Having good corporate governance is crucial. It provides a set of guidelines, values and principles that can promote confidence in investors, an ethical and responsible organisation and enhance performance. Consequently, it is important to understand what constitutes good corporate governance and promote best practice.
Corporate Governance refers to the framework of systems, processes and rules implemented in order to direct and manage an organisation. Most organisations aim to have an effective governance framework that (a) meets individual needs and circumstances (b) helps drive enhance organisations performance and (c) promotes adherence with the companies policies and procedures as well as external laws and regulations.
Several factors influence the corporate governance of an organisation. These include the nature of the organisation’s business activities, its regulatory environment, the regulation and legislation that governs the organisation and the organisation’s constitution.
Corporate governance influences a variety of crucial aspects of a business including company objectives, assessing risk and how performance is optimised. Having good corporate governance provides accountability and control systems within the organisation. It provides structure and can encourage a company to create value through innovation, development and exploration. As good governance underpins good conduct, it is important to understand how good corporate governance is achieved.
As noted by the AICD, an effective governance framework should include and consider:
- contribution of individual directors;
- effectiveness of the board and board performance;
- way in which governance is applied throughout the organisation;
- strength of the relationships the organisation fosters with its stakeholders.
Good governance can maintain and promote investor confidence and is therefore crucial for Australia to be at the forefront of best practice. As corporate governance is relative to the business, there is no single model of good corporate governance. So what is best practice in Corporate Governance? The ASX Corporate Governance Council outlines 10 principles of good corporate governance and best practice recommendations. These principles are as follows:
- Lay solid foundations for management and oversight
Recognise and publish the respective roles and responsibilities of board management
- Structure the board to add value
Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties
- Promote ethical and responsible decision making
Actively promote ethical and responsible decision making
- Safeguard integrity in financial reporting
Have a structure to independently verify and safeguard the integrity of the company’s financial reporting
- Make timely and balanced disclosure
Promote timely and balanced disclosure of all material matters concerning the company
- Respect the rights of shareholders
Respect the rights of shareholders and facilities the effective exercise of those rights
- Recognise and manage risk
Establish a sound system of sick oversight and management and internal control
- Encourage enhanced performance
Fairly review and actively encourage enhances board and management effectiveness
- Remunerate fairy and responsibility
Ensure that the level of compensation of remuneration is sufficient and reasonable and this its relationship to corporate and individual performance is defined
- Recognise the legitimate interests of stakeholders
Recognise legal and other obligations to all legitimate stakeholders
Although good corporate governance will differ in each organisation and will evolve within each individual company, these 10 core principles underlie best practice in corporate governance. It is important each organisation continue to review those practices to reflect developments and remain at the forefront of best practice in corporate governance.
AICD, Guiding Principles of Good Governance, http://www.companydirectors.com.au/Director-Resource-Centre/Governance-and-Director-Issues/Guiding-principles-of-good-governance
ASX Corporate Governance Council, Principles of Good Corporate Governance and Best Practice Recommendations, http://www.asx.com.au/documents/asx-compliance/principles-and-recommendations-march-2003.pdf