Sunday, June 6, 2010

Putting the 'Good' back into Corporate Governance

Corporate governance has lost a lot of its credibility with the seemingly constant flow of corporate scandals from around the world especially when, for many years, these same organisations were revered and admired by many and their executives appeared on the front pages of the Wall Street Journal, Fortune and Forbes magazines, (to name a few), as the champions of industry.

In fact, as Indrarini Laksmana mentions in a 2008 article “the rise of recent corporate scandals has focused considerable public attention on the role of boards of directors in corporate governance. McKinsey & Company's global investor opinion surveys (2000 and 2002), for example, report that institutional investors perceive board practices to be at least as important as financial performance when evaluating companies for investment”, (p.1147).

Even though these scandals are in the minority and though they create negativity and uncertainty around the real benefits of corporate governance, we must be grateful that they have been uncovered in the first place. So it doesn’t mean that corporate governance is failing, in fact the opposite – as the main purpose of corporate governance is to oversee and bring corporate boards to account, through whatever means necessary.

So maybe there is a light at the end of the tunnel, as the media take on a more informal oversight role, giving greater attention and focus to identifying corporate fraud and other scandals – some of which have been going on for years.

Enron is a good case in point, as Kathleen Brickey (2008) explains “the Enron fiasco came close to being one of the ‘biggest failures in financial journalism.’ One of the most perplexing questions is why the financial press was asleep at the switch when Enron collapsed. Why was the news so late? How could the seventh largest company in the United States melt down in a mere 24 days with so little forewarning? And how could the Houston Chronicle - whose headquarters were only a stone's throw from Enron's - come so close to missing the biggest business story of the year? There were clues to be found. In a March 2001 Fortune article Bethany McLean raised what, in retrospect, should have been a provocative question: How does Enron make money?” (p.626).

Having been shaken up, the business community and media are much more vigilant now in respect of finding and eradicating poor corporate governance and are less sensitive to emotive topics like, potential fraud; executive pay and/or bonuses; unusual shareholder dealings or transactions; or irregular operational decisions; that as Ragothaman and Gollakota (2009) explain may “result in an overall destruction of the inherent value of an organisation”.

One way organisations can improve their governance is to appoint quality independent non-executive directors, who bring experience, knowledge and/or networks to the board. In doing so they also bring a form of impartiality and vigilance, where they can oversee key governance issues that may, in some instances, be slightly contradictory to the executive board, especially when they are pressurised with short-term operational or shareholder needs.

The benefits of good governance has been well researched and documented - hence one should be suspicious of any organisation that doesn’t want to embrace these basic principles of governance and oversight. Ragothaman and Gollakota (2009) completed a study as part of their research and concluded that “like many other governance studies, this study indicates that ‘good’ boards result in better firm performance as measured by ROA and market value of common equity. This suggests that good boards focus on the needs of shareholders and the efficiency with which a firm is managed,” (p.317).

So isn’t it time that you put the ‘good’ back into your corporate governance practices?


Brickey, K. F. (2008). From Boardroom to Courtroom to Newsroom: The Media and the Corporate Governance Scandals. Journal of Corporation Law, Vol. 33, Issue 3, p625-663.

Laksmana, I. (2008). Corporate Board Governance and Voluntary Disclosure of Executive Compensation Practices. Contemporary Accounting Research, Vol. 25, Issue 4, p1147-1182.

Ragothaman, S. and Gollakota, K. (2009). The Effect of Firm Characteristics on Corporate Governance: An Empirical Study in the United States. International Journal of Management, Vol. 26, Issue 2, p309-319.

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