The Essence of Corporate Governance

The Essence of Corporate Governance 25
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Published Date:05-07-2017
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ECONOMICS The Essence of Corporate Governance Over the past 20 years I have been engaged in helping boards, senior executives and shareholder activists worldwide to significantly improve their performance and, therefore, their results. There is so much complexity and confusion around the subject of Corporate Governance that it is a useful exercise to go back to the basics of the meaning of governance and what it is or should really be about in practice. By Lynn Carneson McGregor orporate Governance is practice of good corporate governance Face of Corporate Governance, I have fundamentally a human activity is simple, even though it is not easy to suggested that Corporate Governance Crelated to how important achieve. takes place on four interconnecting decisions are made concerning levels: Systemic, Intergroup, the future of corporations and the What Do We Mean By Corporate Interpersonal and Personal governance. communities and environments Governance? Every one of us, regardless of our dependent on them. I suggest that “Corporate Governance” includes role and status, is involved in although the topics that boards need all the activities involved in governing one or more of these levels. to address are complex, the actual corporations. In my book, The Human The “systemic level” refers to the 18 T H E T H I N K E R © ECONOMICS system of governance, both global role. The style and behaviour of the How Can Good Corporate and local, that sets and controls the chairperson sets the tone, culture and Governance at Board Level Be rules, laws and regulations relating to standards of board behaviour. Achieved in Practice? the running of businesses and other The King 3 Report, and indeed organisations and carries out penalties Why is Good Corporate Governance various government Acts, provide for those found breaking the law. So Important? excellent guidelines for how boards This level is run by big global players If all the government and governance should conduct themselves. The – governments, the legal system and systems and the people in them are challenge, however, is to fully other large institutions governing working well, in a perfect world, understand and conform to what is financial systems or trade regulations. business can be conducted smoothly, legally required and then to be able The King 3 Report and various fairly, honestly, without hitches for to select what is most important for government Acts and laws, such as the general good of all. It is a society a particular board. What I like both the New Companies Act, operate at in which trust is taken for granted. about the South African Companies this level. It is possible to influence or There are many boards, companies Act and King 3 is that they encourage change the system in various ways. If and responsible investors that the board to behave intelligently. They the financial or economic system is in make a positive difference. However, highlight three main questions: trouble, this will affect the ability of as we all know, the world is far from 1. Are boards thinking about what companies to operate. perfect. they are doing? “Intergroup governance” refers to Good governance enables 2. Are they able to “apply” the the governance processes that occur sustainable wealth creation whereas Companies Act principles, or between representative groups, for corrupt governance erodes everything “explain” why not? example, between government and that enables decent sustainable 3. Does the board have the required business and between fund managers living for the common good. Poor level of skill and diligence to make and corporations, or between boards corporate governance, usually through sound business judgements? and executive committees. It also a combination of incompetence or Sound business judgement comes includes environmental and social criminal or corrupt practices, causes from understanding how a business operates in relation to the organisation being governed. It requires knowledge Good governance enables sustainable wealth creation and expertise in a number of areas such as finance, law, marketing, whereas corrupt governance erodes everything that enables decent services, production and technology sustainable living for the common good. and human resources. The roles of non-executive directors are different lobby groups and the media. Processes the eventual long-term destruction of from the executive directors they are often include briefing, sharing of whole communities and countries. supposed to govern. Board members information, consultation, negotiation The reason for this is that greedy need to understand what the issues and doing deals, or the opposite. people take as much as they can for are rather than the operational details. The level of “interpersonal their own short-term gains rather than These issues relate to four main areas corporate governance” describes the re-investing in continued productivity. that boards should be competent relationships and dynamics between The industry then lacks the resources to govern: groups of people involved in corporate to develop and grow. Millions of 1. Conformance to legal and regulatory governance. These would include the people eventually lose their jobs and requirements; board, its committees, the executive livelihoods while selfish rich people 2. Performance (strategic direction, committee, and the group of investors go off to tax havens to play. What is deal making, setting priorities and deciding on whether to invest in even worse is that corruption breeds targets); specific companies. The quality of a culture of bribery, blackmail, threat, 3. Monitoring delivery (including making decisions and implementing cover up, deceit, favouritism and financial monitoring and risk them depends on how people vicious attempts to destroy any people assessment); and work together and their levels of who manifest integrity. A corrupt 4. Selection and or sacking of board competency. culture infects the quality of our lives members and top executive “Personal governance” is how each and our ability to live together in trust directors. person “governs” their own life and and harmony. The board also has an overall role to provide oversight of the company being how they fulfil their particular roles. Boards of directors are responsible governed and the external environment How effective an individual is likely for the corporate governance of in which it operates – shareholders, to be will depend on their character, companies. The legacies they leave government, media, stakeholders etc. wisdom, integrity, motivation, values behind will determine whether This requires the board to have a multi- and beliefs, as well as their knowledge our children live in a healthy or dimensional perspective. Experienced and expertise to carry out their work. unhealthy world. The quality of board directors often have an intuitive grasp Corporate Governance is a leadership performance makes a huge difference. V o l u m e 2 4 / 2 0 1 119ECONOMICS or false information, insider dealing, fraud, personal greed, corruption, destructive power games, interpersonal difficulties and tensions and general incompetence on the board. Any of these could undermine the ability of the board to do its proper