Why corporate governance is important.

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The word governance may well have been used by Chaucer in 14th century England, but the phrase ‘corporate governance’ has only been commonly used since the 1980s.

Major corporate failures such as Enron, WorldCom, HIH, the dot.com crisis, the global financial crisis, and the Royal Commissions into institutional abuse of children and the banking sector, have increased governance expectations.

The community requires corporations to improve the way in which corporate governance is practiced.

That is, more is expected from companies behaving as good citizens.

Although not a legal term, ‘corporate governance’ does carry the sense of needing to be defined. It regularly arises in actions or Commissions as something lacking in practice.

Yet the concept of corporate governance has struggled to have a single definition. Early definitions were based around corporate governance being the ‘system by which companies are directed and controlled’ (Cadbury Report, 1992; King, 1994).

The Australian Stock Exchange recently broadened the scope of the concept of corporate governance to ‘the framework of rules, relationships, systems, and processes within and by which authority is exercised and controlled in corporations’.

Similarly, the G20/OECD principles discuss how the monitoring of performance against structure of organisational objectives can deliver better
governance outcomes.

I agree with Siems in praising the OECD of keeping up with changes
to governance principles, writing that with differing social and cultural, settings, government may not because of the vagueness and generality of them. It may be too difficult to offer more than a ‘common frame of reference’ for good practice.

But frameworks, structures and systems only drive compliance. They do not necessarily cause people in companies to act in moral and legal ways. Individuals and companies must decide to act on the accepted and normative societal values.

Acting in a manner supportive of contemporary, values based and ethical corporate governance practice will drive the following important outcomes:

  • Enhance market confidence and attract long term supply of capital to the company;
  • Favourably consider broader community interests – particularly those that drive mutual benefit and prosperity to the company and its communities;
  • An effective governance system drives confidence that is important in proper
    functioning of the company in modern market conditions, resulting in more efficient use of resources, maximising benefit to all stakeholders whilst contemporaneously underpinning growth;
  • Directors, employees, members, and the community will be protected via well executed corporate governance. Risks will be managed and where appropriate, adequately mitigated through compliance and insurance programs.

Mees sums it up well with corporate ‘governance is best seen as a movement to improve the performance and standards of the directorial and executive teams … of … companies and to improve the confidence of … investors’.

That improved behaviour and performance are outcomes worth striving for.
Essentially corporate governance is important to empower companies to develop their own distinctive ways of creating long term sustainable, moral, ethical, and legal prosperity to their shareholders, stakeholders and constituent communities.

In our sector, aged care in Australia should also be about ”creating long term sustainable, moral, ethical, and legal prosperity to their shareholders, stakeholders and constituent communities” – people who are care recipients and/or their representatives, who are often very vulnerable, frail and absolutely reliant upon us to be there to care.

The recent adverse outcries about poor quality in residential aged care services across the nation should cause us all to reflect on our governance and service delivery performance.

Join with me as I continue to comment about these matters.

Nice chatting.

References:

Articles / Books / Reports

  • ASX Corporate Governance Council, ‘Corporate Governance Principles and Recommendations’ (2014)
  • Atacik, Mehmet Can and Michael Jarvis, ‘Better corporate governance: More value for everyone’ February 2006(02) World Bank Institute: Business & Development Discussion Papers
  • Australia, HIH Royal Commission and Neville J Owen, The failure of HIH Insurance, Parliamentary paper
  • (Australia. Parliament) ; 2003, no. 99. (Commonwealth of Australia, 2003)
    Du Plessis, Jean J, Anil Hargovan and Jason Harris, Principles of Contemporary Corporate Governance (Cambridge University Press, 4th ed, 2018)
  • Farrar, John H and Pamela F Hanrahan, Corporate Governance (LexisNexis Butterworths, 2017)
  • Governance, Committee on the Financial Aspects of Corporate and Adrian Cadbury, Report of the Committee on the Financial Aspects of Corporate Governance (Gee, 1992)
  • Harris, Jason, Anil Hargovan and Michael Adams, Australian Corporate Law (LexisNexis Butterworths, 6th ed, 2018)
  • Institute of Directors in Southern Africa, ‘King Report on Corporate Governance for South Africa’ (1994)
  • Lupu, Iulia, ‘The indirect relation between corporate governance and financial stability’ (2015) 22 Procedia Economics and Finance
  • Mees, Bernard, ‘Corporate governance as a movement’ (Paper presented at the Academic Association of Historians in Australian and New Zealand Business Schools, Sydney, NSW, 2010)
  • OECD, G20/OECD Principles of Corporate Governance (2015)
  • Siems, Mathias and Oscar Alvarez-Macotela, ‘The G20/OECD principles of corporate governance 2015: a critical assessment of their operation and impact’ (2017) 4 Journal of Business Law Skousen, K Fred, Steven M Glover and Douglas F Prawitt, An Introduction to Corporate Governance and the
    SEC (Thomson South-Western, 2005)
  • Tricker, Robert, Corporate Governance: Principles, Policies and Practices (Oxford University Press, 3rd ed, 2015)

Cases:

  • Securities And Exchange Commission v WorldCom, Inc, 273 F. Supp. 2d 431 (SD NY, 2002)

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