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Best Corporate Governance Practice

In this section we present our Five Golden Rules of best corporate governance practice - key concepts in embracing good corporate governance and best practices in business. Embracing these principles will mean the companys culture and therefore public image will shine out as an example of an open, well and fairly run organisation. The public image of a corporation will quite accurately reflect the culture of that body. It follows, then, that good corporate governance has to be in the bones and bloodstream of the organisation since this in turn will be reflected in the culture. To carry the analogy further, in the same way that healthy blood and bones are reflected in the naturally healthy look of a person, so an organisation whose internal functions are healthy will naturally look so from an external perspective. Our Golden Rules of best corporate governance practice are like a health manual for your organisation and come with a practical diagnosis and treatment programme which we set out in our good corporate governance implementation section. Corporate cultures and vision When Bill Hewlett and I put together the initial plans for our business enterprise in 1937 ... (we decided) that we wanted to direct our efforts towards making important technical contributions to the advancement of science, industry and human welfare. The above quotation expresses the early aspirations of two entrepreneurs when they started their business. The principles these two men espoused at the beginning became part of the ethos of the business they founded and persist to this day. Similarly, Ernest Butten shortly after he founded the management consultancy Personnel Administration in 1943, issued a document which he called the P.A. Charter. The clear vision behind this document shines through, and was to drive the business forward through his sale of the business i nto trust for its staff and well through his retirement twenty five years later. "EB's" presence permeated the company and guided its behaviour for a generation. This intention and ability to create a vision and turn it into a way of life for the company may be regarded as nothing unusual until one compares a supposed entrepreneur and builder of multinational corporations, Robert Maxwell, whose empire collapsed after he died, with another entrepreneur and business builder, Thomas J Watson, whose creation, International Business Machines, is still a global force to be reckoned with over eighty years after he founded it. Principles of good corporate governance From the above examples, we can draw some conclusions and formulate a short set of rules regarding best corporate governance practice. All the goodies, to a great degree, abided by these rules. All the baddies to a large extent ignored them. The principles underlying these rules are:

ethical approach - culture, society; organisational paradigm balanced objectives - congruence of goals of all interested parties each party plays his part - roles of key players: owners/directors/staff a decision-making process is in place which is based on a model reflecting the above giving due weight to all stakeholders stakeholders are treated with equal concern - albeit some have greater weight than others accountability and transparency: to all stakeholders

Hence, with due respect to Milton Friedman who is quoted as believing that the social responsibility of business begins and ends with increasing profit, we contend that running the business successfully is not simply about market domination and shareholder value. And best corporate governance practice is not simply about a battle between distant, disloyal institutional shareholders and greedy directors but about the ethos of the organisation and fulfilling its clearly agreed goals. These goals may be set by the entrepreneur who starts the business, but they are accepted by all parties as being high-minded and in everyones interests. This is notwithstanding the fact that some parties have bigger stakes and some benefit more than others. And, of course, different parties want different things from the company. There has to be, therefore, a process of identifying the different needs and, as much as possible, harmonising them. This is the starting point for the smooth running of the business. Once dissonance in the common goal creeps in the danger of the standard of corporate governance deteriorating rises steadily. Clearly external regulation can only play a limited part in ensuring that such a deep-seated and beneficial culture as that described above exists. Equally clearly, however, the task of ensuring this desirable state and adhering to best corporate governance practice belongs to the various stakeholders, who can and should, through their proper participation, bring this about. Five Golden Rules As we have iterated, this section of the website lays out and explains our view of best corporate governance practice and the holistic approach by which we believe an organisation can ensure that a state of good corporate governance exists, or is brought into being if its existence is uncertain. It takes the view that there is an over-riding moral dimension to running a business and that the standard of governance will depend on the moral complexion of the operation. Hence the approach developed is based on the belief that: the business morality or ethic must permeate the entire operation from top to bottom and embrace all stakeholders best corporate governance practice is an integral part of good management practice also permeating the entire operation, and not an esoteric specialism addressed by lawyers, auditors and sociologists The principles of this approach are therefore framed in relation to the conventional way of looking at how a business should be properly run.

