Lexicon
What is the meaning of corporate governance?
Corporate governance is defined as “the system by which organisations are directed and controlled”. In essence, it is the “management of an organisation’s management”.
Essentially, corporate governance is what a board of directors is responsible for and a lot of the work revolves around overseeing strategy, performance and culture.
It is also an interesting topic of study, and much has been written about it in recent years, especially when it comes to bad governance.
Regardless of the type, size, or purpose of a company, all board members are responsible for ensuring that their organisation’s governance is fit for purpose.
A simple description of corporate governance
Corporate governance is what a board of directors handles and reports on.
The effectiveness of a good board can be a substantial competitive advantage for an organisation. So, the choice of people to be on the board is very important.
There are different areas where boards can look at their effectiveness, and one of these is the strategic focus.
The board must anticipate the future needs and sustainability of the organisation and develop an overall mission and vision.
The board must also seek a wide variety of inputs from different team members and be good listeners.
Finally, the board members must prioritise the interests of the organisation above any individual needs.
Everyone on the board should be clear on their roles and responsibilities.
Read more: The eight great duties of a board member.
What is good corporate governance?
Good corporate governance also means the directors examine the market and the regulatory and social environments they work in to build practices and procedures that meet the sustainable needs of all stakeholders.
Three essential questions the board of directors must answer as part of their governance are:
- Who has the power in a company, and who makes the decisions?
- Are the correct decisions being made?
- How are employees and directors compensated, and what controls are in place to ensure all stakeholders’ interests are met?
Good corporate governance is essential when we look at what happens when there is bad corporate governance, which can cast doubt around a company’s operations and profitability.
Good corporate governance seeks to balance individual, social, and economic goals to ensure positive and sustainable outcomes for all.
Read more: The importance of good corporate governance.
What are examples of bad corporate governance?
Over the past decade, corporate scandals resulting from bad governance have dominated the news cycle more than ever.
Significant sexual harassment, product recall, corporate negligence, and fraud cases reveal larger, pervasive problems – these incidents are not isolated incidents.
Amid the widening income inequality following the Great Recession in 2008, many corporate CEOs and other leaders have acted in ways that have brought shame and near ruin to their organisations.
Here are five examples of what happens due to bad corporate governance:
1: The Foxconn suicides in 2010
The Foxconn plant in China, where Foxconn manufactures parts for iPhone, PlayStation 4, and Xbox One, reported 14 suicides in 2010. Foxconn’s U.S. customers, including Apple and Hewlett-Packard, were threatened by the scandal and their reputations burned.
2: The FIFA corruption scandal 2015
On May 27, 2015, the Department of Justice charged 14 FIFA officials and executives with racketeering, wire fraud, and money laundering conspiracy. According to the Department of Justice’s 164-page indictment, FIFA executives took over $150 million in bribes to provide advertisers with marketing rights over a period that dates back to 1991. FIFA had net losses of $122.4 million in 2015, $368.8 million in 2016, and $191.5 million in 2017.
3: The Volkswagen emissions scandal 2015
Volkswagen models had been found to emit poisonous nitrogen oxides in illegally high levels. Illegal software was found in the polluting cars that would detect when they were being tested and alter their performance to pass the test. Eleven million vehicles were believed to be equipped with the software. VW was fined over $25 billion in the United States and had operating losses of $1.77 billion in 2015.
4: The Wells Fargo account fraud
According to the Consumer Financial Protection Bureau, Wells Fargo employees opened approximately two million unauthorised credit and deposit accounts between July 2015 and September 2016. The company opened tens of thousands of accounts without customer consent to achieve sales targets and other incentives. In addition to transferring funds from authorised accounts to the unauthorised accounts, they charged the unsuspecting customers fees and additional charges.
As a result of the phoney accounts scandal, Wells Fargo was fined over $2 billion, more than 5,000 workers were fired, and CEO John Stumpf stepped down.
5: The Facebook-Cambridge Analytica data scandal
According to two articles published simultaneously by The Guardian and The New York Times on March 17, 2018, Cambridge Analytica harvested data from over 50 million Facebook profiles to help Trump’s election campaign. Facebook was engulfed in several significant scandals since 2015, creating distrust among Americans, and 44% of Americans now believe Facebook divides the country.
What are the principals of corporate governance?
Corporate governance is a system of rules and practices, which help direct and control an organisation.
The principal of good governance seeks to balance the interests of all stakeholders, such as customers, suppliers, and employees. Corporate governance is the primary responsibility of the company’s board of directors.
Board members today are under increased public scrutiny and must be aware of the risks in their environment. They must also operate in a way that is accountable, transparent, and fair. Their most important job is to ensure that the CEO and the management team are operating within the law and in the best interest of stakeholders.
The practice of good governance means setting up good rules and practices, which is highly important in terms of investor relations since it shows integrity and helps companies build trust.
Excellent and transparent governance ultimately helps the organisation to remain financially viable in the long term. Communicating good corporate governance to external stakeholders is essential.
Profitability will not be the only area investors look to for the health and strength of the organisation. A business must demonstrate good corporate citizenship through sustainable and ethical practices in the community. This is known as ESG or environmental, social and governance.
Who is responsible for corporate governance?
The board of directors is the central entity responsible for corporate governance. However, some of this work may also be done by committees appointed by the board.
The board should consist of a diverse range of individuals who can bring fresh insights into managing the various issues facing the business. The people sitting on the board should be a mix of executives (like the CEO), the chair (an outsider who operates as a critical friend to the CEO), and non-executive directors (independent experts brought in for their skills and advice).
The board’s role is also to manage the relationship between the organisation’s owners and its managers and employees to avoid conflict, set a high standard for performance, and ensure fair practices.
Why should companies invest in improving corporate governance?
Without good corporate governance, a business can quickly ‘go off the rails and end in disaster. Investors like to see companies that invest in good corporate governance. A big warning sign for investors and regulators is when a company is seen not cooperating with auditors.
Good corporate governance has positive effects:
- Corporate governance involves the practices put in place and managed by the board to ensure sound risk management, transparency, and ethical practices.
- Corporate governance involves the rules and practices through which the company is controlled.
- Good corporate governance results in substantial economic growth and corporate success, improved investor confidence, an ability to raise capital, lower risk, and improved share price.
How to join a board of directors
With an increase in scandals involving corporate boards and charities, the roles and responsibilities of boards and directors are coming under more public scrutiny.
To serve on a board, you should understand how a board works and your responsibilities, which can be accomplished by taking a Diploma in Corporate Governance.
Ultimately, the board of directors is responsible for the organisation’s overall governance, management, strategic direction, and accountability.
Across all global markets, the demand for effective, accountable board members is surging. In recent years, investors have become increasingly demanding of company boards, and we expect this trend to continue.
Increasingly, directors are reviewed for their industry knowledge, understanding of challenging issues like ESG, and their experience in transforming companies.
There will also be more pressure on organisations to disclose their board competency priorities, succession plans, and the diversity of their director candidates.
The message is clear – investors and other stakeholders want effective boards filled with people who have industry-specific talents and boardroom skills.
How to become an effective board member
An effective board member needs to understand how effective boards function.
Through the Corporate Governance Institute’s Diploma in Corporate Governance, you gain access to the latest thinking and methodologies used by the most admired boards in the world.
Watch the short video below to see David W Duffy, founder of the Corporate Governance Institute, explain what makes a great director.
