June 25, 2015 What is Good Governance?
What is good governance and how do we measure it? These are the questions which the Institute of Directors in association with Cass Business School set out to answer in a joint report. The key test for any company’s corporate governance regime is whether it helps deliver growth to shareholder value over the longer term. There are a number of definitions for corporate governance, one of the best being the 12 key guidelines set out by the Quoted Companies Alliance.
However, whilst the attributes which define a good governance regime are relatively straightforward, as IOD director Ken Olisa says in the forward to the report, it can be difficult to recognise good governance because “much of it takes place behind closed doors in the boardrooms and executive suites all companies.” This, according to Mr Olisa, can mean that interested parties are confined to observing consequences rather than understanding the actual workings of the governance framework.
In a bid to redress this, the study introduced new ways to look at corporate governance, drawing on the perceptions of business practitioners alongside an analysis of some 50 factors which have been identified as providing an indication of the way in which an organisation is governed . These factors include board effectiveness and relationships, shareholder and stakeholder relations, risk and remuneration, and the business environment.
An important element of the study was the identification and application of a range of methodologies in a bid to identify the optimum pathway towards measuring corporate governance. Although further work is required before a solution is reached there are a couple of interesting conclusions which the report’s authors have highlighted. Perhaps unsurprisingly, the study concluded that companies with higher governance scores have reputational advantage. Interestingly, the study also concluded that high profile companies have reputational disadvantage, perhaps leading one to the conclusion that the higher the profile, the harder an organisation will have to work if it is to build a strong reputation.
The results of the research have been thrown open to the business community in the hope that the work done so far will act as a catalyst for further study. That there is some debate around governance can only be good in the long term for organisations, their investors and their customers. Commenting on the conclusions, Ken Olisa said “One of the key findings of our new research is that no one factor dictates whether a company is well-run, whether that’s the number of non-executives on a board or how often the auditor is changed. It is simply not correct for a company to say that because they have ticked certain boxes, they show good governance.”