This article explains and offers standards and templates for Corporate Governance for business students, teachers, managers and leaders. For a shorter definition and explanation see Introduction to Corporate Governance.
Background Information - The Relevance of Corporate Governance
- The concept of Corporate Governance grew in response to increasingly serious corporate scandals of the late 1900s and remains strongly concerned with these areas of corporate risk, however, the ideas surrounding it are becoming more widely applicable and useful, for small organisations as well as the very biggest.
- It is a truly global concept and when businesses and organisations become established on the moon and on the planets of other solar systems, Corporate Governance will be truly universal too.
- Everywhere that people organise themselves into structures, and especially where these structures have mixed obligations to owners, staff, customers and so Corporate Governance as a concept is highly relevant.
- Corporate Governance also offers a very interesting perspective to consider human characteristics of leadership, authority, ego, wealth creation and accumulation, greed, risk, responsibility, ethics or morality and how these tendencies reconcile or conflict with organisational and market dynamics, the needs of society, environment, quality of life and economic health.
Corporate Governance is now central or strongly related to some of the world's most serious modern economic challenges.
- The extent and methods by which corporations minimise their tax obligations.
- The balancing of corporate priorities to staff, customers, society, planet and shareholders.
- The balancing of reward and employment terms between directors and ordinary staff.
- The tendency for industries to concentrate on cartels and monopolies.
- How industries such as alcoholic drinks, tobacco, media, armaments/munitions, pornography, gambling, pharmaceuticals, etc., approach social responsibility.
- Equality and discrimination.
- How industries such as transport, energy/fuels, mineral extraction, agriculture, etc., approach environmental responsibility.
- The legalisation of industries such as narcotics and prostitution.
- Finance and money.
- Ownership and operation of education, health, prisons, etc.
- How governments reconcile national economic needs with global responsibility needs.
- Free market economics (let market forces decide).
- Regulation of the internet and world wide web.
- Privatisation versus nationalisation.
Definitions of Corporate Governance
The term 'Corporate Governance' is defined in different ways, so care is required when interpreting its precise meaning in different situations.
To begin with, literally, the term 'corporate governance' is by implication self-defining, on the basis that:
- Corporate means: 'relating to a large company or group' (Oxford English Dictionary). The word came into English in the late 15th century, from Latin, corporatus and corporare, 'form into a body', from corpor and corpus, 'body', which is the same origin as corpse, (dead body), and the French-English word corps, (a military subdivision or other group of select people, such as a ballet troop).
- Governance means: 'the action or manner of governing a state or organisation, etc.' More helpfully, the root word govern means: 'conduct the policy, actions and affairs of (a state, organization, or people) with authority. The word came into English in the late 1200s, via Latin and French, ultimately from Greek kybernan, to steer or pilot a ship, and to direct something.
Therefore, literally and essentially the definition of Corporate Governance is the directing of a large organisation.
In more interesting detail: In law the word corporate refers to (a large company or group) being able to act as a single entity, and being recognised as such in law, i.e., the company or group stands alone as a responsible accountable body, quite distinct from the people who work for it, or supply it, or own it.
- This is highly significant. This constitutional situation creates enormous potential for problems, because inherently such an arrangement offers a way for individuals to hide from or avoid personal responsibility, within a protective cloak of 'the corporation', which in fact can only act according to decisions/actions/inaction of its leaders and employees, and yet in law is treated as a responsible accountable entity as if it were a person. The concept and correct implementation of Corporate Governance may be seen as addressing this vulnerability.
While the word governance in the context of Corporate Governance basically refers to directing an organisation, this short phrase implies very many component factors. Governance also includes and extends to:
- Policies and protocols
- Leadership style and methods
- Management structures and practices
- Accounting and taxation
- Organisational culture and habits
- Systems and administration
- Strategies and tactics, marketing and advertising
- Buying, supply chain management
- Manufacturing and distribution
- Organisational purposes, aims and priorities - and how these are balanced against by-products, effects, consequences
- The psychological contract
- Decision-making and decision-making processes
- Quality, safety, sustainability
- Staff development, well-being and health
- Equality, discrimination, human rights
- Risk assessment of activities and decisions
- Communications and public relations
- ITC - information and communications technology
- Technology and innovation
- Social and environmental responsibility
- Finance, profit, remuneration
- Shareholder relations and returns
- Legality, probity, ethics and morality
- Setting the company's strategic aims,
- Providing the leadership to put them into effect,
- Supervising the management of the business
- Reporting to shareholders on their stewardship.
Corporate Governance Definition Cadbury Report
Here is the definition of Corporate Governance which appears in the 1992 Cadbury Report, considered the first major official Corporate Governance code:
"1. Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include:
The board's actions are subject to laws, regulations and the shareholders in general meeting.
2. Within that overall framework, the specifically financial aspects of corporate governance (i.e., Committee's remit) are the way in which boards set financial policy and oversee its implementation, including the use of financial controls, and the process whereby they report on the activities and progress of the company to the shareholders.
3. The role of the auditors is to provide the shareholders with an external and objective check on the directors' financial statements which form the basis of that reporting system. Although the reports of the directors are addressed to the shareholders, they are important to a wider audience, not least to employees whose interests boards have a statutory duty to take into account.
4. The Committee's objective is to help to raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them."
Note. The above-numbered points were originally shown as points 2.5 to 2.8 in the Cadbury report, formally titled Report of The Committee on the Financial Aspects of Corporate Governance, 1st Dec 1992.
Other Definitions of Corporate Governance
Other definitions from different times reflect varying interpretations of the Corporate Governance concept:
- The Capstone Encyclopaedia of Business (2003) defines Corporate Governance as follows: "Corporate Governance is the examination of the control of a company as exercised by its directors. The directors of public companies are accountable for their actions to the company shareholders. However, in practice, the power of the shareholders to affect the behaviour of the directors is limited and rarely exercised. As a result, unlike a government that is restrained from certain action by the people it governs and the institutions of government, directors are relatively unfettered, with considerable power to act however they wish..."
- The Oxford (University Press) Business English Dictionary (2005) defines Corporate Governance as: "(Corporate Governance is) ...the way in which directors and managers control a company and make decisions, especially decisions that have an important effect of shareholders."
- Interestingly the Shorter Oxford English Dictionary (1922) does not list 'Corporate Governance' but offers a definition of 'Governance' as follows: "Method of management, system of regulations..." and fascinatingly says this meaning is first recorded in English in 1660.
- Now consider the Wikipedia definition of Corporate Governance (2013). Notice that it is much broader than typical earlier definitions, particularly in its implications beyond responsibilities to shareholders: "Corporate Governance refers to the system by which corporations are directed and controlled. The governance structure specifies the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and procedures for making decisions in corporate affairs. Governance provides the structure through which corporations set and pursue their objectives, while reflecting the context of the social, regulatory and market environment. Governance is a mechanism for monitoring the actions, policies and decisions of corporations. Governance involves the alignment of interests among the stakeholders..." (Wikipedia 2013)
Corporate Governance is an increasingly significant aspect of business and organisational management, extending to international politics and trade laws and to globalised economics, corporations, organisations and markets.
Theories, standards and regulations relating to Corporate Governance began to develop properly in the 1990s, so it is a relatively recent field of economic and management practice.
From a simple and minimal point of view:
- Corporate Governance is a specialised mechanism for regulating risk in corporate activities, thereby (hopefully) averting corporate disasters, scandals, and consequential damage or losses to investors, staff, society and the wider world.
- Corporate Governance is a very sophisticated and flexible concept which addresses fundamental organisational purposes (for every type of organisation - from a tiny corner-shop to the largest multinational conglomerate) together with the most serious challenges arising from the globalisation of corporate and organisational structures and the markets they serve.
Corporate Governance has also become an instrument for understanding, questioning, and refining some fundamental economic systems and philosophies, notably: capitalism, free-market/market forces economics, business ethics, corporate leadership, the Psychological Contract, political economics and globalisation itself.
Corporate Governance and Globalisation
With special regard to globalisation, the US economist visionary and author, Joseph Stiglitz, winner of the Nobel Prize in Economics, noted the growing significance of Corporate Governance relating to globalisation, with these remarks in 2006: "...Corporate governance can recognise the rights not only of shareholders but of others who are touched by the actions of corporations... An engaged and educated citizenry can understand how to make globalisation work... and can demand that their political leaders shape globalisation accordingly." (Joseph Stiglitz, 2006).
In recent and modern use the term Corporate Governance essentially refers to the actions of directors who run publicly quoted companies.
Increasingly the principles of Corporate Governance also apply to public services organisations and can be adapted for small businesses and cooperatives and social enterprises too.
In fact, Corporate Governance is now a very flexible concept by which to examine, develop and establish the fundamental aims and rules for any sort of organisation, especially organisations which serve multiple purposes (e.g., for owners, staff, customers, etc), as most do.
The concept of Corporate Governance and the term itself became prominent in the late 1900s and early 2000s, in response to several corporate scandals and disasters of that period, which did great harm to:
- Company shareholders and stakeholders, and/or
- Staff and pension-holders, and/or
- Nations and economies, and/or
- The environment, and/or
- Sections of society, and by definition also to
- The companies themselves (thereby reducing values for shareholders).
Many of these disasters and scandals involved criminal negligence or fraud by the directors responsible. These incidents occurred largely because directors and/or senior managers were able to act:
- With too much freedom,
- Without reference to an appropriate transparent, firm, formal code of governance, and
- In ways that were hidden from scrutiny, especially from shareholders.
