Introduction:

In topic 9, we overviewed what corporate governance is, how it links to the issues we have covered in this course, and also looked at governance models in different parts of the world.

It is not possible in two weeks of topic content for this EGS course to explore the many facets of corporate governance. In this topic 10 however, we look at some specific areas 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. Hopefully working through the readings and the case study for this topic 10 will provide some additional insights to help you in your own professional career in dealing with the many governance issues you will face.

Learning objectives:

1. Appreciate some of the governance issues that are particular to the SME and NGO organisational forms.
2. Appreciate some of the issues surrounding the gender makeup of Boards, in particular, the presence of women on Boards.

Discussion:

Although there is ample literature on issues of corporate governance, much (as does much of the management literature) focuses on larger corporations. In this topic, we try and open the door on some other perspectives of governance. This is only a small window view into the many aspects we could look at but the readings will hopefully offer many valuable insights that can provide a broader set of skills to deal with the governance issues you will face in your professional careers.

Here we briefly look at:

• governance for SMEs
• governance in the NGO sector
• the gender makeup of Boards with a focus on the presence of women on Boards.

Governance and SME’s

When dealing with SME’s and governance, one of the challenges is to consider the different firm structures that might exist in the SME space and how governance structures might need to vary to accommodate these structures. A simple example is the difference between, say:

• Privately own firms where shares are held by a close group of family members although even in this setting it is not unusual for there to be minority shareholders across different family units (say, where two friends set up a company and over time, spouses, children, partners of grown children, and so own end up holding shares).
• Public unlisted companies where shareholdings can spread over parties whose only connection is their business interests (say, a group of financial planning firms owning a business that provides services to all of the firms in question).
• A public company listed on a stock exchange.

An example of one approach to addressing the SME sector for SMEs listed on a stock exchange is the discussed by Clarke & Klettner (2009) in respect to the Australian Stock Exchange’s Corporate Governance Principles and Recommendations. These recommendations (shown below) apply to all companies listed on the ASX and work on a ‘comply or explain’ basis – if a company has not adopted a particular recommendation, it must explain why. This gives SME’s listed on the ASX the flexibility to comply or not comply, however noncompliance must be justified in some way.

The ASX web site has a section on corporate governance: here is the link: http://www.asx.com.au/governance/corporate-governance.htm
The principles set out in that report are as follows:

“Principle 1 – Lay solid foundations for management and oversight Companies should establish and disclose the respective roles and responsibilities of board and management.

• Recommendation 1.1: Companies should establish the functions reserved to the board and those delegated to senior executives and disclose those functions.
• Recommendation 1.2: Companies should disclose the process for evaluating the performance of senior executives.
• Recommendation 1.3: Companies should provide the information indicated in the Guide to reporting on Principle 1.

Principle 2 – Structure the board to add value: Companies should have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.

• Recommendation 2.1: A majority of the board should be independent directors.
• Recommendation 2.2: The chair should be an independent director.
• Recommendation 2.3: The roles of chair and chief executive officer should not be exercised by the same individual.
• Recommendation 2.4: The board should establish a nomination committee.
• Recommendation 2.5: Companies should disclose the process for evaluating the performance of the board, its committees and individual directors.
• Recommendation 2.6: Companies should provide the information indicated in the Guide to reporting on Principle 2.

Principle 3 – Promote ethical and responsible decision-making: Companies should actively promote ethical and responsible decision-making.

• Recommendation 3.1: Companies should establish a code of conduct and disclose the code or a summary of the code as to:

the practices necessary to maintain confidence in the company’s integrity

the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders

the responsibility and accountability of individuals for reporting and investigating reports of unethical practices.

• Recommendation 3.2: Companies should establish a policy concerning trading in company securities by directors, senior executives and employees, and disclose the policy or a summary of that policy.
• Recommendation 3.3: Companies should provide the information indicated in the Guide to reporting on Principle 3.

Principle 4 – Safeguard integrity in financial reporting: Companies should have a structure to independently verify and safeguard the integrity of their financial reporting.

• Recommendation 4.1: The board should establish an audit committee.
• Recommendation 4.2: The audit committee should be structured so that it:

consists only of non-executive directors

consists of a majority of independent directors

is chaired by an independent chair, who is not chair of the board

has at least three members.

• Recommendation 4.3: The audit committee should have a formal charter.
• Recommendation 4.4: Companies should provide the information indicated in the Guide to reporting on Principle 4.

