Governance Review with James Johnston

The dramatic collapses of major multinational corporates, including Enron, WorldCom, HIH and Ansett brought governance into the spotlight.  Many local examples to appear in the media.  So, what is “good” governance, and is “bad” governance a significant factor behind these collapses?

In essence, governance is the combination of the principles underlying an organization and the people appointed or elected to implement those principles and direct the organisation.  In large multinational companies, governance has a responsibility to protect the interest of investors and create trust and confidence in the capital market.

In the wake of some dramatic recent collapses, the United States recently introduced “rules based” legislation designed to ensure this occurs.  The changes implemented tough penalties for false certifications in financial statements, compulsory independent audits and banning loans from Companies to their Executives and Directors.  There is talk of extending the ambit of this legislation to privately owned companies.

New Zealand has historically taken a more “principle based” approach to governance, reflected in guidelines released by the Securities Commission.  These guidelines call for a high ethical standard amongst Company Directors, with a balance of independence, skills and knowledge, transparent remuneration arrangements, regular consideration of risk management processes, independent audit processes and constructive relationships with shareholders.

The advantage of avoiding the rules based approach and maintaining a principle based one, is the need for flexibility to foster a growth environment.  Governance compliance should not limit legitimate risk taking, which is part of most business ventures.  By the same token however, risk needs to be managed and this is the role of top management and their advisors, acting under the direction of the Board.

If compliance codes and policies are ignored or are not implemented as part of the general culture of an organisation, then inherently risks are not managed.  These risks can be in many forms, some examples of which are operational IT risks, breach of confidentiality risks and business disruption risks caused by absence of key staff.

Some can be highlighted by audits but others come back to the implementation of appropriate management strategies from the beginning.  Perhaps the most underestimated risk is the part human resources play in any enterprise.  Good governance includes ethical conduct and can this be legislated? 

While adopting an efficient corporate model in itself is no guarantee of success, in our view it is certainly a vital step in the right direction to avoid an organisation’s failure.  Leading law firms all offer effective Compliance Audits, which assist organisations to identify areas in which they need to tighten up or implement procedures.