CORPORATE GOVERNANCE

sustainability briefing paper 4

in partnersHip WitH

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CORPORATE GOVERNANCE
A company that is well governed is one that is accountable and transparent to its shareholders and other stakeholders, such as employees, creditors, customers and society at large.

Corporate governance is the means by which companies are directed, administered and controlled. it influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. good corporate governance enables companies to create value (through entrepreneurialism, innovation, development and exploration) and provides accountability and control systems commensurate with the risks involved. Corporate governance is a key element in improving organisational performance and sustainability as well as enhancing stakeholder confidence.

embedding sustainable development within corporate governance requires companies to identify and understand their environmental and social impact and responsibilities and to act accordingly. the process involves using the knowledge and experience of the leadership and others in the business to establish: • • • responsibilities – of whom and in relation to which issues? accountabilities – to whom are those with responsibilities accountable and how? checks and balances – what systems of supervision, control and communication flows are required?

there is a clear link between governance and financial, ethical and sustainability issues that traditional accounting, reporting and audit do not effectively capture. governance must draw not just on financial but also on social and environmental accounting, reporting and audit to understand the full scope of a firm’s activities and performance and to establish an integrated approach to sustainability.

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Corporate governance and the current financial crisis – where did it all go wrong?

the 2008/09 financial crisis can, to an extent, be attributed to failures and weaknesses in corporate governance. When corporate governance mechanisms were put to a rigorous test, they failed; they did not protect against excessive risk taking and irresponsible behaviour. getting governance wrong is not a small matter that can be dismissed lightly. these failures have contributed to recession, the collapse of large businesses, widespread redundancies, consumer mistrust, and a fundamental recasting of the relationship between the state and financial institutions. so what were the governance-related reasons for the current turmoil? first, it was clear that dysfunctional boards did not fully understand the risks and impact associated with the strategies and activities they approved. neither did they understand these activities and risks in relation to sustainability. furthermore, in many cases, boards did not provide adequate monitoring of implementation, accounting, reporting and audit. the lack of appropriately qualified non-executive directors also contributed to the problem, as the broad range of skills and knowledge required to fully understand the complex financial and non-financial factors that influence organisational performance were not available.

Dysfunctional boards are symptomatic of the irresponsible ownership that has contributed to the financial crisis; powerful shareholders did not play an active enough role in improving governance. as a result, new ownership and governance models are being considered or in some cases, such as rbs and lloyds tsb, being forced upon companies. the Cooperative bank has emerged relatively unscathed from the current financial crisis, causing Jonathon porritt, chairman of the uK’s sustainable Development Commission, to suggest that, ‘at the very least, the relative resilience of this business model should prompt both Treasury and the sector’s regulators to think again about alternative ownership and governance structures in the financial services sector’. the investor