Corporate Governance

Corporate Governance CORPORATE GOVERNANCE The Oxford English Dictionary defines ‘governance’ as ‘the act, manner, fact or function of governing, sway, control’. ‘To govern’ is ‘to rule with authority’, ‘to exercise the function of government’, ‘to sway, rule, influence, regulate, determine’, ‘to conduct oneself in some way; curb, bridle (one’s passions, oneself)’, or ‘to constitute a law for’. Governing is, therefore, a whole range of actions, initiatives and response patterns – from rule through influence to self-control and self-regulation. By inference it includes ‘driving’ as well as ‘steering’. Therefore, in seeking to define governance and the purpose it is to acheive, it is necessary to give adequate consideration to its antitheses – ‘freedom’ and ‘individualism’. Governance as such has been largely taken for granted in the past. Something that does not require a systematic and detailed analysis, ‘efforts’ or ‘commitment’ of resources.

For most of human existence governance has been imposed on the majority by a small elite, this form of governance depended on curtailing the freedom of the ruled in order to maximize the power of the rulers. The monopolizing of power by rulers made it virtually impossible for defects in governance either to be recognized by the ruled or to be challenged by them. Governance has gone by default since regimes did not share decisions with their subjects but left them to suffer the consequences of failure. In more recent times the growth of democracy together with the waning of communism and other extreme regimes has led to increasing concern at undue concentrations of power and its misuse. The loss or depreciation of long – accepted models has created intellectual turmoil and a search for better processes of governance.

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Thus emerged the modern concept of governance based on the foundation that untrammeled personal freedom is akin to lawlessness. Such an employment of personal freedom requires a strict internal discipline or self – governance that is rare. If we admit the concept of original sin, we are faced with the need for a code of morality and a process of self – governance. As Geoff Mulgan suggests ‘morality is a word that can be notoriously abused’. Thus making self – governance an imperfect art and a shaky foundation for the governance of ‘ groups ‘. As corporate’s realised this, new models of governance came to the fore.

Muller defines governance thus: Governance is concerned with the intrinsic nature, purpose, integrity and identity of an institution with a primary focus on the entity’s relevance, continuity and fiduciary aspects. Thus Governance involves monitoring and overseeing strategic direction, socioeconomic and cultural contexts, externalities and constituencies of the institution. Thus, the primary goal of governance is making sure the right questions get asked at the right time, at the right place, ‘by’ the right persons, ‘to’ the right persons and in the right manner. It is not a coincidence that the worst corporate performers are the ones that had once been so securely on top that they stopped asking questions. Governance is usually delivered through an agreed constitution, through a complex web of customs and practices, underpinned by a shared system of ethics, to a range of stakeholders from the shareholder to the customer in that institution.

Styles of governance vary depending on the nature and size of the body concerned. At one extreme is the rule-based style adopted by public sector bodies, which may be concerned with conformity rather than performance. At the other extreme are the churches and clubs where governance is based on trust. Most corporate bodies have an amalgam of both trust and rules in appropriate proportions. The Logic being that trust can only work with open governance. The basic prerequisite to achieving successful and effective governance is the establishment of certain criteria for systematic governance.

As a minimum these are likely to be: 1. the identity of the body 2. definition of its purpose 3. how the purpose is to be achieved 4. membership criteria (both explicit, such as shared interests, and implicit for example shared values) 5.

how the body is to be administered 6. how the body relates externally 7. how success is measured 8. termination arrangement In practice the constitutional details of most organizations will be more complex , interrelated and overlapping, but the basic elements need to be present in order so as to permit the organisation to function. Thus once the foundation for governance has been laid it is very important to address the heart of the issue of governance, which is the tension between achieving the objectives of the organization and the fulfillment of the personal objectives of its members and other stakeholders. Every relationship between individuals requires some trade-off of their separate interests.

In healthy relationships these trade-offs are negotiated openly, explicitly or tacitly, and the bargain is kept. Where the trade-offs are not recognised, or the bargain is imposed from one side or is undermined unilaterally by stealth, there can be no healthy relationship. This process is at the heart of governance. Stakeholding is, basically about ownership. In Company Law it belongs exclusively to ordinary shareholders; other classes of shareholder have lesser rights to reflect the lower risk attaching to their investment.

But in an organisation ‘stakeholding’ implies differently for different interest groups. For the directors it can be seen as the right to secure tenure and to deploy the company’s assets as they see fit. For employees it can be about having a safe job and prospects to advancement, which they may wish to protect by membership of trade unions. For customers it can be about the right to demand outstanding service for an economic price; for suppliers and distributors it can be about a stable and profitable trading relationship, for government it is about providing sufficient jobs and paying all dues and taxes without problems or delays. For competitors it is about sharing a marketplace and protecting it from new entrants. A peculiar category of stakeholder which is distinct from company’s suppliers in that their relationship with the company is to some extent mandatory.

Companies are required by the Companies Act to appoint an auditor and are obliged by custom and practical need to nominate bankers and solicitors. Auditors for long have been looked upon to provide , suggest and develop new custom models of governance as they are seen as one of the highly effective instruments to initiate better governance. The increasing popularity of internal audits ( management audits) , investigation audits clearly highlights the increasing role of auditors in effecting governance . But in reality often the position of stakeholders will not be shared and different stakeholders will make conflicting claims on the company. Once companies realise this the question arises as to how are these conflicts to be handled ? The answer being ‘ openness ‘.

Openness is the key of dealing with stakeholders. Thus an organisation needs to address the key issues effectively to satisfy the various stakeholders. The key issues which need to be addressed might be : 1. Do we have a clear idea of the range of contacts which may be considered to be stakeholders? 2. Can we distinguish between real stakeholders and those who wish only to exploit our company? 3. Can we identify the trade-offs we should make with each stakeholders? What action am I committing myself to take? From the history of corporate governance we can identify the key causes of failure so that they can be addressed and, hopefully, remedied? It would seem that these key causes probably fall under the following headings : A culture of secrecy This culture leads to governance by discretion rather than by rules.The city of London might be a good example which has been run largely by self-regulation, relying on a club culture to keep individuals in line.

This has begun to fail, most notably in collapse of Lloyds as a result of systematic abuse within certain syndicates, and in fraud cases such as the ‘ Distillers ‘. Tribal loyalties The governance structures which tend to rely heavily on the ‘great and good’ of society. These are people of similar background and education and who find it easy to work together and hence the governance model that emerges moves on the path of least resistance and achieves minimum effectiveness. The failure of effective governance in our country can be attributed to the loyalty and dependency of our …