“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” (OECD 2015, p. 9).
Corporate Governance is apparently a new term according to the notes. It refers to the relationships between the stakeholders in an organisation. That would include management, the board, shareholders, employees and any other stakeholders. Corporate governance is about setting the direction the organisation is heading and also keeping an eye on any conflicts of interest, perceived or real, that may arise
The Four Ps of Corporate Governance
Although simplistic, the Four Ps of Corporate Governance sums things up very well.
The first P is for People as they are involved at every level of every organisation. They are the directors, the management, the employees, the customers, the shareholders and the stakeholders.
The second P is for Purpose. Every organisation has a purpose, the reason it exists. An organisation’s purpose will often be addressed in its strategic plan which details the direction of the organisation and the goals it is pursuing.
The third P is for Process. In Process we look at the processes and systems the organisation employs in achieving its strategic objectives. Is the organisation being ethical in the pursuit of its purpose? Can the Processes be improved?
The final P is for Performance. The old saying that you cannot manage what you can’t measure is very true when it comes to organisations. It is important to measure the performance of the organisation in terms of achieving its objectives. Is it successful or not?
Any organisation must be governed effectively if it is to operate properly. The structure in which the organisation is governed is set out in its Articles of Association or Constitution. These documents set out the appointment of directors, their powers and other requirements for the governance of the organisation.
Purpose of Governance
Governance is not just about ensuring that an organisation complies with legislation. It is also about being transparent in dealings, maintaining good corporate citizenship, being fair and taking responsibility for the sustainability of the organisation. (Remember ESG?)
There are a number of examples of poor corporate governance such as the destruction of the indigenous site by Rio Tinto, OneTel, HIH Insurance and the VW emissions issue.
Governance and Management
The concept of governance and management is one that needs to be understood as there is a difference. Management has a hierarchical structure visible via an organisation chart. Governance however is more like a circle comprising several directors. Each of the directors has equal power and responsibility, however one director will be the Chair.
The process of management is the operation of the organisation on a day-to-day basis. On the other hand, the board oversees the management process to ensure the organisation is moving towards its strategic objectives. The board should maintain a high degree of independence from operations so that its decisions are unbiased. That said, the line between management and the board can become blurred from time to time. It is in such situations that there needs to be recognition of the problem and observing the line. If there are imperatives that need to be addressed by the board or a director becoming more involved then it needs to be very short term in order to deal with a specific situation. Such involvement should never be ongoing.
Figure 2 clearly demonstrates the board’s activities. The two right-hand areas of formulating strategy and making policy are focused on the future. They are also intangibles. The two left-hand activities of Accountability and Supervision are tangible as they reflect compliance and management supervision. The accountability function also refers to keeping all stakeholders informed and protecting their interests in the organisation.
Types of Directors
Essentially, there are two types of directors. The executive director sits on the board but is also an executive manager of the organisation. Executive directors who sit on the board are therefore involved in both governance and operations of the organisation.
On the other hand, there are non-executive directors who don’t hold a management or employee role within the organisation. As a result, such directors should be totally independent and unbiased in their duties. Generally, governance organisations around the world recommend a majority of directors be independent. This is the case with the Australian Securities Exchange (ASX) and the International Finance Corporation (IFC).
In addition to these two main types of directors, there are a number of other types of directors although much less common. A “shadow” director is a person who is not a formal director but has the ability to exert influence over the board. Some constitutions also provide for “alternate” directors. These are directors who can replace another director in the event they are unable to attend board meetings. such a director is not an agent for the director for whom they are an alternate, but a director in their own right.
Board Structure and Diversity
The most common board structure is that of a unitary board which is the case in Australia. However, in some European countries, a two-tier board exists which is popular and in some cases mandatory. With this type of structure, a Management Board oversees operational issues including strategy and policymaking. Above the Management Board, a Supervisory Board oversees the activities of the Management Board.
In the EU, this structure is mandatory in ten countries and the unitary structure is required in eight. Like everything, both structures have advantages and disadvantages.
Composition of Boards
In traditional small mum-and-dad companies in Australia, the management needs are nominal compared to larger companies. An external accountant normally handles all the compliance work with annual reports, minutes and lodgements to the responsible authorities.
As companies grow, however, it may be desirable to add more directors to the board. These can be either executive directors or non-executive directors. In particular, non-executive directors can bring skills and fresh eyes to the board which the existing directors may not have.
All non-executive boards are common for not-for-profits and community groups. In such cases, the executives may attend board meetings but are not involved in decision-making and have no voting rights.
Diversity on Boards
Diversity on boards is becoming more and more important. Diversity is about much more than gender balance, although that is very important. In addition, diversity is about skillsets, stakeholder representation, and societal representation from those groups affected by the organisation’s activities and decisions.
Boards will often use a skills matrix to review the existing level of skills on the board and identify those that are needed (Corbett & Strawser 2020).
Another aspect of diversity is having directors on the Board from the community you represent. The creation of this type of diversity on the Board will result in Board decisions being made in the interest of the stakeholders and community.
The good governance of organisations be they corporates or not for profits is of paramount importance.
Governance goes to the heart of sustainability for organisations and is one of the principles of Environmental, Social and Governance (ESG) reporting. Without good governance, organisations will find it difficult to establish trust and with no trust, sustainability will be difficult over the longer term.
All organisations should ensure they monitor the situation with their governance on a regular basis.References
- OECD 2015, G20/OECD Principles of Corporate Governance, viewed 21 October 2022, <https://www.oecd-ilibrary.org/docserver/9789264236882-en.pdf?expires=1666325263&id=id&accname=guest&checksum=6D6280B6FA76203359809F094F40777A>.
- Course: 8005CGOV Corporate Governance 2022 Term 6, Topic: Week 1 Governance, directors, and board structure 2022, Aib.edu.au, viewed 21 October 2022, <https://learning.aib.edu.au/course/view.php?id=1307§ion=3>.
- Governance Institute of Australia 2019, What is corporate governance?, YouTube, viewed 21 October 2022, <https://www.youtube.com/watch?v=QNYMsCpX7Rw>.
- Tricker, B 2019, Corporate governance: Principles, policies and practice, 4th edn, Oxford University Press, London.
- Corbett, LP & Strawser, CC 2020, ‘Nonprofit governance and leadership for social impact’, Teaching Nonprofit Management, pp. 56–73.