Raghad Al-Shareedah
Corporate governance remains of utmost significance in the competitive landscape of businesses, crucial for their survival. Its prominence became evident with the tragic demise of Robert Maxwell while cruising the Canary Islands in 1990.[1] This incident brought to light the intricacies of his company's affairs, as his disappearance unveiled that the debts of the Mirror Group, one of his companies surpassing its assets. The revelation that £530 million was missing from the company’s pension funds led to Maxwell's companies filing for bankruptcy protection in the United Kingdom and the United States in 1992. [2]
The lack of a balance of powers in this incident, along with other similar business failures resulting from task ambiguity, overlapping responsibilities, and Board of Directors' inefficiency, prompted the formation of a committee in 1991 by Sir Adrian Cadbury. He was an English businessman and chairman of Cadbury, aiming to establish corporate governance standards and recommendations for all involved in the business life cycle to prevent such discontinuities.[3]
Introduction to Corporate Governance
Governance, the act of governing a state or organization, finds its structured form in corporate governance. This framework sets the company's objectives, means of attainment, and monitors performance. It applies universally, spanning various corporate entities like start-ups, venture capital, family businesses, limited liability, and private shareholding companies.
The significance of corporate governance lies in its ability to attract investors willing to pay a premium for companies with robust governance and policies concerning Environmental, Social, and Governance (ESG) factors. It also aids in maintaining the company’s reputation, enhancing trust, maximizing financial and operational efficiency, and improving risk management.
Corporate Governance is About Balance of Powers
To achieve positive outcomes, the proverb "give the bread to a good baker" underscores the importance of competent, perfect, accurate, and clear execution. This proverb aligns with our topic; every company, regardless of size or nature, must be governed by a system to operate efficiently. Governance, implemented by competent individuals guided by standards and rules, ensures the roles and duties entrusted to them are carried out, securing the company’s continuity.
Corporate governance is a performance issue, reflecting the relationships among a company’s management, boards, and shareholders. Roles and duties must be fulfilled according to the entrusted responsibilities to ensure the company's ongoing viability. [4]
The shareholders, management, and board of directors are pivotal players in any company. Shareholders elect the board and auditors, while management acts as an agent for the shareholders' contributions. The board monitors and reports on management performance.
Environment, Social and Governance (ESG) Methods of Strong Corporate Governance
The power of corporate governance extends beyond roles to include other elements vital in the competitive landscape. According to Ezekiel Ward, founder of North Star Compliance Ltd., ESG serves as a checklist for investors, indicating a company's sustainability and ethical impact.[5]
ESG factors include environmental considerations like carbon reduction and energy consumption, social considerations involving relationships with employees, suppliers, clients, gender equality, and diversity, and governance considerations encompassing management performance, audit credibility, internal controls, and minority protection.
By adopting ESG criteria, companies act responsibly, avoiding unethical and risky practices. This not only attracts more investors but also fosters sustainability and community contributions. Thus, a strong corporate governance structure, coupled with ESG considerations, becomes integral for companies seeking increased investments, business portfolio upgrades, and long-term continuity. This involves a commitment to governance policies and strategies, a clear board structure, equal treatment of shareholders, transparent annual reporting, and a robust management control environment. Environmental, social, and governance criteria are equally important, with companies earning higher ratings by embracing them, showcasing responsible practices, and contributing positively to communities.
[1] Abid, G., & Ahmed, A. (2014). Failing in Corporate Governance and Warning Signs of a Corporate Collapse. Journal of Commerce and Social Sciences, Vol. 8 (3), 846-866
[2] Abid, G., & Ahmed, A. (2014). Failing in Corporate Governance and Warning Signs of a Corporate Collapse. Journal of Commerce and Social Sciences, Vol. 8 (3), 846-866
[3] The Guardian. (2015).
https://www.theguardian.com/business/2015/sep/06/sir-adrian-cadbury
[4] N.R. Narayana Murthy, Chairman, Committee on Corporate Governance, Securities and Exchange Board of India, 2003.
[5] The institute of chartered accountants of Pakistan. (2022)
https://icap.org.pk/files/per/publications/PA/2022/apr-june/apr-june-2022.pdf