Since the late 1900s, several factors enabled a marked increase in the frequency and scale of corporate disasters and scandals. These factors include notably:
- Globalisation - markets are global, and connected as never before, natural boundaries and limits that existed before globalisation no longer exist, so problems can reach and spread far wider than in earlier times.
- Technology - the vast modern scale of technologies and the sheer size of things that organizations now create and process, in every sector, increase the scale of the potential damage of corporate wrong-doing. For example consider the enormous scale of manufacturing, production, commodities, machinery, transport, construction, IT or the web compared with a generation ago. When something goes wrong in modern times, the impacts are potentially bigger than ever in history.
- Population - volumes and densities of populations everywhere have increased dramatically since the late 1900s. Where corporate scandals and disasters happen, the potential to affect vast numbers of people has never been greater.
- Free Market - since the late 1900s the fondness of (mainly 'western') governments for 'free market' capitalist economics (basically the view that market forces should be kept free from interference) has encouraged the development of unregulated major risk-taking in organisational governance - and this style of running organisations has now become deeply embedded into corporate attitudes. Most corporations are run in an extremely selfish and greedy manner. Short-term gain and the enrichment of directors and senior staff continue to drive corporate strategy and decision-making everywhere. Combined with the other factors, this creates a potent recipe for disasters of all kinds.
Given that these factors are likely to persist in offering progressively greater potential for the negative impact of corporate activity on societies, economies and the environment people are increasingly calling for substantially improved visibility and controls in Corporate Governance.
Below are some notable examples of corporate scandals and disasters in the late 1900s and early 2000s, which helped raise concern and pressure for improved Corporate Governance. These examples contain various degrees of willful and reckless disregard for the proper governance of a corporation. Collectively these events listed, and a few others besides, have dramatically increased awareness and pressure surrounding Corporate Governance among the general public, media, governments and regulatory authorities.
- Polly Peck Collapse - Polly Peck International grew rapidly in the 1980s from a small British textiles company to a vast FTSE 100 conglomerate corporation, but imploded in 1990 with debts of £1.3bn amid claims of gross mismanagement and fraud. The founding CEO Asil Nadir fled from prosecution to Cyprus in 1993. Polly Peck was one of a few scandals which prompted the 1991/2 Cadbury Committee and Code on Corporate Governance, internationally the first of its type. Nadir returned to the UK to face the court and was found guilty of multi-million theft and sentenced to 10 years imprisonment in 2012.
- BCCI collapse - The Luxembourg-registered Bank of Credit and Commerce International (BCCI) was founded in 1972 by Agha Hasan Abedi, with HQs in Karachi and London. By 1982 BCCI operated in 78 countries, with over 400 branches, and assets exceeding $20bn, making it the 7th largest private bank in the world. Following regulatory concerns and investigations BCCI was found to be established fraudulently, trading illegally on a vast scale, including money-laundering, and in 1991 regulators raided and shut its operations in seven countries. Legal actions involving $100s of millions persisted for more than ten years including substantial damages settlements from BCCI auditors Price Waterhouse and Ernst & Young. The BCCI scandal was a major prompt, along with Polly Peck's collapse, for the 19991/2 UK Cadbury Committee on Corporate Governance.
- Guinness Scandal - A share-price manipulation fraud of the late 1980s, related to the acquisition by Guinness plc of United Distillers plc drinks company, in which the Guinness plc CEO Ernest Saunders and three others were convicted and (three of the four) imprisoned for secretly and illegally inflating the value of Guinness shares to help secure the acquisition. Amusingly, Saunders later gained early release from prison due to contracting the incurable Alzheimer's disease, from which later he made a miraculous full recovery. Guinness later changed its plc name to Diageo.
- Enron - The US energy company became in 2001 the world's biggest bankruptcy (supposed assets of $63bn), due to the fraudulent accounting of chairman and a few directors, and negligence of auditors Arthur Andersen (then one of the world's major five accounting corporations), which also folded as a consequence of the scandal.
- BP Deepwater Horizon Disaster - This was the biggest-in-history 87-day 5million-barrel oil spill following the Deepwater Horizon oil rig explosion, sinking, and worker fatalities, in the Mexican Gulf in 2010. BP was convicted of 11 counts of manslaughter and other crimes related to the disaster, including lying to US Congress. Fines exceeding $4bn were continuing to increase at 2013, as were various criminal/civil damages and compensation payments exceeding $40bn. Corporate failures in the disaster itself and the aftermath were utterly catastrophic - for the local eco-system and economy, and for BP, especially in the US.
- Mirror Group Pensions Scandal - Founder Robert Maxwell's death from drowning in 1991 exposed his theft of £100s of millions from his corporation's pension funds, leading to the bankruptcy of the UK Mirror Group company and substantially reduced pensions for thousands of workers even after compensation from public funds. This is quite aside from the damage to shareholders arising from corporate bankruptcy.
- Exxon Valdez Disaster - This was a huge oil spill off Alaska when the Exxon Valdez tanker ran aground in 1989, resulting in protracted litigation and fines of hundreds of millions for ExxonMobil.
- Bhopal Disaster - A gas leak at US Union Carbide's joint-venture Indian plant in 1984 killed thousands of people immediately, and many thousands more subsequently, producing fines of hundreds of millions for the plant's US and Indian owners.
- Barings Bank Collapse - the oldest UK merchant bank collapsed in 1995 after its unchecked maverick trader Nick Leeson lost £827m in progressively disastrous secret trading at Baring's Singapore office. Leeson went to jail in Singapore. The bank's directors escaped despite official inquiry condemnation for complete lack of the most basic levels of governance.
- News International/News of the World phone-hacking scandal - Investigations in 2005-12 found that Newspaper executives and other staff of the Murdoch news organisation had sanctioned/encouraged/conducted phone hacking of public figures and private people in the news, including victims of serious crime and their relatives. The 168 year-old News of the World newspaper was closed by its owners because of the advertiser/public backlash, and at 2013 legal action persisted against executives and associates for serious crimes related to the scandal including bribery of police.
- Global Financial Crisis of 2007-8 and resulting Global Recession of 2007-13 (and for some nations far beyond this) - Corporate recklessness and negligence among some of the world's biggest banks caused the worst global recession for decades, including the effective bankruptcies of entire nations, such as Iceland, Ireland, Spain, Cyprus, Greece and the UK. At 2013 no criminal charges had been brought against any bank directors, although at least one knighthood was voluntarily forfeited, and a small fraction of a single percent of executive personal bonus payments and share options rewards was returned. At 2013 much of the world was still awaiting full recovery from the global financial collapse and the resulting full-blown economic depression, and governments and regulatory authorities were continuing to debate how it all went wrong and how best to ensure that it could not happen again. Almost without exception, the scores of culpable bank directors continue to live in great luxury, apparently completely free from the risk of prosecution or any sort of retribution, holding on to their illicitly gained fortunes and pensions, and many actually still working as corporate directors and consultants being paid more in a year than most people earn in a lifetime.
Corporate Governance and Nudge Theory
The emergence of Nudge theory in the 2000s - a powerful system for change/societal-management increasingly used by governments to understand and alter group behaviour - reinforces the principle that governance must be driven by the needs of the people being governed, not by the governing authority.
This history of Corporate Governance contains a very strong UK bias because the UK has to a great extent pioneered the development of Corporate Governance codes and standards. This, in turn, is probably mostly because the UK has hosted some of the greatest corporate disasters of all time.
The emergence and development of Corporate Governance as a concept and regulatory consideration has largely been driven by events. Corporations have never, as a general rule, been focused proactively on their own proper governance with the same enthusiasm as for example, they have tended to focus proactively on other corporate priorities, such as:
- Expansion of market share
- Advertising, marketing and PR
- Cost control
- Creative accounting and tax avoidance.
Self-Regulation and Risk
As a general rule, corporations, by their nature, tend not to self-regulate. The more money that's at stake, the more this tendency applies. So instead of self-regulating, big corporations, especially banks, have tended to bend rules and push boundaries of all sorts, in pursuit creative profiteering and grotesque self-enrichment, until an authority of some sort, often driven by news media, public opinion, and nowadays social media, finally attempts to control or prohibit the excessive or negligent activity.
Corporations - to one degree or another - have mostly always been like this. It is the nature of corporations to focus mainly on improving commercial performance and to maximise profit, so naturally, these are basic instincts of most entrepreneurs and corporate leaders. Sometimes, it must be noted, this tendency to take risks produces good outcomes - for example, great technological innovations and inventions, and increased accessibility to life-improving products and services.
Also, it can be argued that the world is, in general, more comfortable than it was in the past partly because of corporate adventure and pioneering. Diseases and illnesses that killed millions can now be treated. Our homes are warm and dry (but not for all people in the world). Food is most plentiful and safe and nutritious (also not for all people in the world). We live longer than ever before. We can do more than our ancestors dared to dream. The skills and decisions of corporate leaders and the corporations they lead, since the age of industrialisation, have helped give people better lives (also not all people in the world) and it is important to acknowledge that some of what is done by corporations and their leaderships is positive and on balance has been good for humankind. Yet, as mentioned after each example, whilst some, particularly in the global north, have massively benefitted from these developments, it is important to consider that there are many people who have not benefitted or even suffered - sometimes referred to as "the losers of globalisation".
When corporate risk is misdirected, and risks are permitted or ignored on a vast scale, then there is potential for substantial harm.
History of Corporate Governance
The earliest significant government-level consideration of corporate behaviour, in relation to negligence of corporate boards and directors, began in the USA after the 1929 Wall Street Crash, which prompted the great American and global recession of the 1930s ('The Great Depresssion').
- While there was much debate as to the corporate responsibility for such a deep and enduring social and economic crisis, no specific Corporate Governance legislation resulted.
