Corporate governance is concerned with the work of the board of directors, as these are the individuals that ultimately determine the course a given company will take. Governance is focused around the board’s composition, its structure; providing an outline of its members’ responsibilities and daily duties, as well as laying out a framework for the board to follow, so that it remains accountable to shareholders. This is not, however, a one-way street that is only concerned with shareholder accountability. Proper governance assists the board in pursuing the vision and strategy the company is striving for.
It is far more than just the mechanisms and processes that corporations are governed by. It is the beating heart of the company. It determines the way a business runs and ensures, if applied correctly, that it operates in an ethical manner, something that is not just to the benefit of those impacted by a corporations’ vast influence, but is also key to the success of any business. There are countless examples that exemplify the value that can be added to corporates that make business decisions reflecting ethical values and principles, and an equal number of cases testify the negative impact that a company’s risk is sustaining when it chooses to act to the contrary.
If businesses want to continue operating successfully, it is imperative that they maintain trust with shareholders and consumers. Good governance from the top down is essential in cultivating and, more importantly, retaining that level of confidence between all parties. Though it doesn’t appear on the profit and loss report at the end of the year, trust is as valuable an asset as any other in business, as well as being one of the core objectives of good corporate governance.
European ethics
The outbreak of the financial crisis in 2008 caused member states of the EU to reassess corporate governance, partly because there is a common view that the incident could have been avoided had better governance been applied, particularly in the banking sector. The economic downturn that has caused the EU such a prolonged headache brought with it much criticism that was levied at boards, regulators and shareholders, mainly from Brussels, who were looking for someone to blame for the crisis, as well as trying to ascertain how something this catastrophic could have happened in the first place.
It has sparked big debate in Europe over governance processes and procedures, which aim to define what might be the right way to do business. It has led to a complete review of governance in both the financial and non-financial services sectors, with the EU Commission leading – for the first time at a pan-EU level – discussions about how to improve the situation. In December 2012, the debate culminated in an announcement of a new EU Company Law and Corporate Governance Action Plan.
It had three primary objectives: to enhance transparency, engage shareholders and to support companies’ growth and competitiveness. The EU plan highlights its commitment to improving harmonisation of corporate governance, something that will be essential for developing efficiency of the single market for financial services and products. It will take time to fully implement the changes, but the core objectives the EU Commission will hope to achieve in the coming years include: providing equivalent protection for shareholders and other parties concerned with companies; ensuring freedom of establishment for companies throughout the EU; fostering efficiency and competitiveness of business; promoting cross-border cooperation between companies in different member states; and stimulating discussions between member states on the modernisation of company law and corporate governance.
Across the Atlantic, public companies face increased scrutiny, but not just from the federal and state government, regulators or the press. There is a new trend and fresh source of oversight that stems from investors, better known as activist investors. The rise in this highly rigorous and demanding class of shareholders has made a big impact on public listed companies in recent years. These shareholders are both a blessing and burden for the board of directors. They come to meetings with an impressive arsenal of skills and a significant amount of capital and, therefore, are not bamboozled or intimidated by the board, allowing them to act as an alternative and impressive form of oversight.
The spaces that activist investors are willing and, more importantly, capable of scrutinising and second-guessing are wide-ranging, as Marc Gerber of law firm Skadden Arps Slate Meagher & Flom explains. “[Shareholder activists] have criticised companies and agitated for change on matters such as companies’ portfolios of businesses, capital allocation policy, operating performance, stock price performance, corporate governance and executive compensation”, says Gerber. “Moreover, activists will not hesitate to question the ability of incumbent management to implement necessary changes in business strategy, both as part of a campaign for board seats, and once they are on the board. Nor will they hesitate to question the abilities of boards of directors to oversee management and a company’s business strategy.”
As is the case in any organisation or group, the best form of oversight comes from having smart, intelligent and diverse members, who are able to stand their ground intelligently, so that if leadership does begin to steer too far to the left, there is a method for righting the ship. In the US, it seems that better corporate governance is not coming only from regulators, but from within, which is always to the benefit of all involved.
A recognisable asset
The real purpose of good corporate governance is to construct an environment that encourages businesses to make better decisions, be accountable to shareholders who provide the necessary capital for the company to perform its functions, and to ensure that the company pays attention to the manner in which it goes about achieving its goals, so that can be a positive force within the areas it operates. Since the global financial crisis, the importance of good governance has been recognised by both companies themselves and national governments.
Each party realises that through promoting better business practices they all stand a stronger chance of benefiting from stability and sustainability, which comes from corporate governance. Whether the impetus comes from within, as the US market has shown, with its unique brand of shareholder activism, or from outside forces in the form of supranational bodies, like the EU, everyone has something to gain from employing better corporate governance.
Each year World Finance recognises the firms that have improved their internal structures, mechanisms and achievements. Here are the best performers in some of the most competitive locations. Congratulations to our winners.