Our Five Golden Rules of best corporate governance practice are: 1. 2. 3. 4. 5. Ethics: a clearly ethical basis to the business Align Business Goals: appropriate goals, arrived at through the creation of a suitable stakeholder decision making model Strategic management: an effective strategy process which incorporates stakeholder value Organisation: an organisation suitably structured to effect good corporate governance Reporting: reporting systems structured to provide transparency and accountability

This approach recognises that the interests of different stakeholders carry different weight, but it does not, by any means, suggest that those with a major interest matter and the rest dont. On the contrary, best corporate governance practice dictates that all stakeholders should be treated with equal concern and respect. For obvious reasons, although the methodology we will propose involves taking major stakeholders into greater account when formulating strategy, it is designed to generate all round support because of the fact that every stakeholder, no matter how small, is given the opportunity to express a view. It is key to the approach that organisations truly respect the minority interests. Like the spirit of the US constitution, the approach can be said to embrace liberty, equality and community, but like the US economy, it aspires to produce the most powerful and effective result in the world. Best corporate governance practice = best management practice The regulatory approach to the subject would regard governance as something on its own, to do with ensuring a balance between the various interested parties in a companys affairs, or more particularly a way of making sure that the chairman or chief executive is under control, producing transparency in reporting or curbing over-generous remuneration packages. This indeed is what the Cadbury recommendations and the subsequent reports and code are all about. However, as we express in the rest of this website, we regard this as much too limited a view of governance, and hence of best corporate governance practice. The essence of success in business is:

having a clear and achievable goal having a feasible strategy to achieve it creating an organisation appropriate to deliver having in place a reporting system to guide progress.

There are very many websites and publications advising on how to do this, and of course, this is what is described as good management. Best corporate governance practice is about achieving the stakeholders goal, and delivering success in an ethical way. Hence it follows that it must entail a holistic application of good management. To demonstrate the totality, and the need for a holistic approach, we present below an illustration showing the pressures on a large organisation.

The Pressures on a Company It is important that a wide perspective is taken when considering corporate governance because we cannot emphasise too strongly our belief that good management practices, as described in the rest of this section of the website, will deliver good corporate governance. Compliance with checklists of regulations and codes, in the setting of bad management or a lack of commitment to good management, will NOT deliver good corporate governance. The longer term consequences of this externally-applied regulatory approach will be a progressive introduction of more and more rules which are held in less and less regard, and which produce less and less effect. The result benefits neither business nor its customers, and has only served to spawn a growing industry of specialist advisers in corporate governance and lobby groups. It has also failed to prevent more and bigger corporate failures. So while the most of the provisions of the various Codes of Conduct could certainly be considered best corporate governance practice - or at least good corporate governance, if they are imposed externally and not truly bought into by every part of the company and its stakeholders, and monitored effectively, there will always be those who try - and succeed - in hiding from or bending the rules. As Professor Sir George Bain once said to us, the big advantage of the shareholder model over the stakeholder model in management terms is the simple goal it presents: maximise shareholder value. No such simple target attaches to the stakeholder approach, and yet without a clear goal, management faces an impossible task in trying to do its job properly - what exactly is its job? In our experience of working with and observing management over the past thirty years in all kinds of situations, from the leaders of some of the largest companies in the world to the owner/managers of small entrepreneurial businesses, a general rule stands out. The governance, the goals and the strategy of a business must be compatible, and there must be congruence between the expectations of the various interested parties. Clearly, in defining best corporate governance practice, this means that:

there is a common view as to the ethic by which the business is conducted the views of all interested parties are taken into account when deciding the goal an appropriate weighting is given to those views to arrive at a conclusion as to how to achieve the greatest good a strategy is formulated to attain the chosen goal which takes account of the likely behaviour of the various interest groups an implementation programme is drawn up which makes the necessary organisational arrangements to fulfil the strategy and to protect the interests of the various stakeholders the implementation programme includes reporting systems which ensure transparency and regular feedback on matters which affect them to the various stakeholders

Much of this website is therefore devoted to the process whereby a board, and the main stakeholders, can ensure that the company complies with the Five Golden Rules of best corporate governance practice.

