Corporate governance is an all- encompassing concept that defines the way a company or organization is managed and controlled. Its focus is on the control of legitimate corporate power, the effect of such control on the stakeholders and ways in which the key players are held accountable for their actions. The corporate governance framework establishes legitimate lines of accountability by defining the nature of the relationship between the company and key corporate constituencies.
Corporate failures are often attributed to the failure of the Board of Directors in the performance of its oversight functions. Given the fact that the Board is not wholly involved in the day-to-day management of the company, the question arises as to whether it should be solely responsible for ensuring that the company is compliant with good corporate governance practice or whether it shares this responsibility with other corporate stakeholders. Whilst it cannot be disputed that a sound corporate governance system will benefit all stakeholders, the responsibility for ensuring the enthronement of sound corporate governance is unarguably that of the Board.
Four important stakeholders stand out – shareholders, Management, professional advisers and regulators. The shareholders, as the owners of the company, have a responsibility to ensure that the company complies with relevant laws and regulations including codes of corporate governance (and best practice) and that the company’s business is run in an ethical manner. As posited by Alberto Hirschman, institutional investors exercise their power to influence compliance with corporate governance through the “exit and voice” mechanism” – voicing their dissatisfaction to Management or exiting by disposing of their shares. Management in turn has a duty to ensure that it’s activities align with relevant statutory and regulatory provisions as well as codes of best practice and that the company is run in an ethical manner for the benefit of all stakeholders.
Professional advisers on their part are expected to act as “gate-keepers” in scrutinizing the affairs of the Board and Management. The reliance placed by the B o a r d , M a n a g e m e n t , s h a r e h o l d e r s , regulators and the public on their reports places a duty of care on them to detect and expose corporate misconduct. However, the interests of professional advisers more often than not are more closely aligned with those of Management than with shareholders – they are after all typically hired, paid and fired by corporate managers (and the Board).
In the words of Hector Sants, CEO, Financial Services Authority, UK, “The role of a regulator is to create boundaries within which firms take responsibility for their own decisions. Good governance and a strong culture are a necessity for maximizing the likelihood of the right judgments being made by Management. Regulators have a role to play in ensuring that firms have the right governance and culture. History tells us that we cannot rely on the motivation of individuals alone and that we need credible enforcement to require individuals to be driven by principles rather than just commercial expediency”.
In conclusion, although various corporate stakeholders are active participants in the enthronement of a sound corporate governance system, the responsibility for overseeing the process and of ensuring the continued observance of corporate governance best practice lies within the company rather than outside it. The directors, being the alter ego of the company must be ready to accept this responsibility and work towards entrenching the culture of sound corporate governance.