03 Mar There is no one definition but Corporate Governance is without questions vital!
Definition, Scope and Benefits of Corporate Governance
The Cambridge English Dictionary, defines Governance as: “the way in which an organisation is managed at the highest level, and the systems for doing this”
According to the influential ‘King IV Report on Corporate Governance for South Africa’ (2016) (Link), the use of “corporate” in the term “corporate governance” is used to differentiate it from other forms of governance, for example national or political governance. Specifically, “corporate” refers to organisations that are incorporated to form legal entities separate from their founders and, therefore, applies to all forms of incorporation whether as company, voluntary association, retirement fund, trust, legislated entity, or others.
Alternatively, the G20/OECD Principles of Corporate Governance (2015) (Link) state that: “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.” Importantly, OECD adopts a broader approach and seeks to explicitly involve all stakeholders, beyond merely mentioning the shareholders of an organisation, in its understanding of how corporate governance should function in achieving its objectives.
In 2021, The International Standards Organisation published a new standard ‘The ISO 37000:2021 Governance of Organisations — Guidance’ (Link) which states that: “Good corporate governance not only fosters an environment of trust, transparency and accountability, it also helps align an organisation’s purpose with the interests of society, building strong stakeholder relationships while effectively managing and maintaining its resources. In this way, good governance lays the foundation for the long-term success of organizations and ensures they contribute to the protection and restoration of social, economic and natural environmental systems”
In general, the definitions of corporate governance found in the literature tend to share certain characteristics: they look into governance structures, processes and practices that are adopted by an organisation and define how these organisations are directed and controlled. The Board of Directors has a key role in safeguarding the good governance within a corporation. Another key notion that must be emphasized is that of accountability.
Overall, more recent approaches tend to take a broader approach and expand beyond the processes, policies, laws, and accepted ways of doing business, and how these affect the way a firm is controlled. They go one step further to include the relationship between a company’s stakeholders, an ethical dimension of governance, the structures of responsibility and the flows of information in place that enable a company to achieve its business goals.
Importantly, while the concept has been extensively studied and researched, one cannot speak of an unanimously agreed definition of what corporate governance stands for.
The Benefits of Good Corporate Governance
The Institute of Directors (UK) believes that high standards of corporate governance are essential if public trust in business corporations is to be achieved. Well governed companies deliver better business performance and safeguard the interests of relevant stakeholders, including shareholders, employees and taxpayers.
Good corporate governance helps companies operate more efficiently, improve access to capital, mitigate risk, and safeguard against mismanagement. It makes companies more accountable and transparent to investors and gives them the tools to respond to stakeholder concerns. It also contributes to development since increased access to capital encourages new investments, boosts economic growth, and provides employment opportunities.
Overall, it ensures that an organisation is managed in a manner that fits the best interests of all. Specifically, Ocorian, a leading international firm in the provision of corporate and fiduciary services, highlights certain beneficial impacts that add value to organisations that adopt good corporate governance practices. Such favourable effects include:
- Risk mitigation – An effective corporate governance framework helps to mitigate risks that can severely impact an organisation and its stakeholders/interested parties, by providing shareholders in non-listed companies with the comfort that although their exits may be difficult, their interests will be safeguarded by the board and management.
- Improved capital flow with reduced capital cost – An increase in confidence by investors and banks in the company due to robust financial management reporting will not only improve access to capital, but also minimise both cost of capital and cost of equity, resulting in an optimised capital flow. Deciding on an appropriate capital structure is thus a key element of good corporate governance. Transparency, especially regarding everything of interest to investors, will command a lower risk premium and, therefore, also contribute to reducing the cost of capital and equity.
- Increase in share price – The value of the organisation will be positively affected
- Reputational boost and brand formation – Transparency in a company’s internal policies, control mechanisms and how it deals with its suppliers, vendors, media, staff and government bodies will boost its reputation and thus its brand value.
- Company image – Through its adoption of an appropriate corporate social responsibility strategy and the allocation of necessary resources, the Board can address issues within the society that it operates and thus build a favourable image for the organisation.
- More effective, better decision-making – Good corporate governance also aims at a faster decision-making process by establishing a clear delineation of roles between owners and management.
- Quality of information – Improved reporting on performance in turn leads managers and owners to make more informed and fact-based decisions, leading ultimately to improving sales margins and reducing costs.
- Focus on compliance – Good corporate governance will adequately rest on policies requiring the company to stay compliant with local laws and regulations; it will synchronise risk management and compliance to ensure the company has proper control mechanisms, meets its objectives and operates efficiently in terms of people, processes, technology and information.
- Higher staff retention – An increase in staff retention and motivation can be expected, especially from senior staff, when the company has a well-defined and communicated vision and direction. A focus on the company’s core business will also make it easier to penetrate the market and attract the interest of shareholders. Additionally, millennials – now the largest single group on the labour market in many countries – tend to rank an organisation’s commitment to responsible business practices highly in their employment choices.
- Limitation of disruptive behaviour, corruption, wastages and conflicts of interest – By establishing rules to reduce potential fraud and malpractices among employees; and, avoiding conflicts of interest namely through minority shareholders being given their share of voice by being represented by independent directors.
Corporate Governance is, in a nutshell, a toolkit that enables management and the board to deal more effectively with the challenges of running a company. It ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced.