Perspectives on Corporate Governance

PDF | Corporate Governance is relatively a new area and its development has been affected by various theories from different domains.
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In response to the heightened interest on the part of institutional investors, there has been a rapid expansion in governance rating services that are designed to provide more accurate insights into the quality of governance achieved by all major companies in comparison with their country peer group and also in comparison with global best practice. While some of the initial work of these new rating services has been regarded by corporates as little more than superficial box-ticking, there is no doubt that these services will progressively become more incisive and at least some will become more authoritative.

What this means is that increasingly, corporate leaders must recognise that they are living in a goldfish bowl, not only in relation to their financial and strategic performance, but also in relation to the way they conduct themselves in their board and other governance arrangements, including in particular increasingly intimate details of their compensation and related benefits.

Tougher scrutiny is likely to result in much more adverse criticism by investors and the media when there is perceived divergence from codes of good practice. All this implies that board members will have to be able to articulate with exceptional clarity the logic that underpins the governance decisions they take. Corporate leaders now face the challenge not only of meeting the increasing demands of rating agencies and professional investors, but also of responding constructively to the ever-growing and often divergent requirements and expectations of a wide range of other interested parties.

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On top of all of this there is the burgeoning array of multinational or global codes of practice, such as the Global Compact, the Global Reporting Initiative and the Sullivan Principles. The governance challenge that all this activity and pressure represents is the fundamental challenge of coherently articulating the defining purpose of the corporation.

Achieving this in a compelling way is becoming a more and more demanding task for management. What is emerging as the core notion here is the need to sustain reputational integrity. Each corporation needs to determine its own particular set of values and goals within the broader legal framework and norms set by society, and corporate leaders should be ready to demonstrate that their character as corporations is deeply grounded in these values. Reputational integrity does not mean giving in to whoever is temporarily exercising the most painful pressure. But it does mean achieving consistency between actions and values.


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What are the implications of these six governance themes for institutional investors? More specifically, will they lead to greater investor activism in pursuit of desired governance changes? Essentially, there are two schools of thought. The traditional, and still mainstream, fund management perspective is that investor activism does not make sense.

Key to their commitment has been the growth of their indexed fund portfolios which in effect locks them in as long-term investors with, in their view, inescapable ownership responsibilities. Their willingness to engage in investor activism is also being strongly encouraged by some governments on the basis that unless institutional investors find a way to exercise stronger ownership responsibilities, boards and management teams remain insufficiently accountable.

We are clearly still in the early days of institutional investor activism and an established protocol for engagement has not yet emerged at the global level, although major progress has been made in markets such as the United Kingdom, stimulated by codes such as the Hermes Principles which endeavour to spell out the substance of the dialogue which corporations should be prepared to have with their major investors. In particular, the governance debate, which until fairly recently focused entirely on corporations and their boards, is now beginning to focus more intensively on how fund managers themselves discharge their fiduciary responsibilities on behalf of their clients, and on how pension fund trustees hold themselves accountable to their beneficiaries.


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Our surveys consistently indicate three conclusions: From a global perspective, six themes of importance are apparent: Rapid extension of governance codes worldwide While Sarbanes-Oxley legislation has naturally been the focus of much attention, the broader picture is one of continued substantial progress, market by market, in introducing and refining governance codes. Looking ahead, the two critical issues facing investors and corporate leaders in regard to these codes are as follows: One powerful force driving convergence is the listing of shares across multiple jurisdictions.

Increased focus on board professionalism One of the most critical components of corporate governance reform has undoubtedly been a major shift in expectations of the role of individual board members, especially the outside, or non-executive directors. This has further consequences: Selective redesign of corporate leadership roles The pressure for increased professionalism in board arrangements, especially in the light of recent corporate scandals, has also inevitably extended to an assessment of the appropriateness of combining the roles of chairman and chief executive, as is customary in the US corporate environment and common in other markets such as France.

Re-assessment of corporate reporting needs Alongside changes in boardroom structures and processes, a parallel trend of at least equal importance to investors has been the development of far-reaching changes in corporate reporting. More intensive external scrutiny of governance The top 1, or so corporations worldwide now have to come to terms with an environment which has permanently changed in terms of the detailed and intensive focus on corporate governance arrangements.

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Implications for investors What are the implications of these six governance themes for institutional investors? Many countries have to address complex challenges unique to their business environment, or have had to face acute economic difficulties or legacy issues not experienced here. For example, Cyprus was more severely impacted by the financial crisis — as it tries to restore stability through reinforced governance standards, its story is both a valuable lesson and a salutary warning.

Elsewhere, our lead interview is with Matthew Taylor , who led the government review of modern working practices. He spoke to me about the importance of quality work, while refuting some of the negative perception of particular kinds of employment. Gig employment works for a lot of people, but not so well for others. What matters for people is whether or not the organisation they work for … treats them fairly and decently. In the face of fragmented international regulation, companies must bolster governance frameworks to combat subsidiary risk.


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A leaner UK Corporate Governance Code seeks to refocus attention on the objective of governance, rather than merely ticking boxes. As new reporting requirements are introduced, our community reflects on the possible impact. Our emphasis is on the business-for-profit organizational sector. For interesting recent discussions of the special problems of nonprofit organizations, see Clark, R.

Google Scholar , ISI. We wish to thank an anonymous referee for Applications of Management Science for this point, as well as subsequent correspondence with William Royce, senior management consultant at SRI International. The present authors deserve a great deal of the blame for this comment through informal conversations with Sturdivant, having been led astray by a reference in R.

Pitman , , ch. McGraw-Hill , , 33 — Tavistock Publications Limited , John Wiley and Sons , Irwin , , and Klein, T. Harvard University Press , ; and Ackerman, R. Reston , as well as other books and articles. We do not believe definitions can be constructed and justified in isolation. They should be descriptive of current use, and in emerging theories, prescriptive of linguistic change. While we offer two definitions in order to ease the linguistic change, we are ultimately wedded to the wide inclusive sense of stakeholder. The authors wish to thank Dr.

Marvin Olassky of DuPont for the suggestion of different levels of definitions. The importance of external forces for business strategy is explored in Charan, R. A Case Study of the U. JAI Press , Telecommunications Industry Workshop Organizing Committee , For another stakeholder technique, see Lee, H. Systems Science in Health Care Toronto: Pergamon Press , See Freeman , op.

Stockholders and Stakeholders: A New Perspective on Corporate Governance

William Dill first used kibitzer to refer to external groups who try to use the political process to influence the affairs of the corporation. Its use is not meant perjoratively. Some have argued that markets and politics are inherently connected. Our distinctions are useful, however, in order to understand how and why they are connected. Harvard University Press , , do not pay adequate attention to the positions of shareholders and directors and hence, to questions of corporate governance.