- Legislative reactions to the Wall Street Crash and Great Depression were essentially concerned with the administration and sale of securities (assets such as money, bonds, stocks and shares, debt, and financial derivatives), and the measures taken by the Hoover and Roosevelt governments to push the USA out of depression.
The Securities Act of 1933 centralised and tightened regulation the American securities industry, while the 1934 Securities Exchange Act created the US Securities and Exchange Commission, both of which, subject to amendment remained in force, at 2013.
- There was no specific legislative attention to Corporate Governance anywhere else in the world, and the term itself at that time would not have been recognised, other than in a literal ad-hoc sense.
Thereafter the chaotic industrial and military boom of the 2nd World War (1939-45), and its challenging aftermath, generated entirely different priorities for governments and authorities.
- In the 'developed world' after the wartime efforts and strains of the early 1940s a period of great austerity and gradual recovery followed. The potential for major corporate disasters - by today's standards - remained limited.
- In the 1960s however, the shape of societies and economies across the world was changing fast and radically. Corporations began to organise themselves more globally, enabled by new fundamental drivers of growth.
These growth drivers can also be regarded as contributory factors in the increasing awareness of and need for improved Corporate Governance:
- New technologies and technical innovations
- Bigger faster transport systems
- Better availability of fuel/energy/resources
- Population growth and shifting demographics - the beginning of the mass-market consumer society
- Sophisticated marketing systems/methods
- Liberation of finance, money supply, relaxed credit controls
- 'Free market' economic government strategies - the view that market forces must determine how markets work
- A step-change in female liberation and equality - producing more workers and consumers
- Emerging big new international markets
- Dramatic improvements in corporate systems/efficiencies
- Information/knowledge-management and the internet
- Social networking (an extremely relevant factor in the 2000s)
These drivers of unprecedented growth and globalisation enabled and fuelled huge increases in consumer demand, and an inevitable enthusiastic capability among corporations and nations to innovate, produce and supply, which was both driving and responding to consumption demands.
By the 1970s there was potential for corporate disasters on a wider and more serious scale than ever before, and this potential continued to increase in magnitude and probability.
By the 1980s, globalisation and its accompanying circumstances, had enabled several very big corporate failures which were characterized by unprecedented levels of:
- Executive recklessness, fraud, negligence, incompetence
- A lack of transparency, combined with deeply hidden conspiracy
- The immense scale of impact and harm, to investors, economic stability, society, the environment, etc.
The popularly named 'Cadbury Report' of 1992 provided the first substantial formal Corporate Governance code.
Prompted by several major corporate scandals of the late 1900s involving UK corporations (notably the collapse of public corporations Coloroll and Polly Peck), the Cadbury Committee was established in the UK in 1991, and its report was published in December 1992.
- The Cadbury committee, report and inferred code were informally named after the committee's chairman, Sir Adrian Cadbury (b.1929), of the Cadbury's chocolate corporation. Adrian Cadbury, and the Cadbury's business, founded on Quaker principles, had a long-standing reputation for ethical and astute Corporate Governance, hence his appointment.
- The committee's full name was The Committee on the Financial Aspects of Corporate Governance. It soon became known as the Cadbury Committee. It was established in May 1991 by the UK's Financial Reporting Council, the London Stock Exchange, and the accountancy profession.
The committee report gave its reasons for being established as follows:
"The Committee was set up in May 1991 by the Financial Reporting Council, the London Stock Exchange and the accountancy profession to address the financial aspects of corporate governance... Its sponsors were concerned at the perceived low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company reports sought and expected. The underlying factors were seen as:
- The looseness of accounting standards
- The absence of a clear framework for ensuring that directors kept under review the controls in their business
- Competitive pressures both on companies and on auditors which made it difficult for auditors to stand up to demanding boards
These concerns about the working of the corporate system were heightened by some unexpected failures of major companies and by criticisms of the lack of effective board accountability for such matters as directors' pay. Further evidence of the breadth of feeling that action had to be taken to clarify responsibilities and to raise standards came from a number of reports on different aspects of corporate governance which had either been published or were in preparation at that time."
- The Mirror Group pensions scandal and the collapse of the Bank of Credit and Commerce International (BCCI) - both huge bankruptcies entailing criminal activities of directors - occurred while the Cadbury committee was in process, and dramatically heightened awareness of and interest in the Cadbury Committee's findings, together with the Corporate Governance issue as a whole.
The term 'Corporate Governance' was relatively uncommonly used before the Cadbury committee, and would not have been widely understood outside of economists and business specialists. The Cadbury Committee and its report - and the surrounding publicity - effectively popularised the term and established it as a generally recognised concept among business people and students, in the mainstream media and among the general public too.
The Cadbury Report Summary of Recommendations
Here are the essential conclusions from the Cadbury report's summary of recommendations.
First are notes for compliance, followed by the Code of Best Practice (the 'Cadbury Code of Corporate Governance').
While this code has since been updated it remains a highly significant and useful guide to Corporate Governance principles. The Cadbury code provided the first serious template for all other international Corporate Governance frameworks, including those which were to follow in the European Union, the USA and beyond. It can therefore justifiably be described as a truly substantial landmark in the history of business and economic management.
Compliance with the Code of Best Practice
1. The boards of all listed companies registered in the UK should comply with the Code of Best Practice (set out on pages 58 to 60 of the report). As many other companies as possible should aim at meeting its requirements.
2. Listed companies reporting in respect of years ending after 30 June 1993 should make a statement about their compliance with the Code in the report and accounts and give reasons for any areas of non-compliance.
3. Companies' statements of compliance should be reviewed by the auditors before publication. The review should cover only those parts of the compliance statement which relate to provisions of the Code where compliance can be objectively verified. The Auditing Practices Board should consider guidance for auditors accordingly.
4. All parties concerned with corporate governance should use their influence to encourage compliance with the Code. Institutional shareholders in particular, with the backing of the Institutional Shareholders' Committee, should use their influence as owners to ensure that the companies in which they have invested comply with the Code.
The report also recommended:
- Establishment of a new Committee (1995) to review and extend the reach of the Code (see next paragraph)
- The UK Companies Act be amended to require shareholders' approval for directors' service contracts to exceed three years
- Tightening of requirements for corporate reporting of interim accounts and balance sheet information
- Tightening of rules to improve the objectivity and independence of the auditing of company accounts, and the effectiveness of internal reporting systems
- Tightening of rules concerning evidencing a business as a 'going concern' (i.e., trading properly, viably and profitably)
- An obligation for institutional shareholders to disclose their voting policies
- The accountancy profession extends its auditing considerations to other illegal corporate acts aside from fraud
- Statutory protection for auditors when reporting fraud
Additionally, the Committee noted points for consideration by its successor Committee:
- The application of the Code to smaller listed companies
- Directors' training
- The rules for disclosure of directors' remuneration, and the role which shareholders could play
- A requirement for inclusion of cash flow information in interim reports
- The procedures for putting forward resolutions at general meetings
- Nature and extent of auditors' liability
Summary of The Cadbury Report
1. The Board of Directors
1.1 The board should meet regularly, retain full and effective control over the company and monitor the executive management.
1.2 There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognised senior member.
1.3 The board should include non-executive directors of sufficient calibre and number for their views to carry significant weight in the board's decisions.
1.4 The board should have a formal schedule of matters specifically reserved to it for decisions to ensure that the direction and control of the company are firmly in its hands.
1.5 There should be an agreed procedure for directors in the furtherance of their duties to take independent professional advice if necessary, at the company's expense.
1.6 All directors should have access to the advice and services of the company secretary, who is responsible to the board for ensuring that board procedures are followed and that applicable rules and regulations are complied with. Any question of the removal of the company secretary should be a matter for the board as a whole.
2. Non-Executive Directors
2.1 Non-executive directors should bring an independent judgement to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct.
2.2 The majority should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement, apart from their fees and shareholding. Their fees should reflect the time which they commit to the company.
2.3 Non-executive directors should be appointed for specified terms and reappointment should not be automatic.
2.4 Non-executive directors should be selected through a formal process and both this process and their appointment should be a matter for the board as a whole.
3. Executive Directors
3.1 Directors' service contracts should not exceed three years without shareholders' approval.
3.2 There should be full and clear disclosure of directors' total emoluments and those of the chairman and highest-paid UK director, including pension contributions and stock options. Separate figures should be given for salary and performance-related elements and the basis on which performance is measured should be explained.
3.3 Executive directors' pay should be subject to the recommendations of a remuneration committee made up wholly or mainly of non-executive directors.
4. Reporting and Controls
4.1 It is the board's duty to present a balanced and understandable assessment of the company's position.
4.2 The board should ensure that an objective and professional relationship is maintained with the auditors.
4.3 The board should establish an audit committee of at least three non-executive directors with written terms of reference which deal clearly with its authority and duties.
4.4 The directors should explain their responsibility for preparing the accounts next to a statement by the auditors about their reporting responsibilities.
4.5 The directors should report on the effectiveness of the company's system of internal control.
4.6 The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary.
(Extracted and summarised from the Report of The Committee on the Financial Aspects of Corporate Governance, ['The Cadbury Report'], Dec 1992)
Significance of The Cadbury Report
Further clear evidence of the huge significance of the Cadbury Report appeared in the 1998 UK Hampel Report (Committee on Corporate Governance, 1998), which stated in its opening section, point 1.5:
"The Cadbury Committee - a private sector initiative - was a landmark in thinking on corporate governance. Cadbury's recommendations were publicly endorsed in the UK and incorporated in the [UK Stock Exchange] Listing Rules. The report also struck a chord in many overseas countries; it has provided a yardstick against which standards of corporate governance in other markets are being measured."