The importance of Corporate Governance


Why do we have to take corporate governance seriously? The creators of this website have spent many years espousing the importance of corporate governance, as authors, lecturers and consultants. Even before the issue came to the forefront of business with the Cadbury Committee following the Maxwell pensions scandal, we recognised that it was not actually a new concept at all and that as long as there has been large-scale trade people have recognised the importance of corporate governance - that is, responsibility in the handling of money and the conduct of commercial activities. We discuss the history of corporate governance and the definition of corporate governance in other areas of the website. With globalisation vastly increasing the scale of trade and the size and complexity of corporations and the bureaucracies constructed to attempt to control it, the importance of corporate governance and internal regulation has been amplified as it becomes increasingly difficult to regulate externally. Here we will explore four issues which in our view are key to understanding the importance of corporate governance:

The issue of integrity: are the boards and management of companies carrying out their duties in an ethical way (we define business ethics here)? Topicality - the bonus culture: could better corporate governance in financial institutions and their remuneration policies have prevented the credit crunch and resulting financial crisis? The regulatory framework: introducing more regulation has clearly failed - we need better regulation which ensures businesses recognise the importance of corporate governance as an integral part of management, not a box ticking exercise The importance of corporate governance in Directors' training: prevention is better than a cure, so including knowledge of the princples and practice of corporate governance in mainstream director training is essential

The Issue of Integrity Perception is in the eye of the beholder, and corporate governance, while a technical term for accountants, lawyers and the like, is known by the readers of the popular newspapers by names such as honesty, decency, fairness. Similarly, what the professional would call questionable practice in this arena is criticised by the general public using words such as rip-off, cheating and crooked. The central issue today therefore in the field of corporate governance is not whether most listed companies comply with the various provisions of the Combined Code, Sarbanes-Oxley, King, etc. The key point is whether the top management of large organisations especially, but actually of that of business in general, is seen as possessed of integrity in the eyes of the general public. This is the spirit that gave support to the principle of setting up the Cadbury Committee, not simply a desire to lay down some rules on the financial aspects of corporate governance to prevent innocent fund managers being misled by greedy directors. And it is this integrity - perceived and actual - which underlines the importance of corporate governance, as it is the tool by which integrity can be encouraged, measured and projected. The Bonus Culture

