What is Corporate Governance?
Corporate governance is “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.” It encompasses the mechanisms by which companies, and those in control, are held to account.¹
Effective corporate governance structures encourage companies to create value, through entrepeneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.²
Why is effective Corporate Governance important?
In the landmark royal commission into the failure of HIH. Justice Owen made the observation that:
“HIH is not a case where wholesale fraud or embezzlement abounded. Most of the instances of possible malfeasance were born of a misconceived desire to paper over the ever-widening cracks that were appearing in the edifice that was HIH. The answer here is that HIH was mismanaged.”
Boards (and other governing bodies) must now demonstrate that they have taken steps to ensure that they have effective oversight and control of how the corporation’s objectives are set and achieved, how risk is assessed, managed and monitored and how performance is measured, monitored and improved.
A formal corporate governance system is the universal mechanism demanded by the community (and legislators) to demonstrate this. The ASX Corporate Governance Council’s Principles of Good Governance and Best Practice Recommendations, the Corporations Act (2001) Cwlth and the Australian Standards prescribe this system as demonstrating best practice corporate governance.
Independent review/audit of effectiveness of governance/compliance measures in place can assist in minimising the risk of reputational and financial impact of breaches, c.f. Leighton Holdings penalties for breaches of continuous disclosure requirements.
Why Governance Culture?
It has been widely recognized that simply adopting a formal corporate governance charter does not in itself guarantee effective corporate governance. Whilst best practice holds that a formal written charter is an important step to establishing corporate governance, it is only when corporate governance principles are embedded into work practices and the very culture of the organization that good governance will take root. In fact, the Chairman of the Australian Securities and Investment Commission ("ASIC"), Mr Greg Medcraft has spoken of the ASIC's concerns about the connection between poor culture and poor conduct. “Areas we are planning to target are those where poor practices may increase the potential for poor conduct, and therefore increase the risk to investor and consumer trust and confidence,” Mr Medcraft said (click here).
Accordingly, the establishment of a governance culture is critical to the organization’s establishment of effective corporate governance. Establishing a “new” culture is all about behaviour change and leadership behaviour of the board and senior management is a critical first step. As leaders within the organization everything these leaders do and say must bespeak best practice corporate governance.
GovernanceCulture™ emphasizes the cultural aspect of establishing effective corporate governance within the organisation.
More thoughts on Governance
More focus on culture of governance and the organisation gleaned from the Banking Royal Commission's Final report! click here.
What can we learn about culture from the 2018 CBA report? click here.
Australian Securities and Investment Commission Chairman's expectation of company directors (June 2014), click here.
More thoughts on Governance from the Governance Institute of Australia, click here.
Boards cannot afford to be complacent’ on culture, click here.
Five virtues of ethical leadership according to ASIC Chairman Greg Medcraft, click here.
¹ Justice Owen in the HIH Royal Commission
²ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 2nd Edition