The Greenbury Report (1995)
The Cadbury Report was followed by the Greenbury Report in 1995, sponsored by the UK Confederation of British Industry, ostensibly to examine and make recommendations about the remuneration of directors of UK plc. Titled 'Directors' Remuneration - Report of a Study Group chaired by Sir Richard Greenbury' it was chaired by Richard Greenbury, chairman of Marks and Spencer. Its main conclusions and recommendations basically asserted that directors' remuneration arrangements (including salary, bonuses, pensions, and stock options) were inadequately transparent, arbitrarily determined, often disproportionately generous, and should in future be made properly and transparently linked to performance.
The 'Hampel' Committee on Corporate Governance
The recommended follow-up Committee to the Cadbury Report was the 'Hampel' Committee on Corporate Governance, (chaired by Ronnie Hampel, chairman of ICI). Its report was published in 1998.
- The Hampel Committee and report was sponsored by the original Cadbury sponsors, who were joined by the UK Confederation of British Industry, sponsors of the Greenbury report on director's remuneration.
- The Hampel Committee and Report effectively reviewed the effects of, and refined and combined, the Cadbury and Greenbury codes, both of which were strongly endorsed.
During the early 2000s, the role of institutional investors (for example big pension funds) became increasingly acknowledged as a major issue in Corporate Governance, and a significant change in perception happened, which was later to be reflected in a dedicated separate code for the conduct and responsibilities of these vast and highly influential shareholders. The change effectively shifted part of the responsibility for Corporate Governance onto major institutional shareholders, in recognition of, historically, a degree of apathy and tolerance on their part. Regulators developed the view that if large institutional investors failed to scrutinise and apply high standards to the conduct of corporate directors, then the investors were also at fault.
After the Cadbury Report - The Global Financial Crisis' Impact of Corporate Governance
Despite these new codes and increased regulatory pressures, major corporate negligence persisted, not least in the collapse of the global financial system in 2007/8, caused and illustrated by the failures of several banks in 2007/8, starting with the recklessly over-leveraged Northern Rock bank in the UK, followed by similarly over-exposed US banks Lehman Brothers, Fannie Mae, Freddie Mac, Merrill Lynch, Citigroup, AIG and a few others. Many bigger banks, in the UK notably, had to be saved by state nationalisation, i.e., the taxpayer, causing vast national financial deficit problems and economic austerity measures enduring long into the 21st century.
Following the global financial crisis of 2007/08, and especially the disastrous collapse of the UK Northern Rock bank early in the crisis, the UK Walker Review/Report was commissioned in February 2009 (by Prime Minister Gordon Brown) to examine the board practices at UK banks and other financial institutions. The review chiefly addressed the financial vulnerability and risky behaviour of financial institutions, and concluded, (very basically) that:
- (Unsurprisingly) Corporate Governance was inadequately developed and applied in many banks,
- Banking failures were due to individual recklessness rather than systemic problems,
- Promotion of best practice would be a better remedy than increased regulation.
That such a crisis could develop, and that such a report could be required, is a telling comment on how poorly certain very large corporations had actually adopted any sort of Corporate Governance Code or the recommendations of Cadbury and subsequent similar committees.
It is tempting to wonder why no official Corporate Governance committee has yet dared suggest that there might be something wrong in the way that men of such genuinely limited sensitivity and scruples could so easily climb to and remain at the top of such vast and important corporations. Corporate Governance will surely fail while it ignores the need for corporate leaders to have morality, humanity, and empathy for other people. Corporate disasters continued to occur in the 21st century.
- UK corporations had at this stage a long way to go in meeting Cadbury's 1992 standards, and official surveys indicated substantial non-compliance among major UK listed corporations during the early 2000s. Similar problems persisted in the US and elsewhere in the world, although arguably not to the same extent as in the UK and US, whose financial corporations had for decades been so dominant and powerful.
- These failings were attitudinal, not systemic or procedural. Corporate Governance was continuing to fail because corporate leaders continued wilfully to ignore it. Corporate bosses could make tons of money, but they could not be trusted to make responsible decisions.
- In this respect, many corporate leaders - again especially in the banking sector - were simply not properly qualified to hold their positions. Moreover, the corporations had grown so vast that no-one in a regulatory authority anywhere seemed qualified to specify (let alone assess) what the qualifications of a CEO of a vast multinational bank or oil corporation should be.
Lastly, in 2010 all the previous UK Corporate Governance codes, plus a few other related interim official committee reviews and reports concerning Corporate Governance, were combined into what is known as the UK Corporate Governance Code (also called 'The Combined Code').
In the UK, which continued to pioneer Corporate Governance legislation and code-making (not least because so many of its corporations were continuing to demonstrate a serious need for improvement) responsibilities of institutional investors towards Corporate Governance became subject to separate code. This was called the UK Stewardship Code, introduced by the UK Financial Reporting Council in 2010.
- The Stewardship Code aimed to offer principles and recommendations to institutional investors holding voting rights in UK companies. The main purpose of the UK Stewardship Code was to improve the awareness of, and engagement in, Corporate Governance among institutional investors (the managers of other people's money, via pension funds and other investment mechanisms, etc.) - specifically according to the needs of their own shareholders/customers.
Historically institutional shareholders had not exhibited a very strong focus on these responsibilities and given their potentially great power, this was seen as a major opportunity to improve financial responsibility in the corporate sector. Here are the main obligations of institutional investors asserted by the Stewardship Code:
- Transparent, effective policy for stewardship
- Transparent, effective policy for managing conflicts of interest in stewardship
- Adequate monitoring of companies in which investments are held
- System for escalating activity to protect/enhance shareholder value
- Act collectively with other investors as required
- Transparent effective policy on voting activity
- Report regularly on stewardship and voting
- A legal duty to report non-compliance in any of these obligations
The Stewardship Code built on and extended the UK's position as a pioneer of Corporate Governance legislation, regulation and guidance.
A significant example of Corporate Governance regulatory guidance (not law), developed from the previous statute and official recommendations, was produced in 2010 in the form of the QCA Guidelines (the UK Quoted Companies Alliance guide to Corporate Governance for small publicly quoted companies).
The QCA represents the interests of the UK's small quoted companies - which in the UK (at 2013) equate to 85% of all quoted companies.
The key points of the QCA Corporate Governance Guide are extracted (2013) are outlined below.
The UK Quoted Companies Alliance produced a guide to Corporate Governance for small publicly quoted companies, first published 2010, revised 2013.
"...These 12 guidelines endorse the 'comply or explain' approach and represent minimum best practice for smaller quoted companies. Boards should, therefore, consider each one carefully, and provide a reasoned explanation for any deviations.
- Structure and process. A company should put in place the most appropriate governance methods, based on its corporate culture, size and business complexity. There should be clarity on how it intends to fulfil its objectives, and, as the company evolves, so should its governance.
- Responsibility and accountability. It should be clear where responsibility lies for the management of the company and for the achievement of key tasks. The board has a collective responsibility for the long-term success of the company, and the roles of the chairman and the chief executive should not be exercised by the same individual.
- Board balance and size. The board must not be so large as to prevent efficient operation. A company should have at least two independent non-executive directors (one of whom may be the chairman, provided he or she was deemed independent at the time of appointment) and the board should not be dominated by one person or a group of people.
- Board skills and capabilities. The board must have an appropriate balance of functional and sector skills and experience in order to make the key decisions expected of it and to plan for the future. The board should be supported by committees (audit, remuneration and nomination) that have the necessary character, skills and knowledge to discharge their duties and responsibilities effectively 2. Corporate governance and smaller businesses Tim Ward, the Quoted Companies Alliance Introduction Page 12 Corporate governance and smaller businesses.
- Performance and development. The board should periodically review its performance, its committees' performance and that of individual board members. This review should lead to updates of induction evaluation and succession plans. Ineffective directors (both executive and non-executive) must be identified and either helped to become effective, or replaced. The board should ensure that it has the skills and experience it needs for its present and future business needs. Membership of the board should be periodically refreshed.
- Information and support. The whole board, and its committees, should be provided with the best possible information (accurate, sufficient, timely and clear) so that they can constructively challenge recommendations to them before making their decisions. Non-executive directors should be provided with access to external advice when necessary.
- Cost-effective and value-added. There will be a cost in achieving efficient and effective governance, but this should be offset by increases in value. There should be a clear understanding between boards and shareholders of how this value has been added. This will normally involve the publication of key performance indicators, which align with strategy, and feedback through regular meetings between shareholders and directors. Entrepreneurial management.
- Vision and strategy. There should be a shared vision of what the company is trying to achieve and over what period, as well as an understanding of what is required to achieve it. This vision and direction must be well-communicated, both internally and externally
- Risk management and internal control. The board is responsible for maintaining a sound system of risk management and internal control. It should define and communicate the company's risk appetite, and how it manages the key risks while maintaining an appropriate balance between risk management and entrepreneurship. Remuneration policy should help the company to meet its objectives while encouraging behaviour that is consistent with the agreed risk profile of the company. Delivering growth in shareholder value over the longer term.
- Shareholders' needs and objectives. A dialogue should exist between shareholders and the board so that the board understands shareholders' needs and objectives and their views on the company's performance. Vested interests should not be able to act in a manner contrary to the common good of all shareholders.
- Investor relations and communication. A communication and reporting framework should exist between the board and all shareholders such that the shareholders' views are communicated to the board, and shareholders in turn understand the unique circumstances of, and any constraints on, the company.
