06 Jun 2017

Good Corporate Governance and Organisational Performance

Pikay Richardson_Lockwood

 

Pikay Richardson,
Lockwood Institute, Accra, and Manchester Business School.

 

Introduction

In the first part of the perspective on good governance and economic development, it was demonstrated that a good public governance regime was vital for the optimal successful operation of the private sector and the creation of wealth.  It was argued that the public sector must be strengthened to perform functions lead to poverty reduction, equitable development and participatory governance. Wealth creation in every economy is undertaken by firms and not governments.  Governments in themselves do not create wealth. While some enterprises may be state-owned, it is the firms that create the wealth rather than the government.  Research on nationalisation or privatisation indicates conclusively that it is not the ownership of productive assets that determines the productivity of such assets. What really matters in wealth creation in firms is “who runs the enterprise” rather than who owns it.  Of course this supposes that the owner does not meddle but ensures the divorce of ownership from control, thereby allowing those appointed to run the organisation the freedom to do so.  The bottom line is the level of competence of the management.  With good management the enterprise is bound to be successful.

 

Public/Private Interface

In line with this, it is now generally accepted that governments should concentrate on fostering an “enabling environment” for corporate and private sector growth. The elements of an enabling environment include a stable political and macroeconomic environment; transparent and predictable commercial and investment codes; labour codes that enhance management efficiency and protect basic labour rights; and a legal system that supports the timely and fair adjudication of disputes. They also include government bureaucracies that operate in a reasonably efficient and transparent fashion in providing access to critical goods and services, such as import permits, customs clearance, title for land, and access to utilities.

 

There is need for the establishment of business-government councils and other mechanisms for fostering dialogue between the public and private sectors, as well as support for the commercialization and privatization of certain public sector activities. These include creating enabling legal frameworks for private sector development.  To this end, all private sector enterprises must be seen by government officials as partners in development.  It is not uncommon in some developing countries for governments in power to foster the growth of companies the owners of which are seen to be party supporters while doing whatever is in their power to collapse those whose owners are seen as sympathisers of opposing parties.  Every company employs citizens and create wealth which contributes to the GDP of the country, and public departments should spare no effort in aiding all enterprises to make contributions to the growth of an economy.

 

The Private Sector

With regard to the private sector, there is need to build the capacity to

  • Provide efficient and competitive services.
  • Compete effectively in the global economy.
  • Improve productivity and output.
  • undertake research and development
  • Dialogue effectively with other stakeholders in development, especially the public sector, and civil society, in order influence the policy agenda.
  • establish and adhere to codes of practice, and,
  • enhance corporate governance and social responsibility.

 

It has never been more difficult to run companies successful. Today’s manager is faced with a difficult, dynamic and volatile business environment. Economic futures are increasingly uncertain.  Globalization has meant that competition has become intensified, as many developing countries have become formidable competitors in the production and supply of many goods and services.  Technology has rendered space and time irrelevant in many areas of business, and traditional sources of competitive advantage based on natural factor endowments have become irrelevant or nearly so. In many areas of production, technology has become standard and unit labour costs have become the main determinant of international competitiveness. With easy international capital flows, the human factor has become the most important factor of production. The mobility of capital, and demand for the best returns from the owners of capital, have eroded home country advantages, thereby making business location a factor of crucial strategic importance. This is more so in a world that has become knowledge world in a short space of time.  In response to this, knowledge workers command the highest compensation in every area of human activity.

 

This intense competition means that today’s organizations must focus on achieving optimal productivity through its people, recognize that the new challenge is how to build speed, flexibility and self-renewal, as well as the need for competent and motivated workforce in order to grow and flourish.  At the core of this challenge is the quality and maturity of the leadership. Such leadership capability comprises the ability to integrate workers and staff members in a common venture, and to set clear goals, objectives and value.  Aligned to this a clear understanding of the basic elements of organizational success, vision, strategy and impeccable execution on the part of top management is crucial.  Also important are issues of customer satisfaction and corporate social responsibility.  All these are encapsulated in the term Corporate Governance

 

What is Corporate Governance?

So what is Corporate Governance?  At its simplest, it is the framework of rules and practices by which a board of directors (both executive and non-executive directors) ensures accountability, fairness, and transparency, in a company’s relationship with its all stakeholders (financiers, customers, management, employees, government, and the community).  Put differently, it comprises the practices, principles and values that guide a company and its business every day, at all levels of the organization.

Corporate Governance has become topical since the early years 2000s when the world witnessed the spectacular collapse of huge multinational companies like Enron and WorldCom in the USA, and Ahold and Parmalat in Europe.  A closer examination of these failures unearthed various cankers like auditor conflict of interests, managerial hubris and avarice, poor or inexistent regulatory regimes, weakened public intervention authority, gross irregularities in earnings accounting and ineffective or non-existence boards.  Since then, efforts in many countries have gone on stave the spate of corporate failures by putting pressures on companies to act appropriately, to safeguard against corruption and mismanagement, ensure more stringent terms for financing and demand for an effective corporate governance regime.

