Blue Chip Issue 90

BLUE
CHIP
FINANCIAL PLANNING | Legislation
Corporate governance: a
compliance or business issue?
As highlighted in one of my previous articles, the Conduct
of Financial Institutions (COFI) Bill is founded on culture
and governance. Where a previous article focused on
culture, this article puts the spotlight on corporate
governance. It will show how, contrary to popular belief, it is not a
compliance issue but a business issue.
Sadly, as a result of the wave upon wave of onerous rulesbased
regulatory reform that has challenged the financial
services industry since the turn of the century, the concept
of governance has left a stain of compliance in the minds of
many industry stakeholders, instead of a set of best practice
principles and guidelines. It may be a good idea to test your
attitude towards governance.
If your first response is to associate corporate governance
with compliance, it may prevent you from seeing governance as
your friend instead of an enemy. If that is the case, one of the first
things you will have to do is to adopt an attitude of best practice,
not compliance. Generally, compliance drags you down, but the
desire to be the best inspires you to succeed in every possible way.
Replacing a compliance mindset with a best-practice mindset will
go a long way to preparing your business for success.
What is corporate governance?
Corporate governance is the system of principles, best practices,
rules and processes by which a company is directed, controlled
and managed. It essentially involves balancing the interests of a
company’s many stakeholders, which can include shareholders,
directors, senior management, employees, customers, suppliers,
lenders, government and the community. Corporate governance
includes practically every aspect of management.
In his book, The Corporate Citizen, Prof Mervyn King defined
good governance as fairness, accountability, responsibility and
transparency on a foundation of intellectual honesty. In his view, in
arriving at their decisions, directors have to thoroughly understand
the duties of good faith, care, skill and diligence 1 . According to
King, it is not good governance when a compliance officer reports
to a board that a company has complied with the code and the
rules of governance, without the board applying its mind as to how
the company should be governed. 2
“Governance is about judgement calls and process.”
– Mervyn King 3
The benefits of good corporate governance
Corporate governance is of fundamental importance to any
business, big or small, simply because good corporate governance
leads to sustainable business success that can benefit all
stakeholders, while bad governance can lead to scandal and ruin.
There are many, many examples of failed enterprises globally that
confirm this fact.
There can be no doubt that sound corporate governance is good
for business and that it lays the foundation for the sustainability of
any financial services provider. In reality, most successful businesses
strive to have exemplary corporate governance. For many, if not
most stakeholders, it is not enough for a company to be profitable;
it also must demonstrate good corporate citizenship through
ethical behaviour; sound policies, procedures and corporate
governance practices as well as environmental awareness.
Corporate governance guides the leadership of firms to align
the interests of clients, shareholders, directors, management and
employees, and it helps to build trust between all the stakeholders.
Corporate governance can give all stakeholders a clear idea of a
company’s direction and business integrity. It promotes long-term
financial viability, opportunity and returns. It serves as a sound
foundation to facilitate the raising of capital, if needed. Good
corporate governance can translate to rising share prices and it can
reduce the potential for financial loss, risks and corruption. It lays
the foundation for resilience and long-term sustainable success as
well as increased shareholder value.
Good corporate governance can
translate to rising share prices.
How can the legislation help providers to succeed?
If you have a compliance mindset, you will probably only see
the rules and obligations, as highlighted below, and not the
sound, guiding principles that will assist you as a business to be
competitive at the highest level in our industry. Hopefully, the
comments in the next section of the article will help you to see
how these principles, captured in the legislation, will help you to
establish best-practice principles in your business that will give
you a sustainable competitive advantage.
Obligations of governing body
Section 15. 4
(1) The governing body of a financial institution is accountable for:
Best practice: Where there is no accountability, there is no
leadership responsibility, and where there is no leadership
responsibility, scandal and ruin usually follow.
(a) Compliance with the requirements of this Act; 5
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