- Stakeholder and social responsibilities. Good governance includes a response to the demands of corporate social responsibility (CSR). This will require the management of social and environmental opportunities and risks. A proactive CSR policy, as an integral part of the company's strategy, can help create long-term value and reduce risk for shareholders and other stakeholders. As well as setting out these guidelines, the QCA Guidelines include examples of governance structures as well as minimum disclosures.
[The Guide concludes that]: One size does not fit all. While best practice should be a guide to company governance and organization, it is not always the case that such practice should be rigidly adhered to. Directors need to do what is right for the company in its own unique circumstances and maintain an open and full dialogue with the company's shareholders..."
(QCA 2010-13. From the Quoted Companies Alliance guide to Corporate Governance for small publicly quoted companies.)
Towards the end of the first decade of the 2000s, standards in Corporate Governance began progressively to extend to non-listed (privately owned) corporations and smaller businesses notably demonstrated in documents such as the 2010 Corporate Governance Guidance and Principles for Unlisted Companies in Europe, produced by the European Confederation of Directors' Associations (ecoDa), in association with national member bodies such as the UK Institute of Directors, which published parallel national versions of the Guide. Based in Brussels, via its ten member (at 2013) national institutes of directors, ecoDa represents around fifty-five thousand board members across the EU, collectively having a major influence on national economic policies and laws.
- Here are main 'guidance code' points in summary from the 2010 EcoDa Corporate Governance Guidance and Principles, which via its national membership bodies was published across much of Europe, including UK, Germany, France, Spain, Finland, Norway, Sweden, Belgium, Slovenia, Poland, Netherlands, Croatia, and Macedonia.
Note. The 14 essential guiding principles of the EU EcoDa version below are identical to the UK's IOD [Institute of Directors] version except that the first sentence of principle 11 is omitted in the UK version, presumably because it is irrelevant in a national context ["Board structures vary according to national regulatory requirements and business norms."])
- "...Unlisted companies account for more than 75% of European GDP...."
- "...this ecoDa publication creates a reflection platform that can be used by EU Member States to develop or update national corporate governance codes for unlisted companies...."
- "...Although only applicable on a voluntary basis, the Principles and Guidance included in this document sets out the best practice governance recommendations of ecoDa for Unlisted Companies in Europe...."
- "...The principles provide a governance roadmap for family owners or founder-entrepreneurs as they plan the development of their companies over the corporate life cycle. These principles may be relevant for subsidiary companies and joint ventures as well. Even state-owned companies or social profit organisations can be inspired by the best practices laid down here...."
Summary of introductory points:
Unlisted companies make a major contribution to economic growth and employment, however corporate governance needs of unlisted companies have been relatively neglected by governance experts and policy-makers. Many unlisted enterprises are owned/controlled by individuals/families, in which good Corporate Governance is more concerned with processes/attitudes that add business value, building a reputation and sustaining success, rather than (as in previous codes for listed corporations) relationships between boards and shareholders and compliance with formal rules and regulations.
Shareholders of unlisted companies do nevertheless have a strong dependence on good Corporate Governance because ownership stakes are typically more committed and long-term than for equity in listed holdings. External reputation and stakeholder opinions also increasingly depend on transparent and appropriate Corporate Governance. Smaller companies particularly must demonstrate that the business is not merely regarded as the personal property of the (typically founding or principal) owner-boss.
Presented as a "...dynamic phased approach, which takes into account the degree of openness, size, complexity and level of maturity of individual enterprises. A dynamic approach towards governance is essential, since governance frameworks must evolve over the life cycle of a business..."
Phase 1 principles: Corporate Governance Principles Applicable to All Unlisted Companies
- Principle 1: Shareholders should establish an appropriate constitutional and governance framework for the company.
- Principle 2: Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board.
- Principle 3: The size and composition of the board should reflect the scale and complexity of the company's activities.
- Principle 4: The board should meet sufficiently regularly to discharge its duties, and be supplied in a timely manner with appropriate information.
- Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully.
- Principle 6: The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.
- Principle 7: There should be a dialogue between the board and the shareholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.
- Principle 8: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
- Principle 9: Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.
Phase 2 Principles: Corporate Governance Principles Applicable to Large and/or More Complex Unlisted Companies
- Principle 10: There should be a clear division of responsibilities at the head of the company between the running of the board and the running of the company’s business. No one individual should have unfettered powers of decision.
- Principle 11: Board structures vary according to national regulatory requirements and business norms. However, all boards should contain directors with a sufficient mix of competencies and experiences. No single person (or small group of individuals) should dominate the board's decision-making.
- Principle 12: The board should establish appropriate board committees in order to allow a more effective discharge of its duties.
- Principle 13: The board should undertake a periodic appraisal of its own performance and that of each individual director.
- Principle 14: The board should present a balanced and understandable assessment of the company’s position and prospects for external stakeholders, and establish a suitable programme of stakeholder engagement
(EcoDa 2010. Summarised from the Corporate Governance Guidance and Principles for Unlisted Companies in Europe, produced by the European Confederation of Directors' Associations)
Note. The European Confederation of Directors' Association's website offers helpful links to its national member bodies' websites and pdf documents of the full national versions of the Corporate Governance Guidance and Principles for Unlisted Companies.
The Sarbanes-Oxley Act of 2002 is generally considered the first major Corporate Governance legislative measure in the USA.
- Also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' (respectively in the Senate and House of Representatives), the legislation is also known informally as Sarbanes-Oxley, Sarbox or SOX.
- The act is named after its instigators: Senator Paul Sarbanes and Representative Michael G Oxley.
As in the UK, legislative pressures grew from the outcry by media, public and politicians in response to corporate scandals, specifically and notably the criminal and vast failures in the late 1900s and early 2000s of Enron, Tyco and WorldCom, which caused losses of $billions for investors, and severely undermined US economic stability, and in other major markets too.
- The consequential Sarbanes-Oxley Act became federal law aimed at establishing standards for public company boards of directors, management, and the accounting firms responsible for auditing public corporations.
The act chiefly:
- Increased responsibility of management to certify the accuracy of financial information
- Increased penalties for corporate fraud
- Increased necessary independence of auditors
- Increased the formal legal responsibility of corporate boards of directors for the oversight of their corporations' activities, decision-making and accounting.
Significant US legislation followed in 2010 with the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- It was named after Barney Frank, Chairman of House of Representatives Financial Services Committee, and Chris Dodd, Chairman of Senate Banking Committee, who had together overseen the refinement of original 2009 legislation proposed by President Obama.
- The legislation was a response to the 2007/8 global financial collapse and resulting recession, chiefly to address the financial regulatory environment.
The European Union authorities tended through the late 1900s and early 2000s to encourage member states to develop their own Corporate Governance standards and regulatory instruments, rather than intervene directly or produce mandatory standards.
- Differences in national corporate laws - notably concerning company incorporation and investors - are naturally obstacles to the development of Europe-wide Corporate Governance rules.
A wide and varied range of laws, codes, and institutional bodies, therefore, became established across Europe on an individual nation basis to address Corporate Governance.
- These instruments will continue to be refined through the 2010s and 2020s, perhaps longer, until standards of Corporate Governance, and mechanisms for compliance/monitoring/remedial action, are established adequately in response to the challenging dynamics of globalized commerce.
The inability through the 2010s of international governments to counter large-scale corporate tax avoidance accounting schemes is a prime example of how globalised business is several steps ahead of globalised regulatory control.
During the early 2000s and 2010s EU, commissioners began to produce reports, codes, and guidelines aimed at influencing and coordinating Corporate Governance regulations and instruments at national level.
EU interest and (non-enforceable) guidance during this period focused chiefly on:
- Directors' remuneration
- Non-executive directors selection and appointment
- Corporations' commitment and adherence to transparent published statements of Corporate Governance
During the early 2010s, in the aftermath of the global financial crisis, especially in response to a perceived absence of remorse and remedial action among major banks, the European Union indicated increasing desire to regulate the high risks and 'cap' bonus-driven practices of major banks.
Progressive EU centralisation and enforcement of Corporate Governance standards are virtually certain to continue.
'Departmental governance' refers to the responsibility of corporate departments and functional disciplines to follow the Corporate Governance standards and policies of the corporation concerned and increasingly to adhere to discipline-specific standards that may be developed or defined by professional institutes.
This is an emerging aspect of Corporate Governance, and while the detailing of Corporate Governance implications/standards at a departmental level is useful, any suggestion that responsibility for Corporate Governance might be devolved or delegated to departmental staff is inaccurate.
- "Departmental governance is the ultimate responsibility of the board of directors, and must not be delegated to departments or departmental heads."
The above maxim is crucial in understanding, developing and ensuring compliance with 'sub-category' codes of Corporate Governance.
- Departmental governance standards and compliance are implicitly an extension of Corporate Governance.
- So the responsibility for appropriate departmental governance and compliance ultimately belongs to the board of directors.
- Directors who seek to delegate responsibility for Corporate Governance, or any element of Corporate Governance, are in neglect of their duties.
These principles are ignored by many corporate directors, most obviously when in the aftermath of a disaster or scandal, there is no acceptance of culpability by the board of directors, and all blame and punishment is carried by departmental personnel.
During the 1990s and through the early 2000s-2010s, sub-categories of Corporate Governance began to emerge and be defined. Most prominently, the area of 'IT governance', or 'ITC governance', was defined and variously represented by new 'ITC Governance' institutional bodies. Detailed definitions of IT/ITC Governance vary and are general statements of the obvious. Here is a blended interpretation of the many typical definitions available:
- "...IT/ITC Governance is the management of design, processes and activities of Information and Communications Technology within a corporate or organizational situation, ensuring appropriate safety, security, and responsibility for investors, users, society, and the wider environment..."
