Crisis was caused by banks issuing bad loans without doing proper risk analysis and due diligence, ignoring warning signs and finally causing recession.
Analysts still consider Enron as the representation of CG failure at every level. Every fraudulent practice, contravention of codes of ethics and deceptive business behaviour came to light when it broke, demonstrating how a lack of oversight allowed senior management to take advantage of their positions unethically and illegally. Enron finally collapsed due to its own deceit but repercussions can still be felt in California to this day because of the firm’s involvement in power generation for the state. The consequences of bad CG are dire but good CG takes a lot of effort, and it helps to know what to look out for.
Organisations should, first and foremost, learn how to leverage the data derived from public opinion, news articles and what their stakeholders are telling them. There are IT and data management tools to help them with their analysis. They should also manage stakeholder perceptions, and that means managing public opinion. The data and information thus derived helps them understand where they stand, and what their biggest challenges are. From here, the appropriate corporate strategy can be formulated, policies established, and risks mitigated. Companies which learn how to strategise based on accurate data and are transparent, accountable, fair and responsible, will avoid bad governance.