A culture of accountability must be established and sustained in the organization as a means to channel functional corporate behavior
Corporate governance must be seen as a system in which the overarching purpose is to create a long-term sustainable value that benefits all the stakeholders as well as the society as a whole. Businesses have a strong role to play in delivering public value, which the Association of Chartered Certified Accountants (ACCA) defines as acting in public interest, promoting ethical business and helping grow economies. Good governance is about achieving these objectives by taking proper account of shareholder and other stakeholder interests.
Aligning stakeholder interests
There are times when the interests of the stakeholders in the organization end up being conflicting. This is where the Boards will have to strike an appropriate balance. To this end, ACCA fully agrees with the South African King 3 Code, which says that ‘good governance is essentially about effective leadership’.
In the long run, it is not sustainable for publicly listed organizations to focus primarily on share value maximization. ACCA’s research has shown that the incentive structures associated with such strategies promote and reward risky corporate behavior that may lead to higher return in the short term, but very often causes accidents and reputational damage that result in poorer performance in the long run.
Value does not only equate profit; it should be measured in terms of societal and environmental impact as much as in financial terms. Quality financial reporting and auditing are essential for good governance and ACCA supports the Integrated Reporting framework. However, there still remains a lot to do in terms of sustainability reporting and how this is taken into account by investors.
Creating an environment of good governance
Boards must strive to develop and maintain a healthy culture in their organizations. Leading by example is the first way of doing so. Board members must ‘walk the talk’, aligning and embedding values at the very top and throughout the whole chain of command. The tone set at the top must reflect at every single layer of management and showcase unity of purpose as well as clear vision.
At the level of boards, transparent decision-making processes and openness to challenges and criticisms must be encouraged. Recent research conducted by ACCA with the IMA, the US-based Institute of Management Accountants, concluded that directors could become more actively engaged in risk oversight but to do so, they may need better training in risk issues.
Overall in the organization, a culture of accountability must be established and sustained as a means to channel functional corporate behavior. According to research conducted by ACCA and the Economic and Social Research Council, there cannot be two sets of rules in an organization, one for the big achievers and one for the rest of the organization. Rules and the penalties for breaking them are paramount in promoting desirable conduct. While rules and regulations are seen as a bureaucratic burden and compliance is reduced to a tick-box exercise in Europe and the US, respondents in India strongly believed that value-based sustainable business was inconceivable without being supported by regulation. Many recalled the Union Carbide Bhopal gas disaster as evidence of poor business practices when regulatory frameworks were underdeveloped.
Holding to account is a critical feature of good governance practice. The recent research on pillage and the new threat to global supply chains highlighted the difficulty of prosecuting corporates in cases of war crime. Governance is about managing all those aspects of an organization’s structure and process and boards have a responsibility in making sure they know their supply chain well enough to actively reduce the likelihood of pillage being profitable for the perpetrators.
Finally, promoting a culture of sound business ethics is essential, again starting at the very top of the organization.