Professional Documents
Culture Documents
Giving stakeholders confidence that the business is being run to important legal
standards so that it never violates applicable laws or regulations, including the
unwritten rules of good, ethical behavior.
Providing transparency in the company's decision-making processes both in
good and bad times.
Regulating efficient cooperation between a supervisory board of directors and
the management of a company.
Ensuring the company exercises prudence in strategy-setting and decision-
making so that the best interests of all stakeholders are taken into account.
Providing a framework for action if there's a violation of the company's code of
conduct.
Ensuring the company is geared toward long-term value creation, not short-
term gains.
When the company's management works according to a well-defined corporate
governance structure, the well-being of everyone involved in the company should
automatically be taken care of.
Consensus building/ stakeholder relations : The company should consult with the
different categories of stakeholders in an ongoing discourse to reach a consensus of
how it can best serve everyone's needs sustainably.
The rule of law: The company shall operate within the legal frameworks that are
enforced by regulatory bodies, for the full protection of stakeholders.
Who Is Responsible for Corporate Governance?
The board of directors is pivotal for the governance of its company. The board's role is
to set the company's strategic direction, provide the leadership to put those strategies
into effect and supervise the management of the company. Consequently, corporate
governance is about the way the board behaves and how it sets the values of the
business. This is different from the daily operational management of the company by
executives.
Shareholders play a role, too, and must actively participate in corporate governance
for it to have any bite. Their role is to appoint the right directors and approve major
decisions such as mergers and buyouts. Shareholders have the collective power to
take legal action against a company that does not exercise good governance.
To give this context, countries such as the U.K. have had powerful codes of conduct
since the 1990s – the position in the U.K. is that every company listed on the London
Stock Exchange must comply with the national corporate governance code or explain
why it would not. Noncompliance serves as a massive red flag to investors. Generally,
this code is considered as the benchmark for sound corporate governance in
operations of all sizes.
In the U.S., stock exchanges compete for listings and imposing rigorous corporate
governance responsibilities might lose them business. The Securities and Exchange
Commission, the primary regulator of listed companies, is hot on the issue of
transparency and comes down hard on companies that don't prepare their financial
reports properly or disclose information to stakeholders in the appropriate way.
However, it doesn't look beyond the issue of disclosure.
So, for example, a company might defy shareholders' wishes and offer a large cash
bonus to an unpopular and under-performing director. On the face of it, the decision is
an example of poor governance as there's no consensus, inclusion or stakeholder
accountability in the decision-making. But the SEC would allow it as long as the
company made full disclosure in its reports. This type of regulation has been likened to
a stop sign – useful to prevent serious accidents, but in no way a substitute for skillful
and judicious driving.
Governance standards: A board can have all the equitable rules and policies it likes
but if it can't propagate those standards throughout the business, what chance does
the company have? Resistant managers can subvert good corporate governance at
the operational level, leaving the business exposed to state or federal law violations
and reputational damage with stakeholders. A policy of corporate governance needs a
clear enforcement mechanism, applied consistently, as a check and balance against
the actions of executive staff.
The second problem is that directors only sit on boards for a brief period and many
face re-election every three years. While this has some benefits – there's an argument
that directors cannot be considered independent after 10 years of service – short
tenures could rob the board of long-term oversight and critical expertise.
Diversity: It's common sense that boards should have an obligation to ensure the
proper mix of skills and perspectives in the boardroom, but few boards take a hard
look at their composition and ask whether it reflects the age, gender, race and
stakeholder composition of the company. For example, should workers be given a
place on the board? This is the norm across most of Europe and evidence suggests
that worker participation leads to companies having lower pay inequalities and a
greater regard for their workforce. It's a balancing act, however, as companies may
focus on protecting jobs instead of making tough decisions.
While it's certainly not undesirable to have the actions of the board checked by
shareholders in this way, the future of corporate governance is perhaps more holistic.
Companies can and do have ethical obligations to their communities, customers,
suppliers, creditors and employees, and must take care to protect the interests of non-
owner stakeholders in the company code of conduct.