job. Know the ground has to do with whether the board has enough information to make informed decisions about its various tasks. Does it know the senior executives well enough to give them appropriate feedback, checks and balances or encouragement? How well do board members know what is going on in the company in terms of its ability or inability to deliver? How well does the board know the market and marketing trends? How competent is the board as a whole at analysing financial results intelligently? Are they able to scan the immediate environment to prevent major risks in time? Do they know enough about opportunities that might be available so they can decide to change strategic direction? Do they know enough about how actual or potential investors view them? How well does the board manage the media? Know the terrain refers to the wider national or global context in which the board and the company operate. Non-executive directors often act as the antennae to the outside world. For example, if they see a financial downturn coming, preparations and contingencies can be made to mitigate potential loss of income. On the other hand, directors might be aware of technological changes or know of the right questions to ask. For less chairperson’s particular strengths as about companies that are up for sale experienced boards, I often use a well as weaknesses will influence or potential merger. It is vital to see quotation by Sun Tsui, a fifth century how the board operates. The more the company in a wider context to philosopher to explain the importance the chairperson also understands anticipate its future potential. of perspective in governance: the strengths, weaknesses and needs And your victory will be ensured “Above all, know thyself, know thy of each director and the board as a suggests that only if positive enemy whole, the better able they are to draw relationships are developed and Know the ground. Know the terrain on strengths and to mitigate any risks professionalism, quality of discussion And your victory will be assured.” due to weaknesses and gaps in the and communication are cultivated will – Sun Tsui, The Art of War board’s decision making. ways of working be created that enable Know thyself refers to the quality Know thy enemy is an understanding the board to operate well. Because of of individual board directors and the of external enemies such as bids for the limited time most directors have to board as a whole. Self awareness of the hostile take-overs, financial and global focus on any one particular board at chairperson is most important because crises, media exposure that could present, time and energy is extremely they lead and manage the board. It is damage reputation and significant valuable and needs to be well their unique style, personality and way competition. It is also an understanding managed, not only at board meetings of working that sets the tone, culture of risks internal to the board, such as but between board meetings. and expectations for the board. The inappropriate appointments, withheld By now it should be clear that to 20 T H E T H I N K E R © Lynn Carneson McGregor ECONOMICS govern well is an art and not a tick-box exercise. It is about the ability to make good decisions. A highly effective board is a board where people go away from a board meeting inspired, feeling that they contributed to lively discussions and that the board as a whole made the right decision about an important issue that was as far as possible in the best interests of the corporation, its shareholders and stakeholders. Directors are not afraid to speak their minds but also know when it is appropriate to listen, give others time and when a collective decision needs to be made. There are six key ingredients that occur in all good boards: to boards. Many have the potential Governance at board level is mainly 1. A good chair that sets standards of to develop. Fortunately if there is a about the art of decision making. performance she or he expects from chairperson who understands the Board governance requires oversight the board. minimum competency necessary and a general understanding of 2. An understanding and commitment for the board to do its job, damage a number of complex subjects. by all board members to the same limitation can be done. Investment Corporate Governance fails when the values. in developing expertise prevents board makes the wrong decisions or no 3. A board that understands key expensive mistakes. There are written decisions at all. Hopefully an increasing corporate governance principles and guidelines and courses available from number of our boards will act as is able to carry out its tasks. the South African Institute of Directors, a check and balance against those 4. A board composition that reflects the Institute of Chartered Secretaries corrupt practices that could cripple appropriate knowledge and and various consultancy companies. our country. For many the jury is still expertise. In the media there is a different out as to how many of our business 5. Ways of working together that enable scandal every day. Too many directors leaders will betray our people. I believe directors to work at their best. are found guilty of corruption and that for every one corrupt director, 6. Succession planning and practice nepotism at the expense there are many more who, through implementation that provides of others. There is a new breed of their ability to govern companies well, sustainability. directors who are more interested will enable this country to thrive. Very few boards are perfect in all in fast cars and expensive suits than areas. The difference between a good References responsible governance. It is easy to Lynn McGregor. 2000. The Human Face of Corporate board and a poor board is that there see how the poverty trap encourages Governance. Palgrave. is willingness for the board to evaluate dishonest behaviour and how this Lynn McGregor. Corporate Governance in South Africa. where it needs to improve. Handbook of International Governance, Edward Elgar, becomes deeply embedded and UK, to be published 2011. A poor board lacks all or most of institutionalised in the culture of a Colloquium papers can be found at www.governance. these ingredients. However, there is country. People need to understand a difference between an incompetent that alternative ways of operating are For further information email board and a corrupt board. For those possible and better. In addition, a zero who know that they need to improve tolerance of corruption needs to be their knowledge and expertise, practiced – by government, business, learning is the key. For those who carry courts and judges. Setting up effective out corrupt practices, unlearning is and efficient systems and processes the key. will make it more difficult for corrupt practices to be carried out. It is the Incompetent or Dysfunctional chairperson’s job to insist on and Boards maintain a culture of integrity. South Africa at present lacks large numbers of competent or experienced Summary and Conclusions directors. There is a lack of skilled South Africa is a land of possibilities expertise to fill our boards. This means and opportunities. Its development that directors who do not know what will be influenced by the quality of they are doing are being appointed Corporate Governance. Corporate V o l u m e 2 4 / 2 0 1 121 © Lynn Carneson McGregor

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