Why Does Corporate Governance Matters?

What is Corporate Governance?

Various scholars and practitioners define "corporate governance" differently. For instance, economists and social scientists tend to define it broadly as “the institutions that influence how business corporations allocate resources and returns” and “the organizations and rules that affect expectations about the exercise of control of resources in firms.” This definition encompasses not only the formal rules and institutions of corporate governance but also the informal practices that evolve in the absence or weakness of formal rules.

On the other hand, corporate managers, investors, policymakers, and lawyers tend to employ a narrower definition. For them, corporate governance is the system of rules and institutions that determine the control and direction of the corporation and that define relations among the corporation’s primary stakeholders. participants. The definition used in the United Kingdom’s 1992 Cadbury Report is widely cited from this perspective, and it reads: “Corporate governance is the system by which businesses are directed and controlled." This narrower definition focuses almost exclusively on the internal structure and operation of the corporation’s decision-making processes and is central to public policy discussions about corporate governance in most countries.

Thus, corporate governance refers to all issues related to ownership and control of corporate property, the rights of shareholders and management; powers and responsibilities of the Board of Directors, disclosure and transparency of corporate information, the protection of interests of stakeholders that are not shareholders, enforcement of rights, etc. Corporate governance systems depend upon a set of institutions such as laws, regulations, and contracts. Self-governing firms are the central element of a competitive capital market economy. These institutions ensure that the internal corporate governance procedures adopted by firms are enforced and they render management responsible to owners and other stakeholders.

Why Does Corporate Governance Matter?

Adding value. Adding value. Corporate governance is a priority for the private sector because it presents opportunities to manage risks and add value to clients. Besides benefiting individual companies, improving corporate governance also contributes more broadly to its mission to promote sustainable private sector investment in emerging markets.

Reducing investment risk: reducing the risk of investments by improving the governance of investee companies. In the worst corporate governance environments, poor standards and weak enforcement continue to be barriers to investment. Improving the corporate governance of investee companies allows companies to work in higher-risk environments. It may also increase the market valuation of companies and attract more investors, which together increase the opportunities for the company to exit its equity investments on favorable terms.

Avoiding reputational risk: If companies do not work to improve their corporate governance structure, then they take on not only an investment risk but also a reputational risk for being associated with companies with poor governance or, in the worst cases, corporate scandals. This reputational risk is particularly serious where stakeholders and equity investors stand to lose from governance abuses, such as with banks and insurance companies.

Creating capital markets: Improving corporate governance contributes to the development of public and private capital markets. Poor standards of governance, particularly in the area of transparency and disclosure, have been a major factor contributing to instability in the financial markets across the globe. This was seen in the 2008 financial crisis, where corporate governance shortcomings, particularly in the area of control environment (internal audit, internal controls, risk governance, and compliance), interrupted economic growth.

Corporate Governance vs. HR Governance

For more than three decades, corporate governance has been at the center of the work of most boards and other governing bodies around the world. However, over the past few years, we have faced serious corporate governance scandals, ranging from state capture to other forms of fraud and corruption involving state-owned enterprises, consulting and auditing firms, other private companies, and the government. Ironically, corporate governance evolved from financial governance, while IT governance evolved from corporate governance. Since the release of several corporate governance codes around the world, national systems of corporate governance have improved, and it is only natural that more areas of specialization are currently being developed. Another successful area of governance specialization is risk governance, which evolved from risk management.  

We are reminded on a daily basis about the importance of sound governance, as well as the devastating effect of poor governance at national and provincial levels, and indeed local government. Sadly, the private sector does not escape poor governance. 

When companies enter a period of demise and eventual collapse because of corporate scandals or governance failures, let alone the adverse effect on the investment climate, the economy, and the overall competitiveness of a nation plagued by fraud and corruption. Trust in institutions is being eroded daily, and the sustainability of organizations is threatened. The question is whether corporate governance codes and systems are sufficient to prevent corporate scandals? Hence, the need for HR Governance—the human face of governance. 

HR leaders are expected to lead strategic and governance HR work at board level, ensuring that HR issues are governed not only at the board level but also in the different board committees such as remuneration, nominations, social and ethics, as well as transformation committees. 

Source:

• https://www.ifc.org/
• https://cdn.ymaws.com/www.iodsa.co.za/resource/collection/684B68A7-B768-465C-8214-E3A007F15A5A/IoDSA_King_IV_Report_-_WebVersion.pdf
• Fernando (2006), Corporate Governance: Principles, Policies, and Practices, (Pearson Education), p.12.
• Jeswald W. Salacuse (2004), “Corporate Governance in the New Century”, 25 No.3, The company Lawyer, p.69