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Posts Tagged ‘Good corporate governance’

Good corporate governance is a highly relative concept, made even more slippery by the post-war global business environment. Well-known corporate scandals throughout the first decade of the 2000s, such as the accounting fraud at Enron, have brought corporate governance to new prominence, and governments, in response, have engaged in tightening corporate accounting standards.

Features

The basic factors in good corporate governance are the board of directors, shareholders en masse, and management. How these three power centers work together can make all the difference for a company.

The basic structure is to keep management accountable for its actions, maintain good cash flow, and satisfy the shareholders as a group.

Function

These factors, working together, are meant to keep a firm not only profitable but reputable. Investors want to be a part of a firm that is well-run, ethical, and still profitable. For these reasons, the makeup of the board of directors is extremely important.

How often they meet and the specific areas of expertise of its members are important to keep not only a watch on management and corporate activities, but also to do so in an environment of competence.

Significance

Few will deny that both investors and governments have become more cynical since the corporate scandals typified by Enron and Tyco. More than ever, the state has become a major factor in corporate governance.

This means that governments have clamped down on anything that smells of a conflict of interest and, importantly, the lack of independence of any independent accounting firm. A strict “separation of powers” among the factors of corporate governance has been necessitated by the desirability of independent auditing. Read the rest of this entry »

The financial meltdowns of Enron, Tyco and AIG have increased attention and concerns about corporate governance, which is a system of regulations and policies designed to hold corporate leaders accountable and protect company stakeholders.

While compliance with federal regulation such as the Sarbanes Oxley Act, SOX, is one way of defining corporate governance, good corporate governance is a mixture of meeting both the letter and spirit of the law.

Whistle Blowing System

A sound whistle blowing system is a critical component of good corporate governance. While public companies are required to meet SOX whiste blowing standards, private organizations, as well as small businesses, have also followed suit.

Features of a firm whistle blowing system include clear methods for reporting claims, confidentiality assurance and protection against retaliation. In addition to being good corporate governance, whistle blowing is in an organization’s financial interest.

Tips from employees and vendors catch 34 percent of fraudulent activity and 48 percent of owner or executive fraud, according to a 2006 report from the Association of Certified Fraud Examiners.

Company Climate

Good corporate governance is anchored in organizational culture, not compliance. Good corporate governance cultures are marked by consistency, responsibility, accountability, fairness, transparency and effectiveness, according to Dr. Yilmaz Arguden, chairman of Arge Consulting.

Board members should be chosen not only for qualifications but for their judgment, ethics and experience in making the tough decisions. In addition, corporate leadership should focus on both performance and how that performance was achieved, according to Arguden.

Code of Ethics

A code of ethics, which clarifies and stipulates adherence to some of more abstract ideals of trust and accountability, is another indicator of good corporate governance.

Effective codes of ethics spell out who must adhere to the rules, division of power between company leadership and its board of directors and guidance on other gray areas such as political contributions, conduct and compensation.

While the SOX requires public companies to have a code of ethics, creation and adoption of an ethics code is a best practice for those organizations not covered under the legislation. Read the rest of this entry »