Corporate governance has become a prominent issue for legislators, regulators and global corporate senior management.
With the repeated failures of self regulating organisations, corporations and other institutions, the most recent being the Libor rate fixing scandal, it is unsurprising that regulators increasingly view good governance as a primary guardian of environmental, social and economic value for society. In today’s globalised and wired world, investors, creditors, other stakeholders and entire nations have realised that environmental, governance and social obligations of corporations are key to their performance and long-term sustainability.
Quite often the question is raised: Precisely what is the so-called corporate governance issue? And this segues into the next logical question: Do we sincerely desire to learn from our past transgressions?
Although there is no common definition for corporate governance, Business Directory defines it as: “The framework of rules and practices by which a board of directors ensures accountability, fairness and transparency in a company’s relationship with all of its stakeholders (financiers, customers, management, employees, government and the community).”
Boards, collectively and directors individually, are key to accomplishing these objectives, for, as Sir Adrian Cadbury, chairman of the UK’s ‘Cadbury Committee On Corporation Governance’ said, “corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals”. The driver for this new understanding of board responsibilities is evidenced in an increasing number of global and industry-specific initiatives. The primary one being the Organisation for Economic Cooperation and Development, Principles of Corporate Governance and the United Nations Global Compact.
The OECD guidelines and responsibilities developed in 2004 outline the areas of board responsibilities, shareholder treatment and effective frameworks.
The holistic vision of the role and purpose of the firm ie: its core culture and values and its external impact, relationships and responsibilities merits close examination.
Probably if firms, especially financial services providers, had been more circumspect in managing and understanding these more external facets of corporate governance, then some of the miscalculations and market throes of recent years may have been avoided, or been less severe.
In these situations we should always remember the human factor and its frailties. Individual actions – and there have been numerous – can cause severe reputational risk for firms, which can mean failure or survival of a business.
Corporate governance – here to stay
Irreparable damage can be done to a company’s reputation if it does not implement the right governance culture.
This manifests two of the crucial concerns of corporate governance. Firstly the unbridled, some opine, power-crazy inclinations of chief executives who can only too easily nullify internal challenges – including those of non-executive directors – where they are technically challenged and less well informed.
Secondly, scant concern is often given to handling the wider social and economic goals of commercial enterprises. Previously trusted organisations, eg the banks, utilities and corporations such as drug companies were expected to fulfil a socioeconomic role that affected not only their customers but also the local and global system. However, despite Sarbanes-Oxley 2002, Basel II and now Basel III, in recent times, the actions of these institutions have caused this position of trust to be questioned. Current scandals indicate that we lack, perhaps, the essential controls and safeguards to guarantee that this trust is upheld. Regulatory response has been reactive and to a large extent ineffective.
The extant question is: Do we truly want to learn from our mistakes?
It is not as if there’s anything new. We can cite numerous examples of financial system failures, from decades and centuries past. We can reflect with amazement about the Wall Street crash, the Asian financial crisis, the dotcom bubble, and todays Euro Zone crisis a result of cheap credit and financial shenanigans. Failure in these situations amongst others, very often is attributable to individual and/or group behaviour.
John C Bogle, a noted economist, wrote during 2005 that a series of unresolved challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed. He stated, “Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long. They failed to ‘keep an eye on these geniuses’ to whom they had entrusted the responsibility of the management of America’s great corporations.”
And Warren Buffett said “too big to fail” firms will always exist and that they shouldn’t be broken up. He also said that we have to take steps to change the behaviour of people that are at the top of those institutions so they have huge downsides. They had down side to their reputation but they walked away with tens of millions of dollars so you can’t have that situation exist and expect great behaviour.
This is why a wider view of corporate governance matters. It is not about the details of companies’ processes and procedures, but about making the connection between communities and corporations and the “tone in the boardroom”.
Global regulatory changes have focused on methods to improve independence, enhance internal processes and on improving the quality of non-executive directors. According to the UK Parliamentary report of June 2012, the UK like some other EU states is well-advanced in its review of corporate governance issues arising from the financial crisis, implementing proposals on: board composition, board oversight of risk management, institutional shareholder engagement, remuneration (Walker Review), UK Corporate Governance Code, the Stewardship Code, FRC’s Guidance on Board Effectiveness and the FSA Code on Remuneration. Some feel that these changes aren’t enough, as they do not exert pressure on organisation’s core values and communication techniques and there appears to be no end to the scandals.
Free markets undoubtedly fail; at some point they self-destruct. Even former Federal Reserve Board Chairman Alan Greenspan, in a New York Times interview, remarked that the mistake he made was “to trust that free markets could regulate themselves without government oversight”. As Roman historian Tacitus (A.D. 55-117) observed: “The more corrupt the state, the more numerous the laws.”
Recent European research indicates systemic problems in certain industries and board wide, eg issues with independence, the usefulness of non-executive directors, and little used external advice and assessments. Companies have to learn to embed a more universal view at all business ranks and enforce a culture of good governance as an integral part of core values and routine procedures.
There may be some robust global-wide benchmarks or components that are enforceable, but the focus should be on self-accountability and commitment. This emphasis coupled with some degree of regulation that provides sufficient organisation offers a chance to cultivate critical thinking and originality amongst all participants.
What lessons have we learnt? It is doubtful that we will ever eliminate some component of peaks and troughs in the economic cycle, and that is probably necessary. In reality, myriad variables exist and all cannot be accounted for, although the basic need for stability intensifies in an increasing globalised marketplace.
In essence, good corporate governance does not have to equate to less return on investment. I don’t see an intrinsic divergence between good governance and good business, but it is core to how decisions are made and interests conjoined. More so now than ever, we require companies that attain profitability whilst simultaneously achieving environmental, and socioeconomic value for society as a whole.