Former United States Federal Reserve Board Chairman Alan Greenspan once observed that, “Governance quality is the single best measure of an organisation's character.''
As 2011 rears its tail end, it is wise to reflect that some companies were formed, others thrived, while others were liquidated or folded.
Those who want to quickly forget 2011 are wondering what happened to their fortunes. What caused their downfall? Was it lack of corporate governance? After all proper corporate governance is not only necessary to improve corporate competitiveness, but benefits both investors and companies.
Corporate governance watchers agree that it can be defined as a system which governs the interactions of shareholders, managers, boards of directors, outside auditors and analysts, together with the laws, regulations, and institutions that govern their actions.
Corporate governance gained prominence more than a decade ago after the highly publicised collapse of once-revered companies such as Arthur Andersen, Enron, Tyco, WorldCom and many others across the globe.
Since then corporate misconduct has often led to greater investor scepticism and increased uncertainty. The uncertainty has come to be associated with the negative impact of the economy and business confidence.
That is why good governance and transparency has gained increased priority for investors, overtaking past demands for firms to only seek to maximise shareholder value and profits.
South African companies cannot resist this trend if they want to survive in the global arena.
When corporate governance is effective, it helps safeguard shareholders, customers, and employees without hindering appropriate risk-taking. But when it is ineffective, it can have a disastrous impact on these key stakeholders and on the long-term viability of a company. Therein lays an answer to those who wish to forget 2011.
For the losers, the damage from bad governance has been direct and swift. Stockholders have or stand to lose their equity investments.
Employees, whose earnings, security and activities were entrusted to the executives, paid for their leaders’ lack of good manners with their jobs, their pensions, or sometimes even their lives.
Directors, who kept their eye off the affairs of the company were responsible for the business conduct of executives and lost when bad judgments and their consequences surfaced.
Suppliers have lost their financial stability because of the actions of executives who ignored obligations such as transparency which is associated with the code of business ethics.
For the companies which fared badly this year, their retirees who depended on the good governance of the corporation may or have lost pension benefits, their personal retirement investments in their company's stock, and medical aids benefits.
Communities which housed failed factories and other facilities have lost a significant corporate citizen, employer, and taxpayer because the company’s leaders failed to adhere to the rules of the corporate game.
Investors, BEE or wholly-owned who thought their company was in good hands, have been dealt a severe blow when bad corporate governance sunk their investments.
Consultants have lost valued clients and income, all because of disregard for the laws of business.
Customers have lost companies which provided uninterrupted services.
Banks have had to deal with the advent of bad loans brought on by bad client governance--again, a denial of the obligations of rank to practice integrity.
And whistle-blowers whose warnings were ignored are now saying “I told you so” as they continue to urge the business world to find a way to encourage those in the know to speak out on corporate fraud without penalties from their employers.
Thanks to corporate governance and Judge Mervyn King, our own internationally recognised expert on corporate governance and sustainability, we have better corporate governance systems and structures than many countries in the world. However our governance structures require constant vigilance and policing to keep it properly balanced and effective.
In our country, the definition of corporate governance has been broadened. It now has come to mean the whole process of running a company and serving the best interests of the shareholders in conformity with the laws and ethics of the land. All of the factors that are involved in balancing the power between the CEO, the board, and the shareholders are now considered to be a part of the corporate governance syndrome.
The good news is that shareholders, customers and members of the public are becoming more knowledgeable, better organised, and more vocal on corporate governance matters.
Independent directors, with their newfound powers and responsibilities, are becoming more participative and amenable to corporate governance change.
And CEOs, especially the confident and competent ones, are recognising that they are better off subscribing to good governance ethics of accountability, responsibility, transparency, fairness.
However, the fundamental challenges of corporate governance remain obvious.
These challenges are, first, to select an effective board and, second, to ensure that a board aggressively and effectively measures, monitors, shapes, and rewards top management performance against agreed-upon objectives.
Efforts to strengthen corporate governance must start by recognising a fundamental, albeit circular, reality: Namely, a board will be as effective as top management, and specifically the CEO wants it to be -- and top management will be as effective as a board insists that it be.
More specifically, if a CEO wants strong non-executive board members, he will get them. If a CEO wants the board involved, it will be. If the CEO feels the board’s role includes tough-minded evaluation of his own performance, the board will oblige.
And if the board chooses, evaluates, and rewards a CEO on the basis of shareholders value, the directors will get a CEO who puts shareholder value first.
Company executives must be accountable, willing and prepared to face up to the results of their decisions and actions, accept either commendation and reward or failure and penalty. There should also be a clear structure of accountability.
Every employee must know their duties, tasks and functions and be capable of efficiently and effectively discharging them.
There must be assurance that a business is run in an open, transparent and bona-fide fashion, that everything is open for inspection and cross-examination, and above all that all completed data and information is factual, accurate and current.
As 2011 comes to an end, let us all remember author, Jim Collins’ wise counsel. In his best seller Good to Great, Collins has noted that “adequacy is the biggest impediment to achieving excellence; good, far too often, is good enough.”
For 2012, let us remember that good corporate governance is, in fact, good business manners.