Corporate Governance: It’s Not Just About The Codes

Found in more than 140 countries today, codes of corporate governance were originally developed to complement the regulations already existing in their respective jurisdictions, in the areas of corporate law, regulations and governance. They were fairly flexible so as not to stifle business, yet strict enough to keep organisations responsible and accountable – in keeping with the definition of corporate governance as the rules, practices and processes that direct and control a company. Corporate governance frameworks, guidelines and best practices essentially, amongst others, defines who has the power to make decisions in the firm, and the accountability that comes with it.

This is fundamental to the running of the company, so that the interests of stakeholders – which include its shareholders, employees, suppliers and clients, and the community in which it operates – are taken into consideration. Effective corporate governance translates the company’s strategy, formulated by its Board and senior management, into workable procedures and processes that grow the company, increase its financial viability and adds to its value. But in the wake of corporate scandals and financial impropriety with devastating consequences in recent years, the way companies are run has been increasingly in focus, amid calls for more transparency and corporate integrity.

There is growing awareness that ethical decision-making is integral to keeping businesses sustainable, which allows them to build value for their investors and remain competitive in the long term. Stakeholders have been growing more vociferous in their demands for greater transparency and accountability. Codes of corporate governance actually encourage stronger commitment to corporate accountability through their guidance in the areas of disclosure, stakeholder and minority shareholder relations, Board responsibilities and the role of management. Most codes today have some form of the “comply or explain” provision.

This allows some latitude for organisations which may not be able to adhere completely because of differing circumstances such as the lack of expertise or resources. The aim of codes of corporate governance is to improve the engagement between the Board, management and stakeholders so that the interests of as many parties as possible, are considered in the development of the business. While codes are sometimes viewed as just another tick-the-box exercise, it is worth noting that the development of corporate governance codes has matured over time. This has given rise to discussion within industries themselves about what aspects should be more regulated, and where more flexibility should be applied.

In the case of Zimbabwe, its Corporate Governance Code which was introduced in 2015, augmented outdated colonial-era legislation, besides supporting corporate governance. Since its introduction, research has shown that its application has generally improved companies’ financial performance. In Albania, on the other hand, the Corporate Governance Code was developed to help businesses cope with the economic crisis persisting in Europe, and comply with EU and international standards of shareholder protection. The Code has since become a best-practice reference for unlisted companies although compliance is not mandatory; it has helped them design best-practice frameworks that exceed legal requirements.

Other environments may dictate different reasons for the development of a Corporate Governance code. For instance, the Brazilian Corporate Governance Code’s main objective is to improve corporations’ access to capital. Ethics figure prominently in all codes; one of the key issues with ethics in organisations is avoiding conflicts of interest. But ethics is not something that is easily taught, and although codes may specify many aspects of ethics, the standards that are adhered to at the end of the day reflect how individuals perceive what is ethical and what is not. Again, many codes only require voluntary, not mandatory compliance – which leaves room for manoeuvring.

How Corporate Governance is perceived by an organisation, and its response to the direction given by a code, depends on the organisational culture in place and the way in which the firm approaches risk. The firm’s corporate governance framework underpins its attitude to risk and how it intends to manage risk at different levels. Risk management is most effective when it is integrated into the company’s management and governance processes, and not when it is treated as separate from them. Here, risk assessment, which is part of business strategy and planning, can provide the information integral to decision-making.

The same information may play a part in supporting good governance processes as well. Because overall risk management is the Board’s responsibility, corporate governance becomes part of the risk management process and vice versa. Many management experts opine that risk management is actually integral to good corporate governance because of its ability to “close the loop” between the strategy developed by the organisation’s Board, and its day-to-day operations which are the province of management. Again, the organisation’s risk management system provides the data which informs the decisions that need to be taken by the Board.

Corporate governance and risk management have a somewhat symbiotic relationship which may be immediately obvious internally but adherence to a code has the effect of announcing the intention of ethical corporate behaviour to a wider stakeholder audience, such as consumers, governments, advocacy groups and unions, besides shareholders. This may have a positive effect on the purchasing decisions of prospective customers, and new investors. These stakeholders may consider such adherence a compelling enough reason to continue their support of the organisation, as they see it as a concerted effort at transparency, accountability and good governance.

This kind of public opinion will go a long way in shoring up the organisation’s credibility, and increase investor confidence in the business. Stakeholders will be of the opinion that the firm is putting social concerns, ethical practices and transparent corporate conduct ahead of profits.

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