The current financial crisis has brought into sharp focus the system of bonuses and remuneration operated by financial institutions. It is argued that it encouraged excessive risk taking and irresponsible lending. Combined with the complex financial instruments that the mainstream institutions constructed to move the risk off their books, this - highly simplistically stated - was, some say, what led to the so called 'credit crunch'. What is certainly true is that there was excessive risk and irresponsible lending and this led to the downfall of some of the world's biggest lenders and in turn the insurers insuring that risk. The importance of corporate governance in this scenario is, in our minds, unquestionable. A better system of checks and balances (the coredefinition of corporate governance) would have picked up the warning signs that many people were sending that the level and criteria of lending was getting dangerous. The OECD have published lessons from the financial crisis, which also conclude that "the financial crisis can be to an important extent attributed to failures and weaknesses in corporate governance arrangements which did not serve their purpose to safeguard against excessive risk taking in a number of financial services companies." We strongly believe that our approach, which is different to the conventional, box ticking mechanisms, would have succeeded as it is not only places corporate governance and business ethics at the core of the organisation not as a separate issue, but is based on independent market research. This is covered in our corporate governance and researchsection. Directors' pay and the bonus culture are often seized upon by special interest groups and the media as a single issue, not in the context of business and society as a whole, and is therefore blinkered to the underlying factors causing and affecting remuneration. While the latter is an obvious manifestation of good or bad governance (if only because it exposes the quality of stakeholder communication!), it misses the basic point that companies should be run well and responsibly - in every way, not simply in how they pay salaries and bonuses. In a well run company, good performance is rewarded and rightly so - to attract talent and people dedicated to improving performance, not simply doing a job. In its Principles of Corporate Governance, the OECD acknowledges that: "Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring." Clearly, it is not in the best interests of the company for it to go out of business or be bailed out by governments. So it is not the principle that should be debated here, but the implementation. As we said earlier, while the board, management - and even the shareholders - may feel that remuneration is fair, it is clear that current corporate policy is not in line with public perception. In the US this is perhaps more evident than in more reserved UK society if the internet searches are anything to go by - Wordtracker, the keyword research tool, reports nearly 8,500 searches over the last year relating to the AIG bonus payouts alone, the vast majority including the word 'outrage'. So in spite of the bonus culture being hijacked at times to attack business generally, the issue does highlight the importance of corporate governance and the need to assess the quality of the system of checks and balances in all sizes of company (bearing in mind many of the "toxic mortgages" were sold by small local brokers). The Regulatory Framework - better not more regulation As we argue elsewhere, the importance of corporate governance could be restated as the importance of good management. Put in that simple way it seems obvious, but we see instances daily of a lack of recognition that good governance is actually just good management and a failure of governance is a failure of management. Awarding bank and insurance company bosses generous bonuses and pension packages after government bailouts of failing institutions, apart from being a huge public relations gaff is rewarding poor management and hence poor management itself. But while reform is clearly needed, a knee-jerk reaction will always result in building a sledge hammer to miss a nut. The regulators have openly admitted that they did not understand the complex financial instruments that ultimately folded in on themselves and led to the collapse of the financial system. Constructing new regulations to try to control circumstances that have yet to emerge - every crisis has different causes - is a futile task. Restricting the range of products available to address the problem has major implications on innovation and consumer choice. Some of the knock-on effects of this are that products become more expensive; large providers will not take on certain sectors of society because they are not profitable; and niche providers providing those innovative products will cease to operate or be closed down by the regulators. That clearly represents a significant backward step in the financial services market. The importance of corporate governance in the financial markets is particularly topical but the solution to bad governance is universal and any system of regulation needs to strike the right balance between encouraging innovation and customer choice and enforcing a minimum set of standards. Fundamentally, though, it should provide the incentives to go far beyond these minimum standards and try to demonstrate that, by changing the corporate culture, the long term rewards are actually greater (not least because it should result in less regulation!) Just as punitive tax regimes encourage evasion, avoidance or relocation, it has been proven that the regulatory burden, while in many cases adding cost and confusion, has caused people to invent more and more complex systems to avoid detection. There is, of course, much excellent regulation which has indeed improved the consumers' lot by forcing companies to disclose information, reduce costs/charges and generally act in a fair manner. We need to build on those good aspects and not simply impose more box ticking exercises. The importance of corporate governance in directors' training A corollary to the focus on corporate behaviour and the behaviour of senior corporate employees is the attention increaseingly being paid to the qualification of these senior people to carry out their responsibilities. There has never been any formal qualification required to run an organisation, and none to be a director - although in recent years organisations like the UK Institute of Directors has introduced qualifications such as theChartered Director to address the issue. In practice, of course, most large and well run organisations will look for suitable professional qualifications in their senior staff, and there is an increasing number of organisations offering non-executive director training and selection services. In the last ten years or so, especially following the dot com boom and bust and the collapse of Enron and WorldCom, the role of direction has finally begun to be seen as a profession or at least a discipline requiring specific training and development. It is clear that it is the importance of corporate governance has been a major influence here and the IoD qualifications specifically mention corporate governance as a significant element - and benefit. To make a real difference long term, it should start much earlier in professional development, and corporate governance is starting to filter down, with some MBA courses, especially in Australia, offering it as part or all of the course content (though the latter has the potential to persist the notion of corporate governance being a separate issue, which as you will realise by now, we think it wrong. Others, such as the London Business School, include modules on ethics and Corporate Social Responsibility. It is our sincerest hope that this trend continues and that the true importance of corporate governance is fully recognised and acted upon.

