Is it worth having good governance?

May 2017 | SPECIAL REPORT: OPERATING AN EFFECTIVE BOARD

Financier Worldwide Magazine

At a recent meeting, someone said that good corporate governance is good for companies. Despite it being quite a familiar phrase about the subject, immediately there were questions if this claim has been statistically proved, questioning how we see corporate governance today.

Sometimes, corporate governance is seen as rules that companies have to follow, and which some may try to go around if possible. Some may even see it as a burden. But why does it have to be so?

Let us look back at the Cadbury Code, drawn up as a set of recommendations in a report (formally titled Financial Aspects of Corporate Governance) issued by a committee of experts in 1992. The recommendations in the report were based on the existing best practice. Regulators and companies around the world have since implemented the ideas into their own codes.

Corporate governance is not about rules, apart from a fixed number of requirements that form a part of company law and the stock exchange rules. It is a set of fundamentally good ideas that have been tried and tested by many and that survived the test of time. It is most likely to help companies, but it is not a ‘silver bullet’ solution that can magically transform companies or rescue those that are failing.

This point clearly emerged in the BEIS Green Paper on corporate governance reform. We can all agree with the objectives that companies have to demonstrate stronger accountability and be more transparent. However, there were many proposals that may risk becoming prescriptive measures that may not resolve problems or worse, end up in masking them as businesses seek technical compliance rather than doing something that really helps them.

Perhaps there are some tenets of corporate governance that we need to just accept as a starting point. It might not give us a completely new perspective, but we can at least move on to start doing something positive.

Is corporate governance worth the effort?

It is about time we accepted that the value of corporate governance may not be simply measured: a relationship between two or more qualitative concepts is not going to give us a promise of corporate governance’s worth. Corporate governance cannot be broken down as a sum of individual aspects, such as a board structure or details about disclosures. Furthermore, we are not interested in a snapshot of the benefit corporate governance brings. Measuring the link between the time taken to achieve good corporate governance and business performance would become so complex that the result would be imprecise.

There is also another aspect to this discussion. Company success, as well as failure, is dependent on many things, not just on corporate governance. Corporate governance is an important factor on its own, but also it is important in relation to other factors that affect corporate success, such as a risk-aware culture, absorbing bright business ideas and engaging employees.

So, why are we so concerned about measuring the link? It has been part of assessing businesses for as long as anyone can remember. It is how financial reporting has developed for centuries.

The role of quantitative information, however, is changing. Those who take an active interest in businesses, such as investors, seek a wide range of information, in addition to the financial information, such as business models, strategic directions, board composition and the senior executive team. The trend to require more non-financial disclosure is merely a reflection of an underlying demand for it and creating a level playing field.

Another reason people are interested in quantifying the value of corporate governance is because of the increasing cost of compliance. In an effort to make best examples into something practicable, there have been more specific details in corporate governance frameworks. Indeed, if something is costing us, naturally we may want to know what we get in return.

Yet there are many things that we only have proof of in the form of anecdotes and examples – corporate governance is not the only thing. Upholding good ethical values and having a good corporate culture plays a major role in business success; yet none of these are directly measurable in terms of performance. Nonetheless, it makes perfect sense when others talk about their good corporate culture leading to business success. Equally, we doubt the long term success of a business if bad morale is prevalent among employees.

Companies can achieve short term success with poor governance. Some will be happy with such outcomes – but this is different from delivering long term success.

For a business to succeed in the long term, it will need support from a wide set of stakeholders. Their relationship with the business will vary, as will their own interest in its success. For example, employees would like to have good working conditions, with prospects to advance, while customers would like reliable products and services proportionate to the cost. Additionally, suppliers would like to trade with a business partner with whom they can maintain a stable relationship.

Furthermore, there are other stakeholders whose impact on businesses is more indirect, such as the general public (via public opinion) and the media. Their judgments and views can impact on those who have direct relationships, such as shareholders. Many aspects of corporate governance – whether already reflected in the Corporate Governance Code or existing within the debate, such as corporate culture – also impact these relationships.

What can we do about trust?

There is much discussion about the erosion of trust. One of issues that we know affects trust is short-termism. It is an issue that can be addressed at multiple levels. If short-termism prevails in the boardroom, it will be mirrored in its relationship with the senior management and this will cascade down through the whole organisation.

Take executive remuneration, for example. If the board approves a reward structure tied to company performance in the short term, then executive directors will act to achieve their short term targets. They will monitor the performance of others within the organisation only in line with their timescale. If that is the case, would there be any point saying that the company seeks to deliver long-term success?

Good governance can help, and it has to start at the top. The starting point may be a conviction within the boardroom to do the right thing for the business, using governance as a tool to understand and start positive change.

Cultural change involves concrete, deliberate measures and these are not always simple. Indeed, many things take time to implement. But that is the nature of corporate culture – it involves everyone and impacts their lives, but the value of making genuine change goes beyond words.

Jo Iwasaki is head of corporate governance at ACCA Global. She can be contacted on +44 (0)20 7059 5000 or by email: jo.iwasaki@accaglobal.com.