The ITC departmental function arguably warrants dedicated governance attention because the design and operation of computer systems are highly challenging, is very prone to failure and carries risks on a truly vast scale. The same can be said however of many other departmental functions of a corporation, for example HR (Human Resources), manufacturing, environment and sustainability, transport and distribution, marketing and advertising, research and development, etc.
The following and most significant point about ITC Governance, therefore, applies to all other sub-categories of departmental governance.
Departmental governance is the ultimate responsibility of the board of directors, and must not be delegated to departments or departmental heads. Neglect of this principle unavoidably creates two very serious Corporate Governance risks/failings, which are also major failings of leadership:
- The board of directors must be ultimately responsible for departmental governance standards and compliance - otherwise, standards and compliance will be disconnected with, and uninformed by, corporate leadership and overall Corporate Governance. Governance does not work in isolation from corporate leadership.
- Departmental failure - especially catastrophic disaster - is ultimately the responsibility of the board of directors. Disasters become scandals when directors seek to pervert this principle. A disconnection between departmental governance (standards and compliance) and the board of directors will always deflect blame and punishment for disaster away from directors to departmental personnel, which is grossly wrong.
Of course, departments may assist in the drafting and development of their own governance codes and standards, however, the principle, that "...departmental governance is the ultimate responsibility of the board of directors..." should be an absolute immovable feature of overall Corporate Governance in all corporations and organisations.
- No department, just as no corporation, should ever be solely responsible for monitoring its own compliance to its own governance standards (which after all is one of the fundamental concerns of the Corporate Governance movement).
There is considerable overlap with ethical and moral considerations when exploring examples of poor Corporate Governance. Strict legal definitions of Corporate Governance factors do not generally extend so far as ethical and moral considerations.
There are many organisational leadership activities which most people consider unethical but which do not necessarily contravene a legally acceptable Corporate Governance code.
This listing attempts to convey the types of activities behaviours, policies or practices of corporations, and/or of corporate officers, and/or of staff members acting for the corporation, which would reasonably be regarded as breaching good Corporate Governance in its fullest ethical and moral sense.
The terminology used below is not legal or definitive. It is designed as a simple guide to actions and behaviours which are likely to breach good Corporate Governance to a lesser or greater degree.
In other words, some of these factors do not necessarily contravene purely legal requirements of Corporate Governance but would contravene Corporate Governance standards defined more fully to encompass ethical and moral considerations. Legal interpretations of Corporate Governance can reasonably be anticipated to include progressively more of all these factors below.
Factors breaching good Corporate Governance
- Anything unlawful (according to the territory or other laws applying)
- Taking risks which have serious consequences
- Failing to take action after serious failings
- Dishonesty, withholding information, distortion of facts
- Misleading communications or advertising
- The exploitation of weakness and vulnerability
- Anything liable to harm or endanger people
- Avoidance of blame or penalty or payment of compensation for wrong-doing
- Failing to consult and notify people affected by change
- Secrecy and lack of transparency and resistance to reasonable investigation
- Bribery, coercion or inducement
- Harming the environment or planet
- Unnecessary waste or consumption
- Invasion of privacy or anything causing privacy to be compromised
- Recklessness or irresponsible use of authority, power, reputation
- Nepotism (the appointment or preference of family members)
- Favouritism or decision-making based on ulterior motives (e.g., secret affiliations, deals, memberships, etc)
- Alienation or marginalization of people or groups
- Conflict of interest
- Neglect of duty of care
- Betrayal of trust
- Breaking confidentiality
- Causing unnecessary suffering of animals
- 'Bystanding' - failing to intervene or report wrong-doing within area of responsibility (this does not give licence to interfere anywhere and everywhere, which is itself unethical for various reasons)
This is not an exhaustive list. Other examples exist, and more will no doubt emerge in future corporate scandals.
- Most of the above are subject to degree. Small isolated incidents of the above are common and difficult to prevent at staff level at some time in large corporations, in which event such low-level failings may not really be breaches of Corporate Governance. However big incidents, which affect large numbers of people, or which have a major negative impact on just a single person, and especially where recklessness or negligence of senior personnel is a factor, are likely to be serious breaches of proper Corporate Governance.
The Corporate Governance template below is designed as a simple guide and 'menu' for producing Corporate Governance code or statement code for small businesses, and other types of organisations for which conventional official standards may not fit. Big businesses too might find it helpful, especially if seeking to produce a Corporate Governance statement which is more accessible and far-reaching than official standards.
The complexity and changing nature of Corporate Governance mean that finding suitable guidance and how to interpret and apply it can be challenging. The emergence of 'departmental governance' and 'stewardship' are further complications, as is the increasing range of differing national standards, instruments, laws, guidance notes, committees, reports and recommendations.
- For those seeking a simple 'Do It Yourself' effective solution or a starting point, here's a basic adaptable interpretation and 'menu' of the essential principles of Corporate Governance.
- This code attempts to cover all the main points of best practice Corporate Governance, and includes considerations enabling its use in organisations and businesses of all sorts; i.e., it is not limited to public quoted corporations or any other single type of organisation.
- This simplified code is based on Corporate Governance best practice and official guidance, laws, etc., notably the original 1992 Cadbury Code and subsequent UK/European revisions. It's designed both as a code and as a template, easy to understand, relate and apply, whatever the size and type of your corporation, organisation, or business - from a vast public utility to a corner sweet shop.
- Importantly this code requires the clarification of the business/organisation: its formation type, and its aims and priorities, for example, reconciling the potentially competing need to maximize investor returns, while avoiding unreasonable risk, not exploiting staff, or neglecting social or environmental responsibility.
Where corporate scandals and disasters occur there is commonly a failure to successfully resolve conflict between competing interests. Risks of Corporate Governance failures are greater where interests/aims are not reconciled at a foundational level, and conversely, risks reduce where interests/aims are balanced and reconciled, clearly and transparently.
Simple Principles for Completing this Template
- Corporate Governance originally developed in relation to publicly quoted/listed corporations. However Corporate Governance can apply to any type of organisation, and in the code/template below the term is used in relation to any sort of organisation.
- When adapting/completing the template below produce concise broad principles, not lots of fine detail, or you will produce a document which is too long and not overseeable.
- Test your draft on staff who do not understand corporate language to ensure that the document is clear and simple enough.
- When adapting/completing the template below, items that are irrelevant may be removed.
- This is a practical adaptable template for Corporate Governance. It is not a legal document, and no liabilities are accepted for its use. If in doubt seek professional qualified advice (and ensure that professional advisors use simple plain language, not complex legal terms).
The template is shown first in summary according to its main sections.
|1. Describe the Business/Organisation - This is a crucial area of clarification that traditional Corporate Governance codes ignore. It provides foundations for decisions and governance. Clarify your corporation/organisation type, ownership, structure, leadership, etc. A public quoted corporation is very different from a charitable trust, or a social enterprise. The nature and purpose of the organisation greatly influence its priorities and considerations in Corporate Governance.||Corporate Governance in non-profit or non-investor organisations usually implies greater priority to staff, members, customers, etc. Public corporations aim to produce a dividend (profit-share) for shareholders and to grow the value of the corporation via commercial performance. Charities and trusts tend not to produce a dividend for owners, instead they aim primarily to maintain and/or expand operations. Cooperatives, partnerships, sole traders and social enterprises are generally established with stated financial obligations to owner-members.|
|2. Board of Directors - Define appropriately the roles (including a neutral chairperson), authority, processes, obligations, controls, contracts, rewards and controls of directors, especially so that personal needs do not conflict with organisational responsibilities.||Major conflicts of interest exist if directors' motives are personally driven and uncontrolled, undermining the safety of the organisation and creating risks and harm in areas of corporate responsibility.|
|3. Non-Executive Directors - Non-executive directors are crucial in moderating company boards, so these roles and responsibilities must be clarified appropriately.||Also clarify appropriate policies for non-executive directors independence, appointment, term, re-appointment, and remuneration and duty to scrutinise board and organisational conduct.|
|4. Reporting, Auditing, Controls and Transparency - This concerns the administration and transparency of Corporate Governance, especially in financial reporting and auditing.||Main factors: the Corporate Governance statement itself; appropriate transparent decision-making; truthful reporting of organisational condition; and appointment and duties of auditors.|
|5. Responsibilities of Owners/Shareholders/Trustees ('Stewardship') - This is usually a separate code for the responsibilities of institutional investors of major public corporations. It extends to trustees of smaller situations.||Owners and trustees have a substantial responsibility to remain aware of, understand and control the conduct of the board of directors, especially via meetings and voting.|
|6. Competence - Everyone responsible for Corporate Governance must be sufficiently competent to fulfil the role. Systems must ensure this is so or corrected.||This mainly concerns directors, non-executive directors, chairperson and company secretary, and extends to auditors and major investors/shareholders and trustees.|
|7. Departmental Corporate Governance - Directors are responsible for Departmental Corporate Governance. Department heads and staff are responsible for operational duties which adhere to Corporate Governance standards. This especially concerns delegated responsibilities and decision-making.||There is a tendency for some directors to delegate responsibility for Corporate Governance to departmental heads or other staff, which is incorrect. Directors must ensure departmental heads and staff understand and comply with the organisation's Corporate Governance standards.|
|8. Ethical and Moral Standards - Standards of ethics and morality exist separately to laws and regulations. They must be established, stated, followed and promoted by the directors.||Acting within the law is not a justification for unethical or immoral policies or decisions. There are some great corporate risks which are legal but are unethical or immoral.|
|© Businessballs Corporate Governance Template - summary 2013.|
This template is designed to be adapted before developing your own Corporate Governance policies and statements for each item. Here follows the full template. If you'd like to offer comments or improvements to these guidelines please do so.
