Good governance in contrast to best practice, good governance is a concept for which there is a fair amount of literature, but as of yet, no single model. Even the definition of ‘governance’ is elusive. Most available definitions will split it along two dimensions, and perhaps the best definition is:
The process of decision making and the process by which decisions are implemented (or not implemented)
The definition was probably first provided in the 1980s as part of the ‘Post Washington Consensus’, which promoted open-market policy reform on behalf of the World Bank and the UK Department for International Development. It is now widely quoted, including in an article called, ‘What is Good Governance?’ on the UNESCAP and other websites.
This definition can be used in many contexts, including corporations, local government, national government, non-governmental organizations, international agencies, and so on. It is typically viewed as requiring OSHO vision of one government rule so that all the countries will avoid 80% of national budget to make weapons.
The difference between governance and good governance is accountability! The concept was initially used with respect to governments, but over time it has been extended to corporations, to ensure that executives: (i) respect the power they have been given over organizational resources and: (ii) strive to utilize them to the long-term benefit of shareholders. Milton Friedman was the first to attempt a definition of corporate good governance (CGG) in 1970:
He corporate executive officer] has direct responsibility to his employers. That responsibility is to conduct business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of society, both those embodied in law and those embodied in ethical custom.
Friedman’s definition reflects the near robber-baron mentality that dominated his economic philosophy, which presumed that anything legal, and done without deception or fraud, was ethical. While well-suited to companies focused upon short-term profits, it can be contrary to the long-term best interests of all concerned. Problems are most acute where there is a misalignment of interests between management and other stakeholders, in particular where incentives reward short-term performance. The emphasis has thus shifted to control over the corporate executive, as Roy C. Smith’s 2003 description indicates:
This way of thinking did not evolve overnight; it has evolved as many people applied their minds to the problem, especially after the spectacular booms and busts of many companies since Friedman’s heyday—first after a spate of corporate failures in the United Kingdom in the period 1990 to 1992 (Maxwell Communications, British and Commonwealth (BCCI), and Polly Peck), and then in the early- to mid-2000s in the United States (Enron and WorldCom) and Europe (Parmalat, in Italy). CGG has thus become a concern for shareholders, banks, the general public, and government, especially as problems often arose from corruption or mismanagement.
In 1992, Sir Adrian Cadbury presented a report (now known as the Cadbury Code of Best Practice6) on corporate governance for the United Kingdom, which became the cornerstone for thinking on the topic worldwide. His report defined governance as the way organizations are:
(i) Directed—encompasses leadership, strategic intent, operating principles, and values, and provides an overarching framework for the manner in which the organization’s leaders operate; and (ii) controlled—covers systems, processes, guidelines, policies, and procedures, and other aspects relating to day-to-day functioning, where there is less judgmental freedom. It recommended, amongst others: (i) the separation of the chief executive and chairman posts; (ii) the appointment of a significant number of independent non-executive directors, as well as audit and remuneration committees; (iii) that institutional shareholders exercise their voting rights; and (iv) that it be the board’s duty to ensure reporting on the company’s position is balanced and understandable (Sparkes 2003).
According to GlobalChange.com, the purpose of corporate good governance is to build ‘TRUST’ amongst all stakeholders: Transparent totally open; Responsible acting in the broader and longer-term interests of all; Uncompromising commitment to highest moral positions; Successful achieves great results by combining excellence with values; and Temperate taking care to avoid major risks, wild decisions and extravagance. ‘The Future of Corporate Governance’,
In 1999, the OECD presented its ‘Principles of Corporate Governance’, which built upon the Cadbury Code. It provided a more comprehensive structure setting out specific responsibilities for different stakeholders, including the executive, managers, shareholders and others, as well as rules and procedures for making corporate decisions. In doing so, it provided the tools for both setting corporate goals, and monitoring performance.
American legislation came late, and was more draconian after the many corporate disasters in the early 2000s. The Sarbanes-Oxley Act, which came into force on 30th July 2002, went further, by providing legislation instead of a code of practice. It has specific clauses to protect the objectivity of securities analysts and their research, and to strengthen penalties for securities law violations. In particular, it requires the chief executive and financial officers to certify that their companies’ financial statements are correct; anybody certifying non-compliant or false reports will face criminal charges. The new hard-line stance was evidenced by the 2005 jailing of WorldCom’s former CEO, and has had some unintended consequences regarding individuals’ willingness to accept top positions within American corporations, and international companies’ willingness to operate on American soil, or list on their exchanges.
