5.

Principles of Corporate Governance

From either standpoint, there are a range of activities and responsibilities that are the
concern of organisational governance. They have been set out in a recent publication of
the OECD (1999), entitled, ‘Principles of Corporate Governance,’ available online at
http:'/ wwvv. oecd.org/pdf/M00008000/M00008299. pdf.

In summary, the corporate governance framework should:

· protect shareholders’ rights
· ensure the equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain effective
redress for violation of their rights;
recognise the rights of stakeholders as established by law and encourage active
co-operation between corporations and stakeholders in creating wealth, jobs, and
the sustainability of financially sound enterprises;
· ensure that timely and accurate disclosure is made on all material matters
regarding the corporation, including the financial situation, performance,
ownership, and governance of the company;
· ensure the strategic guidance of the company, the effective monitoring of
management by the board, and the board’s accountability to the company and the
shareholders.

All of these principles have implications on the management of the strategic processes of
the organisation. In particular, the protection of shareholder rights, equitable treatment,
stakeholder rights, timely and accurate disclosure and strategic guidance. Each of these
topics is described in detail below.

5.3.1 Protection of Shareholder Rights

The protection of shareholder rights targets such important issues as knowing the true
mix of ownership, possessing accurate and timely knowledge of the organisation’s
economic performance, and being aware of the patterns of flow and the movement of
investment within the marketplace from business to business. The shareholders of a
company constitute a polity, a community of interests, having a natural concern and right
to exert their individual and collective perspective and influence over the strategic future
of the organisation. As with most such communities, particularly (in the case of publicly
listed companies), there is usually a diversity of perspectives and positions of power and
influence over such processes. Good governance presupposes that it is through creating
the maximum opportunity for the full range of voices to be heard that the executive and
policy makers of the organisation gain the most benefits. To keep a balance of power in
place and to protect the interests of the smaller and less influential shareholders, it is
necessary to establish rules of behaviour to ensure that the following results are achieved:
· ‘Shareholders have the rights to participate in, and to be sufficiently informed on,
decisions concerning fundamental corporate changes such as l) amendments to
the statutes, or articles of incorporation, or similar governing documents of t’:^
SC3 Strategic Management, Block 8 253
Capital structures and arrangements that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership should be disclosed.

Markets for corporate capital should be allowed to function in an efficient and transparent
manner.’ (P. 17)

5.3.2 Equitable Treatment

Equitable treatment refers to the balance of interests and power between different
shareholders based on such factors as size of holding, privileged access to insider
knowledge, personal interest disclosures by management and directors on matters of
policy and strategy. The thrust of this principle is towards the establishment of corporate
societies where equity and transparency are the rule rather than the exception - equity in
the sense of equal access for all, and transparency in the sense of open disclosure of
information with no reserved or hidden position. In recent decades there has been
increasing concern over the ‘rights' of the small shareholder/investor and their power or
lack of it to express their views and opinions or substantively influence the overall
operation and strategic positioning of their investment.

5.3.3 Stakeholder Rights

Stakeholder l ights refers to the ‘rights' of those that have a financial relationship with the
organisation employees, suppliers, customers, investors, shareholders. Any organisation
is a mosaic of interests and expectations, shaped and driven by the interaction between
the stakeholders, who all seek to both optimise their own benefits as well as ensure the
long-term survival of the organisation. If the organisation fails, what happens to:
· the suppliers that have advanced goods and services?
· the savings and pension plans of employees?
· the customers with partially completed contracts?
· the investors that have taken the funding risk?
· the pensioner and institutional shareholders alike that have accepted the
 assurances and smooth words of the annual reports?

Organisations locked into their own ana industry value chains engage in complex
dealings and agreements with stakeholders that stretch from the short to the very long
term. Future shaping and determining decisions that involve an element of significant
financial risk need to be ‘grounded' within a stakeholder consultative framework that
recognises and makes allowance for their interests, as well as those of the organisation
__itself.

5.3.4 Timely and Accurate Disclosure

Timely and accurate disclosure has to do with both the style and the content of the
inio'"mulion passed from the organisation to its stakeholder constituencies. This in turn

SC3 Strategic Management, Block 8 254

 depends on the.type and kind of measures employed and the form in which this is
-processed and disseminated. Financial information needs to be presented within the
context of the strategic framework so that actual performance can be assessed alongside
that which was projected and planned. Consider it a type of ‘scorecardmg’ that links the
measures to the CSFs and through them, to the overall Vision for the organisation. Aged
data is as bad as inaccurate data in assisting to inform stakeholder judgement. Financial
data for the past financial year may relate poorly to the current strategic health of the
organisation and provide little real support for projecting future possibilities.

5.3.5 Strategic Guidance

Strategic guidance has special relevance to the long-term positioning of the organisation.
In particular, the board is seen as especially necessary to the effective discharge of a
number of functions:
‘Reviewing and guiding corporate strategy, major plans of action; risk
policy, annual budgets and business plans; setting performance objectives;
monitoring implementation and coiporate performance; and overseeing
major capital expenditures, acquisitions and divestitures.’ (p. 43)

It is in this area that many of the issues involved with the ‘agency’ and ‘stewardship’
approaches to governance come into focus. In particular, the extent to which the
‘Executive’ component (e.g., the CEO) interacts with, integrates or dominates the
‘Policy’ (the Board), and, the benefits of one over the other of the two alternate
management theories/models; one is centralised around the Executive, aimed at removing
structural and process blockages in the organisation, and focusing on executive
performance - and where executive performance is seen to be driven by additional
motivators other than the strictly financial; the other is focused on establishing the right
motivators to boost executive performance - how to create the buttons to drive the
executive in the pursuit of shareholder wealth. This is not just an academic distinction.
Each perspective assumes a different underlying model of how individuals behave in
organisations and about how best to motivate people. They also assume different attitudes
towards the ‘purpose’ of the organisation and the role that leadership should play in
giving this a particular emphasis.

6 Summary
Measuring the strategic performance of a organisation requires that the strategist fully
understand both the strategic and well as the operational characteristics of their
organisation. As the saying goes ‘the devil is in the details' and the details of financial
performance provide targeted information on how well an organisation is utilizing its
resources, how well ‘conditioned’ it is to progress its strategies and what are the flow-on
effects of strategic positioning (and repositioning) on the interstices of the organisation
itself.

SC3 Strategic Management, Block 8 255

In more recent years, models and methods such as the Balance Scorecard, have
begun to
develop which assist CEOs to expand their perspectives on their organisation and
which
allows them to assess its capacities and performance across a number of
dimensions
including financial; process, customer and resource allocation and usage.

The process of measurement must also reflect both the external requirements of the
law
as well as the needs of the executive and planners for real-time and on-line
information
about the marketplace and the functioning of the organisation within such a context
and
framework. The payoff for the organisation is that the information collected
through
measurement will reduce some of the uncertainty and risk that accompanies the
business
organisation in an age of constant change.