Implementing Corporate Governance (2014-11-05)

February 20, 2015  10526  10526   

Article by Dawn Pretorius (Lead Independent Consultant)

Paying lip service

In the South African financial markets industry we are very familiar with the concept of corporate governance. Or so we think. Ask FSP professionals to actually define what is meant by corporate governance and it tends to boil down to being “ethical” or “doing the right thing”. They may also be quick to refer to King lll. But the difference between referring to it and having actually read it, is precisely where many directors, senior managers and prescribed officers find themselves. Having said that, though, corporate governance is difficult to define. There are so many companies managed by so many different people trying to achieve a specific set of objectives, all purporting to apply what they understand as “ethical” and “doing the right thing”. It therefore seldom means the same thing to all people.

Background to corporate governance

The word ‘governance’ is derived from the Greek verb κυβερνάω (kubernáo), which means to steer and was used for the first time in a metaphorical sense by Plato.  The history of corporate governance is somewhat vague, but even from the earliest years, governance issues varied by ownership structures. Around the world, except for the United States and, to some degree, the United Kingdom, insider-controlled or closely-held firms were the norm. That meant that the difference between voting rights and controlling rights of a company were important as well as whether a company was family-owned or controlled by other big institutions or financial institutions. Control was often reinforced through complicated webs of shareholdings that allowed families or financial institutions to use ownership of one entity to control many more with little direct investment.

The nature of corporate governance challenges is still determined by the countries’ overall development and institutional environment and prevailing ownership structures. Over time, however, the word ‘governance’ was used to apply to any structure, be it for humanity, political, corporate or personal means. It is applied now to states, governments, corporations, organisations, non-governmental organisations, partnerships and other associations, project teams and any number of humans engaged in some purposeful activity.

The backbone of your organisation

Simply put, governance means steering a structure (organisation) morally by assuring, on behalf of those governed, a worthy pattern of good while avoiding an undesirable pattern of bad.

The definition of corporate governance most widely used is ‘the system by which companies are directed and controlled’ (Source: Cadbury Committee, 1992). Sir Adrian Cadbury in his 1999 ‘World Bank Report’ also indicated that ‘Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The aim is to align the interests of individuals, corporations, and society.'

An inclusive approach requires that the purpose of the company and the values by which the company will carry out its operations are identified and communicated to all its stakeholders. In other words, the relationship between the stakeholders and the company should be mutually beneficial and is dependent on three factors:

• The company needs to be totally transparent in its operations and to have a policy of disclosure to all stakeholders.
• The company needs to seek an appropriate balance between enterprise (performance) and constraints (conformance) and to take into account the expectations of shareowners for reasonable capital growth and the responsibility concerning the interests of other stakeholders in the company.
• The company has to manage itself in such a way that investors and other stakeholders can rely on its accountability to its regulators and its responsibility to all stakeholders. That is, it has to consider the industry and market standards, industry reputation, the investigative media and the attitudes of customers, suppliers, consumers, employees, investors and communities (local, national and international, ethical pressure groups, public opinion, public confidence, political opinion, and more).

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