Governance systems

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Is your organisation transparent with regard to its governance?

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This Scorecard is due to be updated in 2018

Corporate governance is the basis of accountability in companies, institutions and enterprises, balancing corporate economic and social goals on the one hand, with community and individual aspirations on the other. For the purpose of this question, it will encompass both the rules under which the business operates and its relationships with stakeholders. Corporate governance therefore covers internal processes, policies, culture, customs and rules as well as the external laws and institutions that regulate business. In addition, it encompasses relations between shareholders, board members, management, staff and other stakeholders such as customers, creditors, suppliers and the community at large.

Past corporate governance scandals in Asia in the late 1990’s and more recently in the United States and Europe caused a crisis of confidence towards the corporate sector. Since then corporate governance has become a significant issue for governments and businesses. In 2002, the U.S. federal government passed the Sarbanes-Oxley Act (SOX) . The primary purpose of SOX was to improve the accuracy and reliability of corporate disclosures on finance, audit and governance issues. It was intended to restore investor confidence in public companies after scandals such as those involving Enron and WorldCom. Similarly, the UK responded to that crisis with the non-statutory Corporate Governance Code that sets out standards of good practice for public companies in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders. This regime was further strengthened by the 2010 Stewardship Code , designed to promote greater engagement by institutional investors with public companies. These regimes expect public corporate governance statements by public companies. However, the majority of businesses are too small to be under a legal obligation to publish one.

Another issue is the public availability of company information. Some governments have established 'company registries' which serve as a reference source for legal information about businesses. However, adequate data and information is still often difficult to track down because, even within these registries, the quality or accuracy of the information can be unclear and often is limited in scope. Businesses still find ways to deliberately build complex systems which make most available data difficult to access for the general public or they cite 'commercial confidentiality' and refuse to open up. A lack of transparency in providing company data can facilitate fraud, corruption, tax evasion, money laundering and organised crime, which further affects healthy economic development. This is why campaigners argue that there is an urgent need for more openness in corporate governance and in the provision of company data . Good corporate governance data might:
● Be comparable within and between divisions, subsidiaries and joint ventures
● Be comparable across or within countries and corporations
● Be available to all freely (without charge or registration)
● Be published in a legible and/or downloadable format
● Make publicly available data on company directors and shareholders
● Make publicly available statutory filings such as annual reports
● Have an open licence which makes the data reusable

Essentially, governance should be based on clear principles such as honesty, integrity, openness, mutual respect, commitment to the organisation and high performance. Good governance will establish an organisational culture of responsibility, accountability and transparency and set out the pattern of directors' and administrators’ or managers’ duties with regard to properly and honestly managing the business. It is important to also address and promote diversity within boards. The OECD “Principles of Corporate Governance” describe the main characteristics of an effective corporate governance framework. In brief, it should:

● Be consistent with the rule of law
● Establish the responsibilities of the board i.e. strategic guidance of the company, effective monitoring of management, accountability to the company and the shareholders
● Clearly articulate the division of responsibilities between authorities
● Support the rights of shareholders i.e. voting, access to information, share in profits
● Ensure the equitable treatment of all shareholders, including minority and foreign shareholders
● Encourage active co-operation between business and stakeholders in creating wealth, jobs and financially sustainable enterprises
● Be transparent regarding all material matters concerning the business e.g. the financial situation, performance, ownership, and governance of the company.

Ultimately, good corporate governance can have a positive impact on stakeholders and society by developing and maintaining a robust business: thus it can be seen as a tool for a financially sustainable future.

Company Registries

'Company registries' are official lists of companies from specific countries, providing easy access to a company's general information. Businesses are legally required to provide information such as annual financial statements and annual company returns, which all become public records.

Corporate governance statement

'Corporate governance statement': a statement detailing a company's approach to corporate governance and an adequate overview of the systems and processes it has in place to ensure the proper and honest management of its operations. There is no ‘one size fits all’ approach. How detailed the overview needs to be will depend on the size and complexity of the organisation. Good practice is to make such statements publicly available.

Governance

'Governance' relates to decisions and actions that define expectations, grant power, or verify performance.

Public Company

A 'public company' is a company whose shares can be bought and sold by the general public through a recognised stock exchange.

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