|1.||Describe the business/organisation (its structure and type, including responsibilities to the following). This section and sub-points crucially describe the organisation type, aims and responsibilities in key areas, to create a foundation against which potentially conflicting issues may be referenced and decided. This is important for all staff, not just directors. This is not a standard aspect of traditional Corporate Governance codes, although it should be. It is recommended here because this code/template is adaptable for all sorts of organisations, and so clarification of fundamental aims and priorities is very important.|
|1.1||Owners/investors/trustees - Define the organisation's responsibilities to its owners/investors/trustees - This may vary greatly depending on the type of organisation.|
|1.2||Directors and senior staff - Define the extent of the organisation's responsibilities to directors and senior staff, and especially the scope of powers of these people, and the limits and controls applying to their contracts, remuneration and other rewards.|
|1.3||Staff - Define the organisation's responsibilities to its staff, extending to agency workers and other individual contractors considered staff. See The Psychological Contract.|
|1.4||Customers - Define the organisation's responsibilities to its customers.|
|1.5||Suppliers - Define the organisation's responsibilities to its suppliers.|
|1.6||Society/social responsibility - Define the organisation's responsibilities to society including local communities.|
|1.7||Privacy/confidentiality/security/data-protection - Define the organisation's responsibilities to privacy and security - particularly electronic data storage and processing - of staff, customers, suppliers, and the public.|
|1.8||Environment/sustainability/planet - Define the organisation's environmental responsibilities.|
|1.9||Marketing strategies, commercial and financial objectives - Define the organisation's responsibilities to meet its strategic and financial aims as an organisational or business entity. (It is by meeting these aims that the organisation remains viable and solvent and therefore able to meet all its other responsibilities, in which respect this is a particularly vital priority, i.e., the organisation must remain financially viable or it will inevitably be unable to meet its other obligations.)|
|2.0||Board of Directors - The roles of directors must be described, which should be appropriate (in number and type, no more no less) for specialised control and knowledge of the organisation's activities.|
Meetings and controls - Meetings must be scheduled, regular (typically no less than monthly), fully attended, and detailed and supported by accurate and timely notes and administration necessary for collective awareness of activities, issues, plans, etc., and especially decisions involving main areas of corporate responsibility and risk. There must be properly qualified and briefed assistants for absence wherever possible, and certainly for extended absences.
Directors' specialised responsibilities - The board must be of balanced authority with no isolated powers of decision. The board must include a dedicated neutral chairman/chairperson or other independent/neutral senior presence able to perform a genuine chairman role.
Non-executive directors - Non-executive directors must be of a quality and number sufficient to monitor and were required to influence the quality of the board's decisions.
External advice - There must be contingency and process for obtaining external expert advice on any matters in which the board does not possess a sufficient and balanced knowledge.
|2.5||Company Secretary (or equivalent post) - The board must contain a member with expert knowledge and responsible for informing board of corporate regulatory rules, responsibilities and implications.|
|2.6||Decision-making - Must be collective by the board, transparent, consultative and referred when required, free from duress. Fair and balanced in relation to the stated priorities and responsibilities of the organization.|
|2.7||Remuneration and reward - Rewards for directors and senior executives (salary, bonus, share-options, pension contributions, ex-gratia payments) should be transparent, and sufficient to attract and retain executives of the quality required to perform successfully, and must be overseen/controlled by a rewards committee formed from non-executive directors, and also where rewards are beyond normal levels must be approved by investors. Remuneration of directors and senior executives must always be based on performance. It is utterly unacceptable for senior executives to be well rewarded when incremental organisational performance fails to substantially over-recover executive reward.|
Non-Executive Directors - Non-executive directors are vital in bringing experience and objectivity to company boards. For organisations which do not ordinarily accommodate non-executive directors, it is important to find other ways to achieve this sort of support.
Neutrality - Non-executive directors must be free from conflicting demands or interests so as to exercise truly objective judgment and influence over organisational activities and board decisions.
|3.2||Remuneration and reward - Non-executive directors may be paid at a reasonable rate based on workload, and may own shares in the organisation, although financial reward must never be such as to compromise independence and objectivity.|
Appointment and term - Selection and appointment of non-executive directors must be a fair and open process, for a limited term generally not exceeding three years, and reappointment should follow broadly the same process as for appointment, and certainly not be automatic.
|3.4||Proactivity - Non-executive directors must be proactive in scrutinising corporate situations, proposals and decisions, and must draw firm attention to any organisational activities or decisions which breach the terms of this Corporate Governance statement, or which do harm or create a risk to other corporate responsibilities which may be omitted from this statement.|
|4.||Reporting, Auditing, Controls and Transparency - These are crucial aspects of Corporate Governance, especially in financial matters and other issues entailing major corporate risk.|
|4.1||Corporate Governance - This (adapted) statement of Corporate Governance must be kept up-to-date and available to the organisation's owners, trustees, leaders, staff; clearly and always, and to customers and other stakeholders, on demand.|
|4.2||Transparent decision-making - Decisions of serious nature (and related notes of discussions, consultations, justification, etc.), especially impacting on an area of corporate responsibility or risk, must be properly recorded and circulated and open to scrutiny by affected people.|
|4.3||Condition of the organisation - The board must at all times make available a balanced and understandable assessment of the organisation's condition, especially its financial situation, and especially clarifying the detailed effects of any financial accounting techniques designed to optimise profitability and values, actual or perceived.|
Auditing - This is an absolutely crucial aspect of Corporate Governance, within which the board must ensure auditors are appointed and act with utmost diligence and objectivity, and are adequately guided and monitored via an audit committee of at least three non-executive directors (or equivalent), guided by transparent and appropriate terms of reference.
Audited accounts - The board must ensure that clear and appropriate responsibilities are stated (within this code and in published accounts) for the board of directors and auditors in the preparing, reporting and auditing of its organisational accounts and this must include the directors' responsibility to report on organisational internal controls; the condition of the organisation as a 'going concern' (i.e., is operating/trading solvently), supported with evidence as appropriate.
|5.||Responsibilities of Owners/Shareholders/Investors/Trustees ('Stewardship') - Owners/trustees and particularly institutional shareholders of organisations (especially large ones) have substantial responsibilities for monitoring and controlling the conduct of the organisation's board of directors or equivalent, and thereby the conduct of the organisation that they own. Therefore comprehensive Corporate Governance must include clearly stated responsibilities for owners/trustees/institutional investors.|
|5.1||Ownership/trusteeship responsibility - Owners/trustees of the organisation have a duty to monitor and control the conduct of the organisation's board of directors or equivalent. The Corporate Governance statement is a vital instrument in enabling this to happen. Accordingly Corporate Governance is strengthened where owners/investors are actively involved in its formulation and monitoring; and conversely, Corporate Governance is seriously undermined where owners/trustees neglect these duties.|
|5.2||Voting - Owners/trustees have a duty to use their voting powers in controlling the conduct and staffing of the board of directors.|
|6.||Competence - The extent of Corporate Governance effectiveness is determined by the competence of the people responsible for its design, implementation, monitoring and improvement (therefore..)|
|6.1||Competence, commitment and training - Any person with responsibility for Corporate Governance (notably directors, chairman, non-executive directors, major shareholders/owners/trustees, and auditors) must be capable of and committed to exercising their specific Corporate Governance duties, and process must exist to assess these competencies/commitments and to correct shortcomings via appropriate training or other remedy (N.B. any person who lacks commitment/competence in exercising his/her responsibilities for Corporate Governance is effectively unfit for their role, and any organisation which retains such people in situ is negligent and creating a serious liability).|
|7.||Departmental Corporate Governance - By definition, Corporate Governance - and any sub-category or departmental level of Corporate Governance - is the responsibility ultimately of the board of directors, and where specifically appropriate, of the appointed auditors or trustees or owners. Departments and departmental staff/heads may certainly be responsible for their operational duties as implied or stipulated by a Corporate Governance code, but are not responsible for organisational adherence to its Corporate Governance standards.|
|7.1||Departmental Governance - The directors are responsible for ensuring that departmental heads and staff are all fully aware of their responsibilities as affected by, and also affecting, the organisation's Corporate Governance standards. This especially concerns employees' and contractors' authority for decision-making, and processes for consultation and referral where departmental actions/decisions have significant implications for corporate responsibility and Corporate Governance.|
|8.||Ethical and Moral Standards - Ethical and moral considerations have potentially huge impacts on corporate responsibilities, and therefore on Corporate Governance. While ethics and morals are open to interpretation and may be difficult to define legally, there are standards and principles of ethical and moral conduct which organisations must observe, and which may be different to limits imposed by law. Observing the law is not the limit of Corporate Governance. Acting within the law is not a justification for acting unethically or immorally. Besides which, law changes. What is unethical or immoral today may be unlawful in the future. Organisations and organisational leadership should advance ethical and moral standards. They should absolutely not seek to use legal limits or loopholes to permit or instigate unethical or immoral policies, actions, or decisions.|
|8.1||Directors are responsible for establishing, maintaining, and transparently stating the highest possible organisational ethical and moral standards. This especially applies to how organisational responsibilities are defined and governed, so that standards and parameters are set according to ethical and moral standards rather than (typically less demanding) legal requirements.|
|© Businessballs Corporate Governance Template 2013.|
Below is a modern model for management and leadership in the 21st century. It's an interpretation of the 'personality' of good ethical modern management and leadership. As such it's not a process or technique - it's an attempt to characterise good, modern ethical management and leadership.
