Is Corporate Governance Really Working?

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By Paul Moxey

Corporate governance is not a new concept, but how well corporate governance works in practice to help businesses create value is a different matter.

In February ACCA (the Association of Chartered Certified Accountants), the global accountancy body, launched a detailed consultation paper ‘Creating value through governance – towards a new accountability’. It considers how well corporate governance actually works to the benefit of a business and whether something has gone wrong.

Paul-MoxeyCorporate governance is vital to societies that depend on business to create economic wellbeing. In most economies, without companies that create long term sustainable value living standards would be very different. Achieving good corporate governance is complex: it involves economics, politics and fundamental aspects of human nature as well as business and markets. Ultimately, governance is about how to make good decisions. As providers of financial information to support better decision making, accountants play a key role.

Capital markets, and attitudes to them, changed radically in the 20 years since the present direction of governance was set so the paper questions whether existing corporate governance and risk-management frameworks remain fit for purpose in light of current financial and economic conditions and our experience of how the frameworks have operated in practice over the past two decades.

Although corporate governance has grown from sound roots, it has seems to have become burdened with excessive rules and too much complexity. Events since 2007 demonstrated that certain banks and other major corporations which were thought to have excellent standards of governance and risk management turned out to have neither. Present approaches have not ensured that companies focus on, and succeed in, creating long term sustainable value.

Governance and risk need to be considered in the context of difficult topics such as the nature of wealth, economic growth, value and money and the challenges of measuring performance. Finding suitable measures of performance can be difficult. There is also a concern that risk management in some organisations has become over separated from management and premised on a belief that all risks can be identified and what is needed is an agreed action for each risk. The future is much less certain.

Corporate culture is a critical component of getting governance and risk management right. This is a vast subject which ACCA is researching separately with a report planned in June 2014.

Our paper argues that corporate governance is, or should be about creating value and that governance codes should be evaluated on how well they facilitate the creation of value. It sets out how a framework of ‘performing, informing and holding to account’ can help to assess and enhance how well governance is working. The framework envisages that the overarching purpose of governance, and indeed of most companies, should be to ensure that sustainable value is created and that three elements must work for value creation.

These are:

Performing; companies and those within them including the board must perform, i.e deliver performance that contributes value;
Informing: the performers need to provide good information on their performance to those to whom they should be accountable; and
Holding to account: those who should hold others to account (such as shareholders in relation to boards and boards in relation to executives) actually do so.
The consultation highlights problems with how all three elements work in practice – particularly with the last one. There are numerous examples of boards not having held executives to account and shareholders not doing as much as some people would like in holding boards to account. Rather than attempt answers to what are highly complex matters, the ACCA consultation analyses the issues and asks 8 key questions and 50 other questions to stimulate thinking and understanding.

Governance and risk management go to the heart of thinking about business, finance and economics. ACCA does not claim to have all the right questions; some recommendations in our consultation are offered but no attempt has been made to find all the right answers. The hope is rather that this inquiry will lead to a better understanding of the problems and then to some solutions.

ACCA welcomes responses to these key questions, general comments about the analysis and issues raised in the paper, as well as responses to the other specific questions asked.

Following the consultation period ACCA intends to publish an updated paper on the subject of governance and value creation, reflecting the responses received and discussions held. Additionally, ACCA intends to prepare separate more targeted and brief papers for different audiences for example: boards, regulators and policy makers, investors and savers.

Paul Moxey is Head of Corporate Governance and Risk Management at ACCA (the Association of Chartered Certified Accountants)

[Global Banking & Finance Review ]

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