CORPORATE GOVERNANCEThe Oxford English Dictionary defines ‘governance’ as ‘the act, manner, fact or function of governing, sway, control’. ‘To govern’ is ‘to rule with authority’, ’to exercise the function of government’, ‘to sway, rule, influence, regulate, determine’, ‘to conduct oneself in some way; curb, bridle (one’s passions, oneself)’, or ‘to constitute a law for’.
Governing is, therefore, a whole range of actions, initiatives and response patterns – from rule through influence to self-control and self-regulation. By inference it includes ‘driving’ as well as ‘steering’. Therefore, in seeking to define governance and the purpose it is to acheive, it is necessary to give adequate consideration to its antitheses – ‘freedom’ and ‘individualism’. Governance as such has been largely taken for granted in the past. Something that does not require a systematic and detailed analysis, ‘efforts’ or ‘commitment’ of resources. For most of human existence governance has been imposed on the majority by a small elite, this form of governance depended on curtailing the freedom of the ruled in order to maximize the power of the rulers.
The monopolizing of power by rulers made it virtually impossible for defects in governance either to be recognized by the ruled or to be challenged by them. Governance has gone by default since regimes did not share decisions with their subjects but left them to suffer the consequences of failure. In more recent times the growth of democracy together with the waning of communism and other extreme regimes has led to increasing concern at undue concentrations of power and its misuse. The loss or depreciation of long – accepted models has created intellectual turmoil and a search for better processes of governance.
Thus emerged the modern concept of governance based on the foundation that untrammeled personal freedom is akin to lawlessness. Such an employment of personal freedom requires a strict internal discipline or self – governance that is rare. If we admit the concept of original sin, we are faced with the need for a code of morality and a process of self – governance. As Geoff Mulgan suggests ‘morality is a word that can be notoriously abused’. Thus making self – governance an imperfect art and a shaky foundation for the governance of ‘ groups ‘. As corporate’s realised this, new models of governance came to the fore.
Muller defines governance thus: Governance is concerned with the intrinsic nature, purpose, integrity and identity of an institution with a primary focus on the entity’s relevance, continuity and fiduciary aspects. Thus Governance involves monitoring and overseeing strategic direction, socioeconomic and cultural contexts, externalities and constituencies of the institution. Thus, the primary goal of governance is making sure the right questions get asked at the right time, at the right place, ‘by’ the right persons, ‘to’ the right persons and in the right manner. It is not a coincidence that the worst corporate performers are the ones that had once been so securely on top that they stopped asking questions. Governance is usually delivered through an agreed constitution, through a complex web of customs and practices, underpinned by a shared system of ethics, to a range of stakeholders from the shareholder to the customer in that institution.
Styles of governance vary depending on the nature and size of the body concerned. At one extreme is the rule-based style adopted by public sector bodies, which may be concerned with conformity rather than performance. At the other extreme are the churches and clubs where governance is based on trust. Most corporate bodies have an amalgam of both trust and rules in appropriate proportions. The Logic being that trust can only work with open governance.
The basic prerequisite to achieving successful and effective governance is the establishment of certain criteria for systematic governance. As a minimum these are likely to be:1. the identity of the body2. definition of its purpose3. how the purpose is to be achieved4.
membership criteria (both explicit, such as shared interests, and implicit for example shared values)5. how the body is to be administered6. how the body relates externally7. how success is measured8. termination arrangementIn practice the constitutional details of most organizations will be more complex , interrelated and overlapping, but the basic elements need to be present in order so as to permit the organisation to function.
Thus once the foundation for governance has been laid it is very important to address the heart of the issue of governance, which is the tension between achieving the objectives of the organization and the fulfillment of the personal objectives of its members and other stakeholders. Every relationship between individuals requires some trade-off of their separate interests. In healthy relationships these trade-offs are negotiated openly, explicitly or tacitly, and the bargain is kept. Where the trade-offs are not recognised, or the bargain is imposed from one side or is undermined unilaterally by stealth, there can be no healthy relationship. This process is at the heart of governance.