Principle 5 – Make timely and balanced disclosure: Companies should promote timely and balanced disclosure of all material matters concerning the company.

• Recommendation 5.1: Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies.
• Recommendation 5.2: Companies should provide the information indicated in the Guide to reporting on Principle 5.

Principle 6 – Respect the rights of shareholders: Companies should respect the rights of shareholders and facilitate the effective exercise of those rights.

• Recommendation 6.1: Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy.
• Recommendation 6.2: Companies should provide the information indicated in the Guide to reporting on Principle 6.

Principle 7 – Recognise and manage risk: Companies should establish a sound system of risk oversight and management and internal control.

• Recommendation 7.1: Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies.
• Recommendation 7.2: The board should require management to design and implement the risk management and internal control system to manage the company’s material business risks and report to it on whether those risks are being managed effectively. The board should disclose that management has reported to it as to the effectiveness of the company’s management of its material business risks.
• Recommendation 7.3: The board should disclose whether it has received assurance from the chief executive officer (or equivalent) and the chief financial officer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks.
• Recommendation 7.4: Companies should provide the information indicated in the Guide to reporting on Principle 7.

Principle 8 – Remunerate fairly and responsibly Companies should ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to performance is clear.

• Recommendation 8.1: The board should establish a remuneration committee.
• Recommendation 8.2: Companies should clearly distinguish the structure of non-executive directors’ remuneration from that of executive directors and senior executives.
• Recommendation 8.3: Companies should provide the information indicated in the Guide to reporting on Principle 8.”

Clarke & Klettner noted from their research that the benefit to SMEs in adopting formal governance structures was the enforcement on Directors of some discipline rather than Directors simply “doing things their own way” with most of the firms participating in the research saying that the imposition of good governance structures leading “to a much higher level of professionalism and better decision making processes”.

Governance and NGOs

One problem in considering governance issues in the non-government organisation (NGO) sector is that this sector comprises many different organisations, established for different purposes, and funded in different ways. Weidenbaum (2008) discusses four types of NGOs that sit on a broader continuum:

• Scientific and professional organisations that focus on issues impacting on their respective professional and scientific areas (professional bodies in say, accounting, economics, and engineering fall into this category).
• Organisations that represent religious, consumer, and other such groups that advocate certain causes and take a position on those causes based on humanitarian or ethical grounds (organisations such as World Vision and the Red Cross fall into this category).
• Organisations that act as ‘think tanks’ and seek to develop ideas that impact on public policy (in Australia, organisations such as the Australia Institute and the Institute of Public Affairs fall into this category).
• Special interest and activist groups that tend to focus on shortcoming in the political and business space, or who seek to address what they see as injustices in the ecological and/or social space (organisations such as Greenpeace, Friends of The Earth, and Free The Slaves fit into this space).

Jepson (2005), in considering the governance issues for NGOs, suggests that

“Governance is about vision, oversight, process, independence and accountability and not the day-to-day running of operations. A key purpose of governance is to ensure that an organisation’s assets are managed and developed in a manner that will maximise delivery on its mission. The key asset of ENGOs [environmental NGOs], and indeed the ‘third sector’ in general, is public trust”. (p. 518)

In this sense, it is hard to argue against any NGO needing to have structures in palace that meet Jepson’s governance objectives.

Things get a little more challenging however as we move increasingly towards the activist form of NGOs and consider the extent to which governance structures, along the lines we might find in the corporate sector, should be imposed (say, by regulation) or adopted by these types of NGOs.

Jepson lists a number of pressures that are driving changes in governance structures in the ENGO space, including:

• Larger ENGOs are increasingly engaging with, and receiving funding from, the corporate sector and this sector is expecting the ENGOs to meet similar governance standards to their own.
• Critical literature on NGOs and governance that suggests good governance is beneficial for NGO growth, stability, and impact.
• Donors (especially larger foundations) are wanting evidence from the NGOs they support on how money is being spent and the extent to which objectives are being met.
• An unease within the field of NGO’s constituencies on the increasing role of managers recruited from outside the movement, and whether NGOs who are following this path of managerial makeup are remaining true to an organisation’s traditional ideology, values and goals.
• Pressure in the media and public space from questions raised about how some NGOs may not be operating under protocols that meet any reasonable expectations of good financial management.