The Role of Corporate Governance in Strategic Decision Making



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Corporate governance directs organizations' decisions. One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur.The interests of stakeholders, such as customers, potential customers and non-customers impacted by the decisions of a company, may begin to get attention as corporate governance plays an increasingly strategic role.

1.

Policy Setting
Corporate governance is the system used to direct and control organizations. One of the many important roles played by corporate boards and executive committees is to establish and enforce policies deemed necessary for the effective operation of the company. These may include codes of ethical conduct towards customers, vendors, employees and shareholders, input into the organization's structure, as well as approval of functional positions and responsibilities. This may include input into the corporate culture, or a host of subtle governance cues that affect the transparency or opaqueness of strategic decision making.

Establishing Corporate Strategy

An organization's corporate board must be intimately involved with establishing a clear definition for the organization's purpose and desired outcomes. If a company sets the goal to become the global leader in telecom technology for the military market, for instance, then corporate objectives, strategic plans, financial allocations and measurable outcomes should all be measured against their ability to move the company toward that goal. If resources are being allocated to places that do not support this strategic goal, then the board's due diligence must identify the reason why and give input into which is off-strategy: the strategic goal itself or the resource actions that appear initially to be out-of-sync.

Assurance That Actions Support Strategic Positions

A company's executive team is directly accountable to the board of directors. This requires that major corporate decisions and results tracked against the corporate goals should be vetted, if not by the full board, then by the board's executive committee. Key strategic actions, such as mergers and acquisitions, major new market entries, exiting markets, closing plants, or changing the diversification mix or pricing position, are examples of decisions that require the oversight of corporate governance.

Monitoring Investment Decisions and Capital Investments

It is the responsibility of the corporate board to review and understand the financial statements of the company and to guide the prudent investment of funds to maximize net income and returns. Especially since the Sarbanes-Oxley Act of 2002 which introduced new responsibilities for financial reporting, corporate boards must be vigilant regarding the strategic impact of new requirements for internal controls. Corporate boards must also review and understand product portfolio and support the executive management team, offering strategic oversight regarding adjustments to the product mix, approving or shifting capital investment to product categories with the most potential to maintain and grow revenue streams and manage expenses. At the same time, corporate board members have a difficult task: helping the executive team balance the short-term goals so desired by shareholders with the long-term investment necessary to ensure the company's future.

Accountability to Stakeholders

From a governance perspective, accountability, while often focused on stock shareholders, can sometimes become something heretofore unconsidered. Historically, business school curriculum has emphasized responsibility primarily for stock shareholder returns, leaving the responsibilities of a corporation to be a good corporate citizen often overlooked. As stock prices and quarterly dividends have taken center stage, long-term investments are often set aside. Critical aspects of corporate governance responsibilities, such as infrastructure investment, plant retooling, workplace safety or disaster planning, have often been ignored or delayed past safe time parameters. The Gulf oil disaster in 2010 demonstrated questionable judgment by the corporate governance of British Petroleum (BP). While the lapse was perhaps shared by many oil producers, it followed years of unprecedented revenue growth and shareholder returns. As unprecedented profits rolled in, it appeared that little to no corporate investment was designated to technology, safety inspections or deep water disaster response plans, even as oil reserves were tapped in deeper and deeper water. Surely the stakeholders in this disaster go far beyond BP shareholders and include the fishermen and small business people whose livelihoods were destroyed, the wildlife being killed by it and the people of the Gulf, whose lives would be impacted for decades to come. A corporate board that does not prepare for crisis, or consider the broad impact of their operational decisions, is not fulfilling its board mandate.