In recent years, Corporate Governance has become increasingly important because of the

  • pressure for companies to act rightly
  • need to safeguard against corruption and mismanagement
  • value in facilitating the tapping domestic and international capital
  • globalization and the importance of good corporate governance

role it has in ensuring competitiveness, sustainability and growth.

In the main, Corporate Governance is therefore concerned with (among others), four main elements.  Firstly, it is concerned with the effectiveness and efficiency of the operation of the organization.  Here the importance of managerial competence cannot be overemphasized.  Leadership and management skills are crucial to determine the rights things to do and then to them done right.  Secondly, the finances of the organization need to be well-managed to ensure the reliability of all financial reporting.  The cause of failure in most companies is poor financial control and management.  This is a sine qua non condition for organizational survival and prosperity.   Thirdly, managers must ensure ethical behaviour at all times and ensure compliance with all laws and regulations. Every organization exists in a country and it is important that all laws and regulations obeyed and all operations according to the book.  It must be pointed out that it is the actions of people that determine the “behaviour” of the organization.  In short everything that is encapsulated in the term “organizational behaviour” all boils down to people.

Lastly, managers must safeguard the assets of the organization, in order to ensure future survival.  Regardless of whom the current owners are, the assets of any company belong to humanity and generations yet unborn and current managers have an obligation to ensure that such assets are safeguarded.  While such assets may be owned by certain individuals or national governments, they are ultimately the assets of a country and its people, upon which the future survival and prosperity of the country resides.  It is a fiduciary duty of current managers to exercise of corporate power in a responsible and ethical manner. Good stewardship over corporate resources includes openness/transparency, integrity, accountability and responsibility.

At the core of this challenge is the quality and maturity of corporate or organisational leadership.  “Leadership” has been defined variously but when it relates to corporate direction and control, it is defined as “the development of vision and strategies, the alignment of relevant people behind those strategies, and the empowerment of individuals to make the vision happen despite obstacles” (Kotter 1990).  This requires that those responsible for delivering leadership must

  • have sound ethical compass
  • have the ability to take unpleasant but right decisions
  • be able to show ambition, clarity and focus
  • have a knack for developing talent and achieving buy-in
  • be emotionally self-confident, and,
  • have charisma and charm

What is more, due recognition need to be taken of all stakeholders and their legitimate rights, as well as the contribution of each stakeholder in the company’s bid to build a competitive and sustainable business. Good business thrives on good corporate governance and good corporate governance is a sound business strategy as it promotes sustainable growth.

Operationally, good corporate governance demands:

  • good stewardship over the company’s resources
  • transparency, accountability, and fairness to all stakeholders
  • a strong Board of Directors to provide leadership, strategic management, and oversight.
  • cooperation among all stakeholders.

The Role of the Board

The Board of Directors of an organisation constitutes the ultimate authority. The buck in a sense stops with it.  It is composed of executive directors and non-executive directors.  The executive directors are the hired senior employees who have direct responsibility in running the affairs of the organization and charged with ensuring its success. The non-executive directors are independent officers from various walks of life who are invited to join the executive directors to constitute the board, and joint responsibility for overall oversight of the organization. The board therefore has many important duties to ensure good governance of the entity as well as provide competent general oversight.

 

To this end, the Board operates through a number of sub-committees which are set up to determine the modus operandi of the governance regime.  The Remuneration Committee determines the appropriate levels of compensation of the chief executive offer and directors, and determines their annual increments based on their performance.  The Finance Committee is responsible for safeguarding the integrity of the company’s financial reporting and advices the whole board on investment decisions. The Ethics Committee ensures that the organization operates within the laws and regulations of the economy of which the organization is a apart.  Other duties of the board include risk management assessment, regular review of solvency and board effectiveness, referred to sometimes as “board activism”.  Without doubt the board’s roles are vital to the proper operation of the organisation.

The Failure of Corporate Governance: The Case of Ghana

In a Survey on Corporate Governance and Bribery conducted in Ghana in 2002, the researcher found that all of the companies which had foundered in the 10 years before had serious corporate governance deficiencies. These broke down to two groups, internal and external problems.  The internal factors included:

  • Lack of financial controls
  • Poor working management
  • Inappropriate financial controls
  • High organisational inertia and confusion
  • Lack of succession plan
  • Poor recruitment practices
  • Over staffing

while the external factors comprised:

  • Lack of financial controls
  • Poor working management
  • Inappropriate financial controls
  • High organisational inertia and confusion
  • Lack of succession plan
  • Poor recruitment practices

The research findings provided many lessons and since then much effort has gone into ensuring that good governance is the heart of the matter of corporate sustainability and prosperity.

 

Conclusion

While it is true that luck may play a role in human fortunes, in the large majority of cases, the reality is that we are the drivers of our fortunes and the masters of our own destiny. As a result, no company can achieve any measure of success in this highly competitive global environment without good corporate governance.  It is the key to the integrity of corporations, financial institutions and markets, and central to the health of economies and their stability.

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