Before we continue with this short article let’s agree first that bad corporate governance is oftentimes a good sign of corporate trouble ahead.
Corporate governance has become a well-discussed and interesting topic in the press. From time to time newspapers produce, and TVs broadcast, detailed accounts of corporate fraud, accounting scandals, insider trading, excessive compensation, and other perceived organizational failures that lead to lawsuits, resignations, and bankruptcy.
Decades of corporate scandals from Bank Bali’s 1998 Insider Trading allegation to Enron’s 2001 collapse to Caterpillar Inc.’s 2017 tax and accounting fraud allegations have taught us the paramount importance of good corporate governance in a company.
If management is about what we do to run the business, corporate governance is about what we do to see that the business is run properly. All companies not only need good management but also good governance in order to measure up to the expectations of their shareholders and stakeholders at large. The Board of Directors plays a pivotal role in influencing an organization’s governance environment.
The need for corporate governance actually rests on the idea that when separation exists between the ownership of a company and its management, self-interested executives have the opportunity to take actions that benefit themselves, with shareholders and stakeholders bearing the cost of these actions, and from corporate perspectives such conditions under any circumstances should not happen at all.
Corporate governance is the structure of rules, practices, and processes that guide practices, and processes that guides the way a company communicates with stakeholders, achieves objectives, and measures performance that I like most about corporate governance is that it also serves as a system of checks and balances that holds corporate leaders mainly board of directors accountable.
When developed and implemented wisely, corporate governance can become a very useful tool to showcase the board’s commitment to integrity as well as its obligations to shareholders.
Conversely, poor corporate governance policies can cause a breakdown of trust, both internally and in the minds of outsiders. When this happens, it can result in a loss of shareholders’ confidence that can jeopardize the future of the company.
About 66% of global consumers were said to be willing to pay more for products and services from a company that demonstrates good corporate governance as they believe that being honest and open about processes and operations counts a great deal. Both shareholders and consumers want to see companies operating with integrity, transparency, accountability, and trustworthiness. Good corporate governance is built on a foundation of integrity, transparency, accountability, and trust.
It is also increasingly understood that governance standards are a very important factor in maintaining the trust of shareholders and stakeholders at large, and even in sustaining good financial and share performances of many public companies e.g. ITMG, Astra, BCA, Sinar Mas, just to mention a few.
“CORPORATE GOVERNANCE INFLUENCES EVERY ASPECT OF THE OR- GANIZATION, INCLUDING THE CORPRATE DECSION- MAKING PROCESS ON THE MOST IMPORTANT ISSUES FACING A COMPANY.”
In the extreme, poor governance can result in governmental or regulatory fines, contractual penalties, or boycotts by consumers against unacceptable business practices, etc. Even without such consequences, it can lead to a weak culture and bad decision-making. It is not about moral judgement by the stakeholders per se, but the impact of these factors on a company’s long-term performance can be severe.
Corporate governance influences every aspect of the organization, including the corporate decision-making process on the most important issues facing a company. Such issues include M&A, JV, JO, partnerships, business litigation, intellectual property matters, regulatory compliance issues, and all other general corporate matters.
Today’s business environment demands that companies do more than just increase shareholder’s value through profits and growth.
Instead, businesses are expected to make a profit while also demonstrating good corporate citizenship through environmental awareness, ethical behaviour, and responsible governance practices.
An independent, professional board, strong controls, transparency and shareholder rights generally increase market value. But precise impacts of ‘good governance’ can be hard to pin down. Exact linkages to share price are not often obvious, governance is more important in some periods than in others, and it affects some industries more than others.
An investment’s environmental and social impacts are also among the most prominent issues that responsible investors consider when looking to invest in a company. But any responsible investing analysis would be incomplete if it did not incorporate a meaningful and in-depth review of a company’s corporate governance.
Effective governance frameworks challenge organizations to demonstrate that strategy and outcomes are being delivered at optimum levels while maintaining and adhering to all mandatory processes of rules, regulations, and legislation.
The Boards are held accountable to follow processes and make sound and well-informed decisions based on the processes that make the best use of the available people, resources (financial, technological, methodology and material) and time to ensure the best possible result.
One more thing, the government factor. The role of government cannot be underestimated as like any other administration anywhere in the world, government plays a pivotal role in promoting good corporate governance. Developing countries like Indonesia have recently been working hard to improve their governance by streamlining and simplifying processes that would improve speed, control, supervision and transparency of government services to the society.
For Indonesia particularly, this is part of its initiative to promote itself to become one of the most attractive investment destinations in Asia.
There is good evidence that shows that there is positive correlation between good government and good corporate governance.
Good government is now considered as a key element, among others, that improves economic efficiency, growth, and stability as well as encouraging investments in the economy —and also it contributes to the increased capability of corporations to create another good thing, that is good corporate governance environment.
In conclusion, overall successful corporate governance is predicated on the ability of the Board and Senior Management to demonstrate how it operates within a framework that holds the organization accountable. Boards should take ownership of governance by ensuring the strategy is reviewed and assessed on a planned periodic basis. Measures to assess progress against the strategy should include time to detection, the speed of response and recovery processes. Good government plays an “enabler” role toward good corporate governance in the business contexts.
Corporate governance is a subject that should concern all investors, yet which can be difficult to understand, why? Because it is not just about executive pay, but it covers all aspects of how companies are managed, including internal control, audits, supply chain awareness, business ethics and regulatory compliance with environmental and consumer right protection laws and so forth. Board’s ultimate approach is about making sure that the clients’ interests as shareholders are represented and protected at all times.
Last but not least, corporate governance is a dynamic process and is continually evolving. And it has no boundaries or limits!
