Introduction:

In topics 1 to 8, we have discussed the nature of the firm, its purpose for existence, ethics and justice, and sustainable business. If organisations have various obligations and behavioural expectations, who is ultimately responsible for ensuring these obligations and expectations are met, how should these parties go about their role, and what systems and processes need to be in place to see the desired outcomes achieved?

This is where the subject matter of topics 9 & 10 – corporate governance – comes in.

In topic 9, we overview what corporate governance is, how it links to the issues we have covered in the course so far, and also take a brief look at governance models in different parts of the world.

In topic 10 we look at some of the many aspects of the corporate governance topic, namely governance for SMEs, in the NGO sector, and the gender makeup of Boards with a focus on the presence of women on Boards.

Learning objectives:

1. Understand the general concept of corporate governance and its linkages to the issues covered in topics 1 to 8 of this course.
2. Gain a general understanding of governance models in different parts of the world.

Discussion:

What is corporate governance?

What is corporate governance? Here are a few ways in which this concept is described:

“The definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury Committee, 1992). More specifically it is the framework by which the various stakeholder interests are balanced, or, as the IFC states, "the relationships among the management, Board of Directors, controlling shareholders, minority shareholders and other stakeholders"” (source: http://www.applied-corporate-governance.com/definition-of-corporate-governance.html).

"Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined." (source: http://www.oecd.org/dataoecd/32/18/31557724.pdf).

“[Corporate governance is] the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders (financiers, customers, management, employees, government, and the community). The corporate governance framework consists of (1) explicit and implicit contracts between the company and the stakeholders for distribution of responsibilities, rights, and rewards, (2) procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles, and (3) procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.” (source: http://www.businessdictionary.com/definition/corporate-governance.html).

We can see from this, that corporate governance is a broad concept, based on the idea that certain parties (in the corporate setting, the Board of Directors) have a role in ensuring the organisation’s purpose, duties, and responsibilities are fulfilled. In addition, it has to do with the systems and processes in place that see this come about. Governance is more than simply a ‘where the buck stops’ discussion – it is an active process including duties, responsibilities, supervision, control, information flow, systems, and process.

The corporate governance term is also one that extends beyond the publically listed corporation to also include other organisational forms – privately held firms, charities, NGOs, clubs and associations….any organisation really.

Jamali, Safieddine & Rabbath (2008) propose that corporate governance can be seen in narrow and broad terms as to what it has to do with. The narrow view considers governance as dealing mostly (or only) as “an enforced system of laws and of financial accounting, where socio-environmental considerations are accorded a low priority” (p. 444). A broader view on the other hand, sees governance as addressing a “business’ responsibilities toward the different stakeholders that provide it with the necessary resources for its survival, competitiveness, and success” (p. 444).

Jamali et al go on to summarise good corporate governance as:

“ revolve[ing] around a set of universal attributes, including ensuring accountability to shareholders and other stakeholders…, creating mechanisms to control managerial behaviour…, ensuring that companies are run according to the laws and answerable to all stakeholders…, ensuring that reporting systems are structured in such a way that good governance is facilitated…, crafting an effective leadership/strategic management process that incorporates stakeholder value as well as shareholder value…, and enhancing accountability and corporate performance…. Leadership, direction, control, transparency, and accountability attributes thus lie at the heart of sound and effective CG” (p. 445).

Ethics, governance and sustainability

From the discussion so far, the linkages between the topic content we have covered so far in this course, and the topic of corporate governance, begin to unfold. Note for example the narrow and broad views of governance proposed by Jamali et al and how these link to the shareholder vs stakeholder approaches. The ‘good governance’ statement by these authors also opens the door to how the broader set of business ethics and sustainable business issues we have discussed fit in the ambit of good corporate governance.

Elkington (2006), proposes that the corporate governance agenda is progressively overlapping with the CSR and wider sustainable business agendas. For Elkington, the driver for this overlap is that, in his view, corporate governance is fundamentally about issues of what the purpose of a business is and in whose interests it should be run (back to the shareholder/stakeholder question plus the questions that enterprise strategy is concerned with). For Elkington, question of ethical behaviour of business (including ethical issues that flow through entire value chains), bribery and corruption, climate change, and sustainability are all finding there way to corporate boardrooms and are just as much a part of the governance agenda as are issues of financial integrity and control.

Governance in the global setting

So far we have spoken of the meaning of corporate governance and the purpose it serves. We have also proposed that, within organisations, there are parties who are ultimately responsible for ensuring the organisation’s purpose, duties, and responsibilities are fulfilled: these are the parties on whose shoulders corporate governance responsibilities ultimately fall.

Governance structures do, however, differ from country to country. In some countries, the approach followed in the corporate sector is a unitary Board of Directors where a number (sometimes the majority) of Directors are independent, a regulatory body is established to oversee many key corporate activities (in Australia, this is the Australian Securities and Investments Commission (ASIC): in the US, the Securities and Exchange Commission (SEC)), and certain obligations imposed on corporate behaviour through the stock exchange(s) on which their shares are listed. This model can be found in countries like Australia, the US, and the UK although there are differences within these countries when getting into the detail of how Boards are generally comprised and how laws impacting on the corporate sector are constructed (Tricker 2009).

In Japan, the keiretsu business model has a significant influence on governance structures, The classical keiretsu model sees Boards of Directors being quite large and in effect form the top layer of management with people often talking of seeking to be “promoted to the Board”. In this setting, independent and non-executive directors would be unusual. Although the classical keiretsu model is becoming less influential, it still remains prominent in Japanese business (Tricker 2009).

In China, where central government still plays a substantial role in corporate ownership and governance control, governance structures have developed to reflect this role of the State. In China, the current standard governance structure is one of a Management Board of Directors (with some independent outside Directors) and a Board of Supervisors (which includes both employee and employer members). Under this model, the power of the Supervisory Board is somewhat soft and tends to act more through influence than command (Tricker 2009). 

The important point to take from this very brief overview of how governance structures may vary across nations is that, when engaging in business in the international setting, these different structures will be encountered and will need to be confronted in how business dealings are conducted. In short, if you are doing business in another country, learn the governance structures of that country before stepping out!

References

Elkington, J 2006, 'Governance for Sustainability', Corporate Governance, vol. 14, no. 6, pp. 522-529.

Jamali, D, Safieddine, AM & Rabbath, M 2008, 'Corporate Governance and Corporate Social Responsibility Synergies and Interrelationships', Corporate Governance, vol. 16, no. 5, pp. 443-459.

Tricker, B 2009, 'Models of Corporate Governance', in Corporate Governance - Principles, Policies, and Practices, Oxford University Press, Oxford, pp. 181-216.