Ten principles of corporate governance

by Andrew Chambers - Tuesday, 2nd December 2008 -

Good corporate governance is not the sole domain of big, corporates – it can also play a part in the management of a small businesses.

There are three complementary purposes of corporate governance. The first is to ensure the board, as representatives of the organisation’s owners, protects resources and allocates them to make planned progress towards the organisation’s defined purpose. Secondly, corporate governance must ensure those governing and managing an organisation account appropriately to its stakeholders. Lastly, it must enable shareholders and other stakeholders (where appropriate) to take boards to task.

A recent report into corporate governance and risk management from the Association of Chartered Certified Accountants (ACCA) offers ten principles fundamental to corporate governance – from managing risk to disclosing executive remuneration. These are relevant to all business sectors, to any organisation around the world.

The first principle argues that boards, shareholders and stakeholders share a common understanding of the purpose and scope of corporate governance, and that this should be standard for all organisations.

The remaining nine principles are as follows:

Boards lead by example, setting the right tone and behaving accordingly, paying attention to the ethical health of their organisation: This means that directors should regard one of their responsibilities as being guardian of the corporate conscience.

Boards appropriately empower executive management and committees: This means setting clear goals, accountabilities, structures and committees, delegated authorities and policies. Boards need to be aware of their strengths and weaknesses and keep asking if they are doing the right things. They should also monitor management’s progress towards the achievement of these goals.

Boards ensure their strategy actively considers both risk and reward over time: All organisations face risk, but success in achieving strategic objectives will require understanding, accepting, managing and taking risks. It is not acceptable to leave risk management to executive management. Boards need to understand the risks faced by the organisation, satisfy themselves that the level of risk is acceptable and challenge executive management when appropriate.

There is a need for boards to be balanced: Non-executive directors and executives need to be engaged so that the board operates as a team. Financial literacy is important so they have a proper understanding of the complexities of the organisation’s activities and associated risks.

Executive remuneration must promote organisational performance and is transparent: This is a fundamental challenge. Remuneration arrangements should be aligned with individual performance to promote organisational performance. Inappropriate arrangements can promote perverse incentives that don't properly service the organisation’s shareholders or other stakeholders. Pay, sustained performance and accountability need to be linked.

The organisation’s risk management and control should be objectively challenged, independently of line management: Internal and external audit are potentially important sources of objective assessment and assurance and they should be able to operate independently free from management influence.

Boards account to shareholders and, where appropriate, other stakeholders for their stewardship: Boards should work for the organisation’s success and they should also appropriately prioritise and balance the interests of the organisation’s different stakeholders. In a shareholder-owned company, shareholder interests are paramount but their long term interests will be best served by also considering the wider interests of society, the environment, employees and other stakeholders.

Shareholders and other significant stakeholders hold boards to account: Owners and other significant stakeholders need to take an interest in the organisation and hold boards to account for its performance, behaviour and financial results.

Corporate governance evolves and improves over time: Globally, organisations in different sectors operate in diverse environments. Culture, regulation, legislation and enforcement are all different. Governance-wise, what is appropriate for one type of organisation will not be appropriate for all. Further research and open debate is needed in this area.

Corporate governance and risk management will never be fully evolved and may always be improved: It is vital that requirements do not create a straightjacket that prevents innovation and improvements in the way organisations conduct themselves in the future.

You can find the ACCA’s corporate governance and credit crunch reports here

*Andrew Chambers is the chair of ACCA’s corporate governance and risk management committee