CORPORATE Governance – What is it? In Greg Shaller’s An Introduction to Corporate Governance in Australia, corporate governance is described as the mechanisms, processes and relations by which corporations are controlled and directed.
It has also been described as the governance structures and principles that identify the distribution of rights and responsibilities among different participants in the corporation such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders). Another approach is that corporate governance includes the rules and procedures for making decisions in corporate affairs.
The popular online resource for investment knowledge, Investopedia, offers the following as a guide: “Corporate governance is the system of rules, practices and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Since corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.” The Institute of Chartered Secretaries and Administrators in the UK offers the following: “Corporate governance refers to the way in which companies are governed and to what purpose.
It is concerned with practices and procedures for trying to ensure that a company is run in such a way that it achieves its objectives.” The definition that appeals to me more is that “corporate governance encompasses the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment.”
The single thread: Sifting through these definitions and descriptions, the one singular thread that ties them is that of pursuing or achieving corporate objectives. This is what I choose to call vision. Indeed, visioning by corporations is the primary and foundational step to having an effective corporate governance framework.
John Graham noted the importance of visioning as follows: “vision inspires action. A powerful vision pulls in ideas, people and other resources. It creates the energy and will to make change happen. It inspires individuals and organisations to commit, to persist and to give their best. A vision is a practical guide for creating plans, setting goals and objectives, making decisions, and coordinating and evaluating the work on any project, large or small. A vision helps keep organisations and groups focused and together, especially with complex projects and in stressful times.”
In fact, it is the need to achieve corporate vision that necessitated the need for corporate governance framework. This is because corporations need to be able to answer the following questions: How do we get from where we are to where we want to be?
Having agreed on the road map, who will implement the road map? How do we identify who will be responsible for individual tasks? How do we sustain our plan for achieving the vision? How do we measure performance as we go along the way? And, how do we make amends whenever we veer away from the desired path? Ultimately, these are the questions that corporate governance frameworks seek to answer. And this leads us to our next point which is: why is corporate governance so important?
Why is Corporate Governance Important?: From the preceding discussion, it is clear that we have identified one aspect of the answer to this question, namely, that a corporate governance framework is important in order to realise corporate vision. You will find that the other aspect of the answer is rather obvious: corporate governance is also important in order to ensure that corporations do not derail from the stated vision.
This is not a point to be taken lightly. When corporations deviate from, or are able to deviate from, agreed and stated vision, consequences follow. In this respect, you may have heard it said that corporate governance assumed greater importance from year 2002. Why is that? When you hear that, you know that reference is being made to the epic failure of Enron Corporation in the United States. I will briefly share that story.
In one of the ‘autopsies’ on the Enron collapse, the New York Times published a report from which I extensively quote below: “There is increasing evidence that Enron’s board, composed of many prominent and financially sophisticated people, was actively involved in crucial decisions that may have led to the company’s downfall.
While the board fired Andersen as Enron’s auditor Thursday and contended it only learned of the serious concerns raised about the company’s accounting and financial practices in October, the directors appear to have played a significant role in overseeing the partnerships at the center of Enron’s collapse.
“The board — which includes Wendy L. Gramm, a former government regulator and the wife of Senator Phil Gramm, Republican of Texas; John Wakeham, a member of the British House of Lords and a former British cabinet member; and Norman P. Blake Jr., the Chief Executive of Comdisco, a computer services company – even went so far as to suspend Enron’s code of ethics to approve the creation of the partnerships between Enron and its Chief Financial Officer, according to the report of a preliminary investigation conducted at Enron’s request by the law firm of Vinson & Elkins. . . . The partnerships kept significant debt off Enron’s books and masked much of what was really going on at the company. . . . (Emphasis mine).
While outsiders have had few glimpses of what actually happened between Enron executives and its directors, the report’s disclosures leave little doubt that the board was intimately involved in approving them. Questions have already been raised about the independence of the board, and many corporate governance experts say the directors appear to share substantial responsibility for what happened at Enron.
“The questions surrounding the involvement of board members also raise concerns over a special committee created to investigate what happened, according to corporate governance experts, because that committee includes a longtime member of the board – Herbert S. Winokur Jr., the head of a private investment firm. The strongest indication that the board was aware of the potential risks of setting up the partnerships in June and October 1999 was its decision to waive Enron’s ethical code. The waiver was necessary to allow Andrew S. Fastow, then the chief financial officer, to serve as general partner of the partnerships.
The board also adopted a series of guidelines for the partnerships to protect the company’s interests, according to the report. “But such a waiver is extraordinary, according to corporate governance experts. When the board learned of concerns over the partnerships and their accounting treatment is unclear. As early as last February, an internal memorandum by Andersen says that the accountants planned to suggest that the board create a committee to oversee the partnerships. The audit committee was never informed that Andersen said a committee should be created to review the fairness of the transactions.
“Two weeks later, the board announced the creation of a special committee to examine the controversial transactions. But with the exception of William Powers Jr., the Dean of the University of Texas School of Law, the members had all played some role in creating the partnerships or reviewing the transactions. The special committee is now composed of Mr. Powers, Mr. Winokur and Raymond S. Troubh, a longtime outside director who joined the board in late November.
“Some corporate governance experts said they were concerned by Mr. Winokur’s presence on the committee. He was on the board when it decided to suspend the code of ethics, and as chairman of the finance committee he was directly involved in the approval of one of the partnerships. Mr. Winokur is also one of the directors who reviewed the company’s dealings with the partnerships.
“Enron directors were among the mostly highly paid for their services, according to Pearl Meyer & partners, a New York compensation consulting firm. The average director was paid nearly $400,000 in cash and stock in 2001. . .But troubling questions surround the board’s independence.
Lord Wakeham, for example, received $72,000 for his advice on Enron’s European operations. Mr. Winokur was involved in a company doing business with Enron, while Dr. Gramm and other directors were associated with organisations that received charitable donations from Enron. Dr. Gramm said she could not accept equity for her services and directed the company to put that deferred compensation into a mutual fund.”
That is the end of the excerpts from the New York Times report. I hope that you noticed the main themes from that summary. The themes of independence, disclosure, Chinese walls, effectiveness of board committees, among others.
Being excerpts of a Keynote address delivered by Dr. Akintola Benson-Oke at the 2017 Induction Ceremony of the Association of Corporate Governance Professionals of Nigeria.