Divergent governance

When most people think about corporate governance they think of large (usually UK or US) quoted companies and with good reason as this is where governance issues are most prominent. The committees and codes of practice in the UK are implemented through the Financial Services Authority (FSA) and adherence is a requirement of listing on the stock exchange.

However corporate governance also impacts on other types of organisational structure than listed companies. For example:

• not for profit organisations (NFPs), such as charities or local government departments
• smaller limited companies
• private or family companies

Furthermore there are national differences between governance approaches.

NFPs

Many NFPs are seeing a need for better governance. In general, there is a need for increased commercialisation in operations, for example, the need to run a charity as a business for the benefit of all.

Reasons for the movement towards a more commercially run operation include:

• the need to be seen to run resource efficiently by stakeholders
• the need to get the most out of budgets, gifts, grants in service provision
• the increased use of directors drawn from the private sector to run NFPs
• increased awareness and skills among employees in relation to business management techniques.

The shift in terms of increased accountability and performance measure is not without its cost. The culture clash between serving a social need and running a business often leads to a dilution of resolve:

• Boards are councils or governing bodies.
• Managers are administrators or organisers.
• Boards struggle to find a method or function which is not at odds with their association's configuration and philosophy.

Key reasons for this are:

• dormant or silent patrons
• the anti-industry bias/culture
• the discretionary nature of the sector, using volunteers
• the ambiguity of mission and commercial imperative
• historical mode of operation/custom and precedence
• lack of commercial skills in senior management
• unwillingness of directors to move beyond their parental, devotional view.

The Code of Governance for the Voluntary and Community Sector

• Principle 1: Board leadership - every organisation should be led and controlled by an effective board of trustees which collectively ensures delivery of its objects, sets its strategic direction and upholds its values.
• Principle 2: The board in control - the trustees as a board should collectively be responsible and accountable for ensuring and monitoring that the organisation is performing well, is solvent, and complies with all its obligations.
• Principle 3: The high performance board - the board should have clear responsibilities and functions, and should compose and organise itself to discharge them effectively.
• Principle 4: Board review and renewal - the board should periodically review its own and the organisation's effectiveness, and take any necessary steps to ensure that both continue to work well.
• Principle 5: Board delegation - the board should set out the functions of sub-committees, officers, the chief executive, other staff and agents in clear delegated authorities, and should monitor their performance.
• Principle 6: Board and trustee integrity - the board and individual trustees should act according to high ethical standards, and ensure that conflicts of interest are properly dealt with.
• Principle 7: Board openness - the board should be open, responsive and accountable to its users, beneficiaries, members, partners and others with an interest in its work.

The Good Governance Standard for Public Services

• Good governance means focusing on the organisation's purpose and on outcomes for citizens and service users.
• Good governance means performing effectively in clearly defined functions and roles.
• Good governance means promoting values for the whole organisation and demonstrating the values of good governance through behaviour.
• Good governance means taking informed, transparent decisions and managing risk.
• Good governance means developing the capacity and capability of the governing body to be effective.
• Good governance means engaging stakeholders and making accountability real.

Smaller limited companies

There is a duty on all organisations to operate within the law and, for those of any given size, to produce audited accounts. In governance terms, the agency problem does not tend to arise in private limited companies since shareholding is restricted and those with shares tend to have a direct involvement with the running of the firm.

Particular problems arise due to the limited size of such concerns:

• role and numbers of NEDs
• size of the board
• use of audit and nomination committees.

Despite this there is generally a perception that all companies should comply and, like all other companies, in order to foster the key need for improved communication, should either comply or explain through the Business Review.

Governance structures

A wider world view of governance requires consideration of the nature of ownership, power and control.

Family structures (as opposed to joint stock)

A family structure exists where a family has a controlling number of shares in a company. This has potential benefits and problems for the company, and the other shareholders involved.

Benefits that arise include:

• Fewer agency costs - since the family is directly involved in the company there are fewer agency costs.
• Ethics - it could be said that threats to reputation are threats to family honour and this increases the likely level of ethical behaviour.
• Fewer short-term decisions - the longevity of the company and the wealth already inherent in such families suggest long-term growth is a bigger issue.

Problems include:

• Gene pool - the gene pool of expertise in owner managers must be questionable over generations.
• Feuds - families fight, and this is an added element of cultural complexity in the business operation.
• Separation - families separate and this could be costly in terms of buying out shareholding and restructuring.

Insider-dominated structures (as opposed to outsider-dominated)

This is an extension of the same idea. Insider-dominated structures are where the listed companies are dominated by a small group of shareholders. These:

• may be family owned
• may be banks, other companies or governments
• predominate in Japan and Germany.

The close relationship suggests benefits including:

• fewer agency problems and costs
• lower cost of capital
• greater access to capital
• less likelihood of suffering short-termism
• greater, stable expert input to managerial decisions.

Problems include:

• lack of minority shareholder protection (unlike protection in law in outsider-dominated structures)
• opaque operations and lack of transparency in reporting
• misuse of power
• the market does not decide or govern (shareholders cannot exit easily to express discontent).

National differences

The insider/outsider model deals with the issue of national differences. These tend to lie in the nature of the legal system and the degree of recourse investors (minority investors) have.

Little recourse leads to insider dominated structures.

• Insider orientation: termed the French structure because of its origin.
• Outsider orientation: Anglo-American structure because of its origin.

The global diffusion of such governance standards tends to be initially led by Anglo-Saxon countries because of the agency problems and similarity between legal systems from the UK origin.

