Everyone is talking about ‘corporate governance’…. but what does it actually mean?

In recent times the term ‘corporate governance’, and the increasingly popular ‘good corporate governance’, appear to be regular topics of discussion both in the media and the general population.

These terms are routinely used when considering the actions of a wide range of companies from very small local companies through to global giants such as McDonald’s and Nike.

However, it is not always clear what these terms actually mean or what steps a company or its board of directors need to take to ensure they are able to demonstrate that they are exercising good corporate governance.

What is ‘corporate governance’?

At its simplest, the term ‘corporate governance’ refers to the way in which companies or organisations are run.

In the Final Report in the HIH Royal Commission, the Hon Neville Owen (former Justice of the WA Supreme Court) wrote that “[c]orporate governance—as properly understood—describes the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. Understood in this way, the expression ‘corporate governance’ embraces not only the models or systems themselves but also the practices by which that exercise and control of authority is in fact effected.”

Corporate governance covers the rules, practices and processes that are in place to direct and control the operation of all companies and organisations. This might include:

How does corporate governance affect how a company or organisation is run?

Corporate governance covers almost every aspect of a company or organisation’s management model. It affects everything from the most fundamental decisions about where supplies are sourced and where products are produced or services provided through to how staff performance is evaluated, employees remunerated and, increasingly these days, whether a company has adopted environmentally sustainable practices both in Australia and overseas.

Other relevant concerns can include how overseas employees are treated and whether a company uses what is often colloquially referred to as “sweatshop labour” or engages offshore suppliers or contractors who support these types of labour arrangements.

Why is ‘good’ governance so important?

Good corporate governance can be viewed as the internal component of corporate citizenship (also known as corporate social responsibility).

Corporate citizenship has been described as having four “faces”:

  1. an economic face—the need to be profitable,
  2. a legal face—the need to obey the law,
  3. an ethical face—the need to engage in ethical behaviour, and
  4. a philanthropic face—the need to “give back” and support the community that supports the business.*

It is not enough for a company or organisation to simply adopt rules and practices that benefit only its directors, shareholders or employees. A balance needs to be struck between the needs and objectives of all stakeholders including those within and outside the company or organisation.

Depending on the type of entity concerned, stakeholders may include a diverse group of interested parties including shareholders, employees, management, clients or customers, organisations that provide funding such as banks or other lending institutions, the government and even the broader community.

In the current climate of ever-expanding media scrutiny and trial by social media it is vitally important that organisations are able to clearly articulate and demonstrate that they are socially responsible corporate citizens and that the manner in which they go about their daily business is beyond reproach.

The guiding principles of good governance

Regardless of whether your company or organisation is small, a not-for-profit concern, or a larger commercial entity, there are some general principles that need to be considered and adhered to in order for good corporate governance to occur:

  • Board members need to fully appreciate and understand the role of the board on which they sit and their particular role on that board. The board must set the culture and ethical tone of the organisation. It needs to play a central role in shaping vision, purpose and strategies. This ‘top-down’ approach is necessary to ensure everyone within the organisation understands the importance of acting honestly and ethically;
  • In addition to acting ethically as a group, all board members should exercise their own independent judgment to any decision-making processes;
  • The board should be composed of a sufficient number of suitably qualified individuals who have a wide skill base and sufficient experience. If possible, the chairperson of the board should be independent and separate from the CEO;
  • Appropriate internal risk management strategies should be in place and directors should always be informed and act in a timely manner in response to any information that comes to their attention that affects the management of the company;
  • If a board delegates any management functions to a management team within the organisation any delegated functions or responsibilities should be clearly detailed in a written statement;
  • The board is responsible for choosing and appointing a CEO and should also be responsible for monitoring the CEO’s ongoing performance;
  • The board should also be responsible for ensuring that communication with stakeholders both within and outside the organisation is regular and timely and that stakeholders are provided with sufficient information to allow them to make informed decisions about the organisation; and
  • The board’s own performance including that of individual members and any sub-committees should also be regularly evaluated and if any problems or issues are identified then steps should be taken to rectify problems as soon as possible.

Accepting a position on a board comes not just with a nice title for the CV, but also with a range of important responsibilities and obligations.

Interested in better corporate governance?

The Governance Institute of Australia has loads of resources for board members and offers postgraduate courses on corporate governance and risk management.

The ASX also publishes a guide called Corporate Governance Principles and Recommendations.

Conclusion

Good corporate governance is integral to the proper management of any company or organisation and seeking legal assistance when needed can be an important part of both individual directors and the board ensuring that they fulfil their roles with both skill and integrity.

If you or someone you know wants more information or needs help or advice, please contact us.

 

* Carroll, A.B., 1998. The four faces of corporate citizenship. Business and society review100(1), pp.1-7

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