The P4 Model (PPPP)
These are (according to the model) the four cornerstones of sustainable success in any modern organisation or business and a maxim for today's management and leadership philosophy.
This model is not a process or technique - it's the character or personality of a good ethical organisation, or manager or leader.
It's a useful aid too for working with Corporate Governance, when developing a Corporate Governance code/statement, or for training people, or launching a Corporate Governance initiative.
The aim of all good modern organizations is to reconcile the organisational purpose:
Probity enables the other potentially conflicting aims to be harmonized so that the mix is sustainable, ethical and successful.
The model is also useful for considering the balance between risk and responsibility, which is a factor in all organizations, whether for profit or not.
For the foreseeable future into the 21st century, globalised business is likely to remain relatively weakly regulated.
By implication, so too will Corporate Governance.
There are two main reasons for this:
- Free market economics and 'market forces' - and their effects.
- National economic interests vs Global Corporate Governance.
These issues are explained below in more detail. See factors limiting Corporate Governance development/regulation.
Also for the foreseeable future into the 21st century, Corporate Governance is likely to remain difficult to develop and enforce, and there will continue to be major corporate scandals and disasters even where standards are extensively defined and established officially as lawful requirements.
There is a big main reason for this (aside from the factors above):
- The leadership style within major corporations (effectively demanded/rewarded by shareholders) commonly conflicts with the needs of good Corporate Governance.
This issue is explained below in more detail.
Here is an explanation of the two major factors likely to inhibit the development and application of Corporate Governance - globally, and consequentially, unavoidably, nationally too.
- Firstly, much the world remains committed to free-market economics, which by its nature resists interference and regulation.
- Secondly, the world is governed on a country-by-country basis, and while there are lots of international treaties and conventions, and international groupings with established rules covering all sorts of activities on a global basis, laws are virtually impossible to apply and enforce in a truly global sense, especially considering that fundamental corporate law varies internationally anyway.
Moreover - where business and economic controls are concerned - while Corporate Governance regulation will continue to be refined and tightened on a national basis in much of the world, internationally individual governments will continue to face a dilemma in attempting to balance the needs of:
|Supporting a national economy and its corporations||Versus||Refining and enforcing corporate governance laws (usually claimed/perceived to hinder corporate competitiveness and performance)|
The question of whether to regulate bankers' bonuses, to help reduce risk-taking and fraud in banking corporations, is a good example.
- Increasing Corporate Governance law relating to bankers bonuses would logically tend to reduce risk-taking and fraud in banks, but also (it is claimed, logically) would encourage banks and bankers to relocate to other nations offering less Corporate Governance regulation and more freedom. For national regulators and governments, this is a dilemma that is difficult to reconcile.
The question of how to counter corporate tax avoidance is another example.
- Nations want to attract corporations and corporate investment, because this increases economic performance, employment, etc.
- Nations which offer attractive and flexible corporation tax rates/rules (which equates to a relaxation of Corporate Governance laws and interpretation) tend to attract corporations and corporate investment.
- However, offering attractive and flexible corporation tax rates/rules also enables corporations to avoid or substantially reduce their tax liabilities, which while being good for investors, is not very socially responsible or ethical.
So Corporate Governance, when seen in a global or international context and on a big global scale is prone to potentially serious conflicting or influential factors.
- These issues present real and very challenging obstacles to the development and application of Corporate Governance in a firm global sense, and a consequence of globalisation is that its benefits and problems unavoidably affect nations on an individual basis.
Corporate leadership - more precisely the nature of typical corporate leaders - often involves a paradoxical obstacle to improving Corporate Governance. Specifically, leaders of big corporations commonly possess qualities that help them to rise to and maintain a leadership position, but which are not naturally suited to prioritising and exercising good Corporate Governance. The same can be said of political leaders too, for whom Corporate Governance (of their political party or government) is also a major challenge.
- Generally, corporate bosses have strong qualities and skills which enable them to maximise profit. This is not surprising as these qualities enable them to climb the greasy pole of corporate leadership in the first place.
- Other qualities featuring strongly in the make-up of many corporate leaders include dominance, initiative, creativity, pragmatism, decisiveness, fast-acting, inflexible, low empathy, adversarial or low regard for incidental detail.
But personalities like this generally don't possess strong qualities and skills that are required for understanding and exercising good Corporate Governance.
- Corporate leadership is generally characterised by a powerful outwardly-directed control, with minimal regard for resistance or implications (which from the leader's standpoint must be overcome or beaten). Achieving the targeted result is the sole purpose. Everything else is secondary and (it is usually believed and asserted by the leader) that consequential damage can be managed or cleaned-up or minimised afterwards. The end result justifies the decisions and methods.
- Conversely, good Corporate Governance prioritises the quality of the result. A result which produces damaging consequences is not an acceptable or good result. The end result - no matter how profitable or beneficial to some - does not ever justify a decision or method which does harm.
These two styles represent two quite different personalities (see list below). Leaders who possess the first characteristic cannot truly adopt the other (see the scorpion and frog story, which illustrates the often permanent nature of personality).
- Corporate leaders typically possess many highly effective and positive personality attributes for achieving corporate results, but these attributes are to a great extent opposed to the ideal characteristics for achieving good Corporate Governance. (See personality theory to understand this better). This is not actually the fault of corporate leaders - they are doing and succeeding at what the system requires them to do (i.e., maximise profit as quickly as possible); it's far more the fault of how corporations and economies operate (which effectively values short-term financial results more highly than good Corporate Governance).
The table below aims to show that skill-sets and personalities of corporate leaders and guardians of Corporate Governance are quite different. The two lists compare some key characteristics which broadly represent two personality types - for typical corporate leadership, the other for good Corporate Governance. It is not a definitive or scientific analysis, but it illustrates the point:
|Qualities Typically Found in Corporate Leaders||Qualities Required for Good Corporate Governance|
|risk-prone and maverick||risk-averse and careful|
|directing and persuading||empathy and caring|
|drive and dominance||diligence and caution|
|creativity and pioneering||reactivity and awareness|
|dogmatic and focused||adaptable and flexible|
|speaks and instructs||listens and interprets|
|win at all costs||work together|
|combative and adversarial||cooperative and synergistic|
|speed and force||patience and balance|
The table attempts to show that many characteristics typically possessed by corporate leaders (and effectively demanded by shareholders and free-market stock exchange culture) are radically different from the characteristics required in appreciating, applying, developing and protecting good Corporate Governance. In many cases, the qualities are directly conflicting.
The roots of this dilemma are deeply embedded in the human condition, society, corporate culture, economics and politics. The causal factors are difficult to analyse, and solutions/improvements are probably impossible to manage or regulate to any reliable extent - human nature and big systems of people are so complex. Nevertheless, these working style conflicts certainly exist:
Many corporate leaders are simply not naturally skilled or inclined to be guardians of good Corporate Governance.
- A solution to this paradox must await ultimately a more fundamental shift in the attitudes and design of corporate stock markets and related economic systems and laws so that corporate leaders are required to be and are therefore characterised in a far more rounded and grounded way than has traditionally happened.
Extending the last point, it is appropriate to revisit the effect of the free market capitalist philosophy and its implicit faith in 'market forces' to resolve economic challenges.
Broadly this 'light-touch', 'non-interventionalist', 'minimal regulation' approach to economic management has been preferred by governments in most of the 'western' world for the past several decades, and certainly since industrial globalisation.
- Market forces, of course, encourage and reward above all else the maximising of profits and investment returns, cost reduction, improved efficiencies, increased scale, volumes, productivity and so on.
- So corporations seek leaders who are highly competitive and driven towards these things, and for whom nothing matters more than maximising profits, and the 'profit levers' which enable this pursuit. Moreover, stock markets and influential financial analysts and commentators also demand leaders like this.
- In a game where there are no major rules other than producing maximum profits as quickly as possible, a prospective leader who can do this will generally get the job ahead of a leader who works more carefully and thinks longer-term and about wider issues of responsible governance.
- Particularly, leaders in the free market who have relatively low regard for people, planet, and probity, will generally be referred to leaders who take a more balanced approach.
As with pornography, alcohol, narcotics, and gambling, in the free market, consumers get what they want.
- If there were no demand for pornography there would effectively be no pornography. However there is a lot of demand for it, so there is a lot of it. This is how the free market works. If there had been no law to cease public floggings and executions in the civilised world, then there would still be public floggings and executions in the civilised world.
Financial markets, notably stock exchanges, which basically represent the interests and pensions of ordinary people - are a little like audiences at public executions - they demand something which is not good, and if the supply is not regulated, they get what they want.
In conclusion, generally, there is still sufficient general public acceptance, ambivalence, ignorance and trust, equating to tacit approval, of how stock markets and pensions and free-market economics operate, to ensure that fundamentally nothing changes, and so market forces continue to dictate the type of corporations and corporate leadership that succeeds, rather than really important considerations. So major corporations will continue to be run with far too much emphasis on profit, and far too little emphasis on good Corporate Governance, and people and planet and probity, until and unless things change at a very deep level of society and human organisation indeed.
"The concept of free-market capitalist economics may be viable or may be not, but what is certain is that free market capitalism is much too volatile to put in the hands of emotionally dysfunctional idiots, no matter how clever they are at making money."
Corporate Governance is a complex and changing subject. We welcome comments and suggestions for improving this guide.
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- Tannnenbaum and Schmidt Continuum, Management and Delegation Model
- Tuckman's Forming, Storming, Norming, Performing Model