Corporate governance is a multi-faceted subject that has no precise definition — the narrow view sees “governance” as a fancy term describing the way directors and auditors handle their responsibilities towards investors and shareholders, whilst the wider view sees corporate governance as a firm’s relationship to society, often confusing corporate governance with corporate social responsibility.
By and large, corporate governance refers to the system of check and balances between the board of directors, management and investors to produce an efficiently functioning organization that can produce long-term value. It describes what the board of the directors of public companies should do to learn what is really going on within their organization.
The Organization for Economic Cooperation and Development (OECD) definition of corporate governance is widely accepted: “Corporate governance is the system by which business corporations are directed and controlled.
The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance”.
Although the prime responsibility for issues relating to corporate governance within an organization falls under the board of directors, whose primary task is to understand and approve risk taking of the company at any stage in its development, the CEO has a pivotal role to play in ensuring compliance at the working level. He, together with other senior managers, needs to set the agenda to ensure that members of the board participate constructively in honest and useful debates.
CEOs can provide a stimulating platform to non-executive directors by scheduling regular meetings for them from which the CEO and other executives are excluded. Non-executive directors are expected to express their opinion on the way the business is managed. They need to debate and express their views on the leadership’s performance, including the strategic direction of the business and express their concerns on how they feel towards the availability of information. Companies that do not have non-executive members on their board e.g. family business, should seriously consider appointing some.
CEOs should gain the trust and confidence of all stakeholders by explaining in detail what assumptions were used when compiling the balance sheets, particularly the earnings and profit figures. Judgments must be made about what goes on or off the balance sheet particularly when it comes to non-tangible assets such as the brand name.
In addition, the CEO and his senior management team can initiate and encourage risk-appetite reviews amongst non-executives, as the reason for failure in many companies can be attributed to poor management decisions on risk. It is essential for non-executive directors to understand the company’s risk-taking policy and be able to express their opinion on any divergence from such a policy.
It is the responsibility of CEOs to take adequate measures to ensure that non-executive directors are independent and remain as such. People with any link to or association with the organization, such as members of the controlling family or former employees of the company who may still have some connection with the company’s work force, must be excluded from being appointed as non executive directors.
CEOs may raise awareness amongst the board regarding potential conflicts of interest, including consultancy contracts, payments to charitable organizations or sponsorships. It is also recommended that CEOs, in conjunction with the board of directors, carry out an audit on non-executive directors’ performance as well as that of the board. The attendance record of non-executive directors needs to be openly discussed and their specialist skills appraised.
The corporate website can be leveraged by an organization’s management to ensure that corporate data, such as annual reports, are published on their website. A dedicated corporate governance section should be created; published material should include the attendance record of non-executive directors at board meetings. To promote a corporate culture of accountability and responsibility, CEOs are expected to lead by example through their actions and behavior, since the company is greatly influenced by this.
For example CEOs should not participate in unethical or unprofessional practices, as others may take this as a green light to do the same. Should the company culture be compromised at any point, CEOs should take a decisive action that gives a sharp signal to eliminate such malpractice.
CEOs may establish sovereign compensation committees to ensure that corporate bosses are prohibited from trading shares in their firms whilst in service. For risk-averse companies, the corporate governance could be much simpler, but the reality is that CEOs have to accept risk taking, since avoiding risk taking is the main enemy for growth and prosperity.
Regional CEOs, particularly for publicly listed companies, need to demonstrate their leadership by putting corporate governance high on the board’s agenda.
They are key in shaping corporate governance policies within their organization by taking a proactive approach toward compliance with applicable national and international regulations and adherence to best industry practices. Simultaneously they should enforce a unique corporate culture of ethics and transparency.
(Yahya Shakweh is a vice president at Advanced Electronics Company, Saudi Arabia. The views expressed in this article are the author’s personal opinion. He can be reached on e-mail: [email protected])