Chapter two described developments in corporate governance regulation in the UK. Similar developments have occurred in other countries. This section considers other international developments, in particular the development of corporate governance guidelines in the Commonwealth and European Union

Corporate governance and the European Union

In May 2003, the EU Commission presented a Communication entitled "Action Plan on Modernising Company Law and Enhancing Corporate Governance in the European Union". The aim of this report was to put forward recommendations designed to lead to greater harmonisation of the corporate governance framework for EU listed companies in all countries in the EU.

The recommendations in the report included measures such as;

• An EU directive requiring listed companies to publish an annual statement on corporate governance, including a 'comply or explain' regulation
• Another directive on collective board responsibilities for the disclosure of certain key financial and non-financial information.

On 5 April 2011, the EU Commission launched a public consultation on possible ways forward to improve existing corporate governance mechanisms. The objective of the Green Paper is to have a broad debate on the issues raised and allow all interested parties to see which areas the Commission has identified as relevant in the field of corporate governance.

However, new EU Directives or amendments to existing Directives will have to be incorporated into the national law of all the member states of the EU.

Corporate governance and the Commonwealth Countries

Concern for the need to establish good corporate governance practice has led to an initiative from the Commonwealth countries, which began with the first King report in 1994.

Many commonwealth countries have emerging economies and some such as South Africa have developing Stick markets. Good corporate governance is seen as essential to the further development of national economies and the growth of the capital markets in those countries.

The work of the first King report lad to the setting up in 1998 of the Commonwealth Association for Corporate Governance (CACG). It produced a set of Corporate Governance guidelines in 1999.

The CACG guidelines put forward a list of fifteen principles of corporate governance. These are fairly similar of the corporate governance guidelines of other organisations it is useful to view them from the 'emerging markets' viewpoint.

Corporate governance in Japan

Some new corporate governance provisions were introduced into the Japanese Commercial Code in 2003, including provisions for US-Style board committees. However not many Japanese listed companies have yet decided to adopt this new system.

International convergence

The competitiveness of nations is a preoccupation for all governments.

• Harmonisation and liberalisation of financial markets mean that foreign companies now find it easy to invest in any marketplace.
• This has led to a drive towards international standards in business practices to sit alongside the global shift in applying International Accounting Standards (IASs).

Two organisations have published corporate governance codes intended to apply to multiple national jurisdictions. These organisations are:

• the Organisation for Economic Cooperation and Development (OECD) and
• the International Corporate Governance Network (ICGN).

Organisation for Economic Cooperation and Development (OECD)

What is it?

• Established in 1961, the OECD is an international organisation composed of the industrialised market economy countries, as well as some developing countries, and provides a forum in which to establish and co-ordinate policies.

 Objectives of the OECD principles

• The principles represent the first initiative by an intergovernmental organisation to develop the core elements of a good corporate governance regime.
• The principles are intended to assist OECD and non-OECD governments in their efforts to evaluate and improve the legal, institutional and regulatory framework for corporate governance in their countries, and to provide guidance and suggestions for stock exchanges, investors, corporations, and other parties that have a role in the process of developing good corporate governance.
• The principles focus on publicly-traded companies, both financial and non-financial. However, to the extent that they are deemed applicable, they might also be a useful tool for improving corporate governance in non-traded companies, e.g. privately-held and state-owned enterprises.
• The principles represent a common basis that OECD member countries consider essential for the development of good governance practices.
• The principles are intended to be concise, understandable and accessible to the international community.
• The principles are not intended to be a substitute for government, semi-government or private sector initiatives to develop more detailed 'best practice' in corporate governance.

The OECD principles were updated and republished in 2004.

Content of the OECD principles:

• ensuring the basis for an effective corporate governance framework
• the rights of shareholders and key ownership functions
• the equitable treatment of shareholders
• the role of stakeholders in corporate governance
• disclosure and transparency
• the responsibilities of the board.

International Corporate Governance Network (ICGN)

What is it?

• ICGN, founded in 1995 at the instigation of major institutional investors, represents investors, companies, financial intermediaries, academics and other parties interested in the development of global corporate governance practices.

 Objectives of the ICGN principles

• The ICGN principles highlight corporate governance elements that ICGN-investing members take into account when making asset allocations and investment decisions.
• The ICGN principles mainly focus on the governance of corporations whose securities are traded in the market but in many instances the principles may also be applicable to private or closely-held companies committed to good governance.
• The ICGN principles do, however, encourage jurisdictions to address certain broader corporate and regulatory policies in areas which are beyond the authority of a corporation.
• The ICGN principles are drafted to be compatible with other recognised codes of corporate governance, although in some circumstances, the ICGN principles may be more rigorous.
• The ICGN believes that improved governance should be the objective of all participants in the corporate governance process, including investors, boards of directors, corporate officers and other stakeholders as well as legislative bodies and regulators. Therefore, the ICGN intends to address these principles to all participants in the governance process.

Content of the ICGN principles:

• corporate objective - shareholder returns
• disclosure and transparency
• audit
• shareholders' ownership, responsibilities, voting rights and remedies
• corporate boards
• corporate remuneration policies
• corporate citizenship, stakeholder relations and the ethical conduct of business
• corporate governance implementation.

Limitations

• All codes are voluntary and are not legally enforceable unless enshrined in statute by individual countries.
• Local differences in company ownership models may mean parts of the codes are not applicable. 

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Tags:	ICGN;OECD;Corporate governance;NFP