Against these pressures for improvements in governance, Jepson lists 5 concerns within the NGO sector on the possible implications of imposing increasingly demanding governance processes on NGOs, namely:

• The increased costs and resource implications NGOs will face that distract from their core purpose.
• Governments may take quick ‘one size fits all’ responses that fail to take into account the issues that span across the full scope of NGO forms.
• Bringing governance discussions to the public forefront may expose (real or otherwise, and material or otherwise) weaknesses in NGO governance processes that may be seized on by organisations and groups that are the focus of NGO activism, as a means to try and curb the influence these NGOs have.
• Admitting weaknesses may jeopardise donor funding (the concern being that the weaknesses may not be a cause for ceasing funding by a donor – the concern is that the funding market is highly competitive and apparent weaknesses may be taken by donors as more problematic that they are, with significant implications to an NGO if funding is lost).
• The governance issues for NGOs are somewhat fuzzy and how this can be addressed in ways that are meaningful to NGOs and their supporters/constituencies is not as yet well addressed.

These concerns are not necessarily reasons to resist change and improvements in NGO governance structures. Jepson’s arguments are more ones of needing to proceed with caution and not simply impose change for change sake, or assume that governance structures developed in the corporate sector are suited to application in the NGO sector.

The gender makeup of Boards

The final issue we will discuss here (but far from the last of the many issues corporate governance presents) has to do with the gender makeup of Boards.

There is no doubt that women are, as a general rule, under-represented on corporate Boards (as is the case for senior management positions in the corporate sector).

There are many challenges to confront when thinking about the gender makeup on Boards, some being:

• Does it matter that males tend to dominate and if so, why?
• Should society seek to see a better balance of gender on Boards and if so, how can this be achieved?

To the first question, answers can follow a number of paths. For example, does it matter as a simple issue of fairness and justice in society? Is it right that our society is, in many ways, male dominated (think of the corporate sector, politics, pay rates etc) and in this sense the Board room is one of many areas where this domination should be overcome? Alternately, is it a case that women have certain attributes that improve Board functioning and decision making? Terjesen, Sealy & Singh (2009) for example note that Boards with women members tend to behave differently to all-male Boards, including having:

• An increased tendency to measure and monitor the implementation of strategy
• Higher levels of Board accountability
• More effective communication between the Board and shareholders
• A significantly increased focus on promoting non-financial measures (such as customer satisfaction, employee satisfaction, innovation, and CSR).

The answer to the second question is very challenging as the causes of underrepresentation on Boards by women are deeply rooted in how society functions and how roles for males and females in society are constructed. One approach driving change is through ‘positive discrimination’ where some form of obligation (say, government regulation) is placed on organisations to have a minimum number of females on their Boards.

Positive discrimination has the benefit of forcing change, and in situations where the drivers of discrimination in society are institutionalised and long standing, it can provide a means of progressively overcoming these problems. This approach has its critics. One criticism is that positive discrimination focuses on symptoms of a problem not the underlying causes. Supporters would argue however that positive discrimination can, given time, act as a force for change at the underlying cause level. Another criticism of positive discrimination is that cuts across principles of equality and merit. Under this argument, decisions on Board composition are not being made solely on merit, as some positions must be filled by women even if men are better qualified. A counter argument is that there may not in fact be a difficulty in finding well qualified and suitable women to fill Board rolls – the problem is that women tend to be overlooked through institutional gender bias, not lack of competency.

One final point to mention before finishing up. Terjesen et al make an interesting observation in their exploration of the ‘women on Boards’ issue. It has to do with the needing to be a ‘critical mass’ of females on a Board for the boardroom culture to change sufficiently for the role of women on the board to have an impact. The idea of ‘tokenism’ – say, adding one woman to a Board for the sake of showing diversity – simply maintains the male domination status keeping the one female Director at the margin. According to Terjesen et al, real change only occurs where there are three or more women Directors on a board.

References

Clarke, T & Klettner, A 2009, 'Governance Issues for SMEs', Journal of Business Systems, Governance and Ethics, vol. 4, no. 4, pp. 23-40.

Jepson, P 2005, 'Governance and accountability of environmental NGOs', Environmental Science & Policy, vol. 8, pp. 515-524.

Terjesen, S, Sealy, R & Singh, V 2009, 'Women Directors on Corporate Boards: A Review and Research Agenda', Corporate Governance: An International Review, vol. 17, no. 3, pp. 320-337.

Weidenbaum, M 2008, 'Who will Guard the Guardians? The Social Responsibility of NGOs.', Journal of Business Ethics, vol. 147-155, pp. 147-155.