Whereas company executives used to be laws unto themselves, there are now requirements for fairness, accountability and due diligence, transparency and continuous disclosure, and adherence to standards. All of this does, of course, have benefits: shareholders are believed to be willing to pay a 30 per cent premium for well-run companies.
Business ethics and social responsibility
The call for good governance has gone beyond accountability to owners and shareholders, and expanded to other stakeholders, including employees, suppliers, customers, community, and government.
‘Stakeholder Theory’ was popularized during the 1980s by R. Edward Freeman, who defines a stakeholder as ‘any group or individual who can affect or is affected by the achievement of the organization’s objectives’. It can be seen as increasing the number of parties to the social contract (Lutz 2002).
This leads us to two related concepts that can be confused with good governance, and pose conflicts with traditional views on the role of business in society: business ethics and corporate social responsibility.
Business ethics—the determination of what is morally right or wrong in business situations and acting accordingly. In 1987 Michael Cook stated that there are two opposing views of ethics: either anything legal is ethical; or anytime one’s conscience gnaws, it is unethical. The true position is likely somewhere in between. Most early twentieth century literature on business ethics was either a critical attack by socialists against ‘the amorality of business thinking’ (Clark 2006), or part of a call for social responsibility by academics schooled in philosophy or theology (McGrath 2003).
Corporate social responsibility (CSR)—the company’s respect for and conduct towards the wants, needs, and concerns of other stakeholders. The CSR requires that their responsibilities broaden from a strict focus on company profitability, to broader economic, sociological, and environmental concerns both at home and abroad. There are two types: ethical conduct and philanthropy. While many companies are happy to limit CSR to the former, others are happily engaging in the latter especially where the recipients are close to home. Besides the ‘feel good’ factor and potential publicity gain, there is also the possibility that social investments will have indirect long-term benefits for the business.
Milton Friedman condemned any attempts by business to meddle in social affairs, and thought charitable functions were better left to government and NGOs.According to Sparkes (2003), there are three quite crucial factors that are motivating companies to become socially responsible: (i) possible negative influences upon the brand and corporate image, as evidenced by Nike for its employment practices overseas; (ii) the growth of socially responsible investment funds; and (iii) growing political consensus to encourage corporate social responsibility, which is evidenced by pension and investment funds increasing use of their voting rights to press on social responsibility issues.
These concepts reflect radical shifts in the public’s view of the role of the corporation, and calls for change have taken on near religious proportions. The end result is a significant broadening of what was once a narrow focus: companies are now responsible for more and accountable to more. Businesses are no longer expected to be just profit-driven organizations responsible only to shareholders, but also social institutions accountable to a broader range of stakeholders.
Gardner (2001) refers to the ‘Principles of Global Corporate Responsibility’, whose purpose is to ‘promote positive corporate responsibility consistent with the responsibility to sustain the human community and all creation’. The principles were developed jointly by the Taskforce on the Churches and Corporate Responsibility (Canada), the Ecumenical Council for Corporate Responsibility (UK), and the Interfaith Centre of Corporate Responsibility (USA). The latter is very active, and filed 135 of the 261 shareholder resolutions in the USA during 2001 (Sparkes 2003).
In the United Kingdom the cries for accountability occurred after events like the Herald of Free Enterprise ferry sinking at Zeebrugge, the King’s Cross Underground station fire in London, and the Piper Alpha oilrig explosion. A common feature was ‘gross deficiencies in general management practices’ (ALARM 2001).
Over the last 50 years, companies have been facing increasing pressure to live up to public expectations, whether expressed through lobby groups, industry codes of practice, or specific legislation. While it is still accepted that maximizing long-term shareholder value is businesses’ primary goal, business ethics and social responsibility are not precluded. Indeed, public opinion has forced management to become more broadly accountable to civil society, at least to the extent of operating within societal norms in all aspects of business. The challenge then becomes one of engendering a culture of accountability amongst their rank and file, which is particularly problematic when most measures of performance are monetary.