Question

Statement by PricewaterhouseCoopers (2008)

“In view of the current economic downturn, corporate governance, and the reporting of that governance, may become a more pressing issue for listed companies; particularly insofar as it relates to going concern reporting, risk management, internal controls, board balance and directors’ remuneration.”

ICSA, The Chartered Governance Institute, believes that good governance is important as it provides the infrastructure to improve the quality of the decisions made by those who manage businesses. Good quality, ethical decision-making builds sustainable businesses and enables them to create long-term value more effectively

Corporate governance has been highlighted as an important factor in alleviating or reducing the risk of corporate failure. Evaluate which aspects of corporate governance are likely to guard or protect against corporate failure.

Answer 1

Corporate governance is of paramount importance to a company and is almost as important as its primary business plan. When executed effectively, it can prevent corporate scandals, fraud and the civil and criminal liability of the company. Corporate governance keeps a company honest and out of trouble.

Top Six Steps to Improving Corporate Governance

1. Recognise that good governance is not just about compliance.
2. Clarify the board's role in strategy.
3. Monitor organisational performance.
4. Understand that the board employs the CEO.
5. Recognise that the governance of risk is a board responsibility.
6. Ensure the directors have the information they need.

With a good corporate governance framework in place, supported by a healthy corporate culture, the organisation should see direct benefit. Risk is controlled; procedures are streamlined and consistent, as one commentator notes.

These benefits include:

• Efficient processes — due to repeatability and consistency of tasks.
• Visibility of errors — repeatability and consistency quickly highlight nonconformities in the processes.
• Reduced costs — repeatability and consistency eliminate waste from scrap, rework and other costly inefficiencies.
• Smoother-running operations — ‘fire-fighting’ is eliminated and operations are either ‘conform’ or ‘non-conform’.
• Compliance is assured — with a culture that supports corporate governance and products in the market — product that reaches the market meets the intended specifications and works correctly.

However, there are also broader benefits of good governance that can have a much wider and far-reaching positive impact on the business, as follows:

• Culture — consistently good governance as an input at all levels creates as an output a culture of excellence. Those that ‘swim against the tide’ stand out against the ‘blueprint’ or ‘DNA’ of the organisation. The leadership’s behaviour defines the behaviour of the workforce, and it becomes far easier in such circumstances to fit in with the defined culture.
• Reputation — good governance delivers good products, which, in turn, lead to good business performance. The reputation of a company can make or break it in the market.
• Clarity — all organisations have issues, problems and nonconformities. An organisation with good governance can isolate these, reducing the impact on the market and very often containing the risk internally.
• Financial sustainability — good governance reduces the threat of safety, legal, performance and warranty concerns that can severely impact an organisation and its stakeholders and/or interested parties. These stakeholders and/or interested parties may be customers, directors, staff, suppliers, shareholders and even whole communities.

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