Stakeholding is, basically about ownership. In Company Law it belongs exclusively to ordinary shareholders; other classes of shareholder have lesser rights to reflect the lower risk attaching to their investment. But in an organisation ‘stakeholding‘ implies differently for different interest groups. For the directors it can be seen as the right to secure tenure and to deploy the company’s assets as they see fit. For employees it can be about having a safe job and prospects to advancement, which they may wish to protect by membership of trade unions. For customers it can be about the right to demand outstanding service for an economic price; for suppliers and distributors it can be about a stable and profitable trading relationship, for government it is about providing sufficient jobs and paying all dues and taxes without problems or delays.
For competitors it is about sharing a marketplace and protecting it from new entrants. A peculiar category of stakeholder which is distinct from company’s suppliers in that their relationship with the company is to some extent mandatory. Companies are required by the Companies Act to appoint an auditor and are obliged by custom and practical need to nominate bankers and solicitors. Auditors for long have been looked upon to provide , suggest and develop new custom models of governance as they are seen as one of the highly effective instruments to initiate better governance.
The increasing popularity of internal audits ( management audits) , investigation audits clearly highlights the increasing role of auditors in effecting governance . But in reality often the position of stakeholders will not be shared and different stakeholders will make conflicting claims on the company. Once companies realise this the question arises as to how are these conflicts to be handled ? The answer being ‘ openness ‘. Openness is the key of dealing with stakeholders. Thus an organisation needs to address the key issues effectively to satisfy the various stakeholders. The key issues which need to be addressed might be :1.
Do we have a clear idea of the range of contacts which may be considered to be stakeholders?2. Can we distinguish between real stakeholders and those who wish only to exploit our company?3. Can we identify the trade-offs we should make with each stakeholders?What action am I committing myself to take? __________From the history of corporate governance we can identify the key causes of failure so that they can be addressed and, hopefully, remedied? It would seem that these key causes probably fall under the following headings 😕 A culture of secrecyThis culture leads to governance by discretion rather than by rules. The city of London might be a good example which has been run largely by self-regulation, relying on a club culture to keep individuals in line.
This has begun to fail, most notably in collapse of Lloyds as a result of systematic abuse within certain syndicates, and in fraud cases such as the ‘ Distillers ‘. ? Tribal loyaltiesThe governance structures which tend to rely heavily on the ‘great and good’ of society. These are people of similar background and education and who find it easy to work together and hence the governance model that emerges moves on the path of least resistance and achieves minimum effectiveness. The failure of effective governance in our country can be attributed to the loyalty and dependency of our corporate’s to the heavy weights of our society , for developing a purposeful model of governance .
? Legislative weaknessesThe limited liability system initiated by the Companies Acts and other legislation’s , laws formulated by the government and other agencies to impose governance have not been as effective as they should have been, which is a matter of common knowledge and need not be gone into. The Companies Act place the ownership of the company solely in the hands of equity shareholders. Holders of preference shares have no rights of intervention unless their dividends are unpaid, investors of loan capital also have limited rights and the directors have unlimited liability and are appointed by the equity shareholders. No other parties have rights under the Companies Acts; employees are subject to employment legislation, customers and supplies are subject to commercial contracts and the government exerts its rights. Are all parties involved in the excitement of the rise of businesses in some way implicated in their subsequent failure, so that they share the group hangover that follows the party as an alternative to assaulting their host is another problem that is yet to be addressed.
The outcome of trials under law has been very unpredictable. This is due in part to a legal structure which is heavily dependent on case law, and also to the difficulty of securing conviction not to mention the delay in getting results . Accounting standards are issued by the Accounting Standards Board, following a process of discussion through the Accounting Standards Committee based on Exposure Drafts issued by the Institute of Chartered Accountants. This process though is very thorough but, like the ‘mills of God’, it grinds slowly, so that ‘creative accounting’ is invariably one step at least ahead of the regulatory process.
? Lack of commitment. Stakeholders in a company have always has their individual agendas and have tended to use that company to serve their ends. Employees were ‘loyal’ to the company while it offered lifetime employment and promotion prospects, but tended to live their real lives outside their working environment. Customers had a growing range of choice and would only remain with the company if it offered exceptional value and service. Directors saw their role as ‘empire builders’ in preparation for their next career move.
