Developments in Corporate Governance And The Things You Should Know
Corporate governance is comprised of the principles on which a company bases its operations, from compensation and risk management, to how it manages its workforce and functions as a member of the community in which it operates. Strong, transparent corporate governance reflects a company that makes ethical decisions for the benefit of all its stakeholders, leading to ethical business practices and financial viability. A company’s corporate governance is indicative of its direction and business integrity. Good corporate governance encompasses practically every sphere of management and provides the framework for the firm to attain its objectives.
There are three main models of corporate governance: the Anglo-US model, the German model and the Japanese model. Governance practices, however, are not uniform across industries or nations, mainly because of differing legal structures and varying cultural settings in different jurisdictions. The Anglo-US model is generally stock-market oriented while the German and Japanese models focus on the banking and credit markets. Corporate governance has become something that everyone is interested in, probably because of the rising instances of corporate wrongdoing, and what the public perceives as big businesses getting away with bad behaviour.
The issue of whose interests have to be protected in corporate decision-making, and how this should be undertaken, is gaining traction beyond the board room. Shareholders who may have previously been content to merely notch up returns on their investments are now becoming increasingly concerned about how these are derived. Stakeholders, too, who may have been just bystanders before, are becoming more vociferous. In recent years, a number of countries – Canada, the UK, Netherlands, Denmark, Brazil, Taiwan, India, Malaysia and Philippines among others – have revised their governance codes and improved best practices and disclosure requirements.
The UK Corporate Governance Code, for example, was revised in 2018 to require boards to establish the company’s purpose, value and strategy; France’s Pacte Law requires companies to write their purpose into their by-laws. These measures are intended to increase the board’s responsibility to oversee risk and ensure greater accountability as businesses have become more complex, and the consequences of corporate failure are thus direr. Organisations have to apply corporate governance for sustainability. Corporations have responsibilities not just to shareholders but to employees, customers and the general public.
These responsibilities are now extending from the oversight of not only the organisation’s finances and operations but its human resources, cybersecurity, treatment of the environment, data privacy and customer interaction as well. A robust risk function has become an organisational imperative, and with its emphasis on ‘tone from the top,’ corporate governance’s relationship with Enterprise Risk Management has never been more relevant as it is today. Overseeing risk today pushes boards beyond their traditional monitoring activities; sample practices around the world, as well as changes in guidelines and regulations in many countries, are beginning to reflect this.
One of the main thrusts of corporate governance in the US and Canada, for instance, is gender diversity. There has been active recruitment of women as directors; investors were found to be unlikely to vote for boards with no diversity policies or no female directors. There was also increased focus on environmental and social issues, and their interconnectedness with governance. In the UK, the New Governance Code is pushing for better representation of workforce interests on boards, and greater emphasis on company culture. Mandatory Gender Pay Gap reporting is already in effect; disclosures on the promotion of diversity of gender, ethnic and social backgrounds are also a must.
Austria, too, has a gender quota. Listed companies with more than 1,000 employees must have at least 30% of each gender on boards. The Dutch see corporate culture as a driving force for effective corporate governance, and are taking steps to protect Dutch companies from foreign takeovers. Amendments to the new Danish corporate governance code focus primarily on management evaluation, board and committee composition and remuneration policy. In Japan, quality controls and culture will come under scrutiny because of falsified data from large firms, and there may be gradual improvement of board independence.
Taiwan is looking at improving shareholder rights and transparency through the reform of its Company Act, and improving corporate governance particularly of family-controlled firms. With India’s Kotak Committee Reform, changes to board diversity, board and committee independence, related-party transactions and directors’ remuneration may be made. Boards in the Philippines must now have at least three independent directors, or one-third of the board, and in Australia, boards are becoming more concerned about consumer protection and pay inequality – with more emphasis on transparency and governance to come.