Shareholders, by now predominantly institutions, saw their investment as a ‘punt’ – to be retained while building short-term value and sold at the first sign of difficulty. Considering the problems and issues of corporate governance over time two major approaches to improving corporate governance have emerged, which we may characterize as (a) traditional corporate governance and (b) inclusive corporate governance. The “Traditional Approach” follows the established philosophy underlying the Companies Acts and complementary legislation. It underlines the findings of the Cadbury, Greenbury and Hampel Report and focuses on the work of the Board and its relationship to shareholders. The basic concern is to improve current practice and avoid further scandals.
Shareholders are to be encouraged to be more active. The focus is on process rather than philosophy. The wider approach to corporate governance has been pioneered by the RSA enquiry into ‘Tomorrow’s Company’ and subsequent work to develop a broad strategic approach to corporate governance, involving stakeholder other than shareholders and the Board, which may be called ‘Inclusive Corporate Governance’. The work done has focused on principles as well as processes. The ‘Seven Principles of Public Life’ distilled by the review process are selflessness, integrity, objectivity, accountability, openness, honesty and leadership. The greater complexity of business made it necessary to bring specific skills to the board table and executive directors had to be given wider discretion in order to direct the company.
This enabled many boards to concentrate control in their hands, leaving stakeholders to act as mere profit takers. The rapid expansion and progressive integration of businesses into larger groups led to a diminution in the power of the holding company boards, who were forced to give greater discretion to the managers of business units in order to maintain the impetus of growth. Carl Icahn, T. Boone Pickens and Lord Hanson. These were the first people to dissect living companies and find ‘breakup value’ within them.
They developed techniques such as ‘Shareholder Value Analysis’ (SVA) which later evolved into ‘Economic Value Added Analysis’, known as EVA. The use of SVA and EVA techniques has not only helped to restructure businesses but has enabled clear profit and investment targets to be driven down to the lowest operating levels. This strengthens the hand of group directors in the strategic management process and makes it easier to manage reward systems throughout the group. The role of international law in effecting governance across boundaries has grown steadily, with the increasing globalization of trade in goods and services. The legal structure pivots on The International Court in the Hague for disputes between states, with criminal cases being brought to special tribunals. Countries individually have various acts such as The Companies Act , 1956 and the Income Tax Act have been formulated by our government for effective governance.
A new technique which has emerged as a result of growing business empires is based upon a very important paradox in the struggle between integration and devolution. Larger units are expected to be more economic and more homogeneous. Much of the reality of larger units is that they become more bureaucratic and internecine. The United Nations is an excellent example of this phenomenon; the World Bank has degraded in a similar fashion.
To an increasing degree the world’s largest companies have restructured themselves to achieve internal devolution. The bottom line of organisations being : “We are not a global business. We are a collection of local businesses with intense global coordination”. As Jack Welch, CEO of GE very aptly quotes: ‘What we are trying relentlessly to do is to get that small company soul – and small company speed – inside a big company body’. Issues of corporate governance have been addressed largely from a standpoint of improving controls and board processes rather than from a conviction that continuous improvement in governance can be a powerful competitive weapon. There lie a number of opportunities for better corporate governance which may include:? A convergence of governance criteria with the public sector to reflect a more integrated modern world;? The change to reach beyond the shareholder/board of directors relationship to include customers, employees, suppliers and other who deliver results for the company;? The chance to use good governance to build competitive advantage in the long-term;? The chance to widen stewardship to build a platform for a long-term sustainable growth of profits.
? The responsibilities of executive and non-executive directors for reviewing and reporting on performance to shareholders and other financially interested parties; and the frequency, clarity and form in which information should be provided;? The case of audit committees of the board, including their composition and role;? The principal responsibilities of auditors and the extent the value of the audit;? The links between shareholders, boards and auditors;? Traditionally, a company’s directors have been tasked with the role of choosing and monitoring its managers. But this is a moot exercise unless the directors also have the power to effect change. Directors should go beyond a basic “watchdog” role, to foster effective policies and act in a strategic capacity. Ideally, directors should have a recognized role in governing the corporation.
Companies are increasingly reliant on the wider community which surrounds them, which in turn needs the support and resources which few others apart from companies can give. This is a stakeholding relationship which good governance needs to recognise and which can make a company distinctive to those who deal with it. Companies which share values with their wider communities are likely to generate sustainable profitability to share with them also. New structures are needed to reflect new and more complex relationships. Today, at the close of the century, corporate governance is still an important tool for monitoring performance and enhancing value even though the ultimate shape of this tool is in the process of being forged.