Underlying Concepts of Corporate Governance

These are the fundamental concepts behind how companies (and more importantly those involved with companies, primarily directors) should behave. These concepts are very individual in nature; remember, it is the individual who decides how to act, and therefore corporate governance is as important to the individual as it is to the company that the individual represents.

1 FAIRNESS

All people affected by decisions (stakeholders) should be treated with equal consideration. Fairness implies an open and even handed approach without bias.

2 OPENNESS/TRANSPARENCY

All information should be made available to stakeholders, and in a clear manner. This may suggest companies should not just follow disclosure rules, but also add voluntary disclosures if it adds to transparency. The greater the level of transparency in decision making and reporting to shareholders, the lower the agency cost.

3 INDEPENDENCE

All those in a position of monitoring should be independent of those/what they are monitoring:

• Non-executive directors should be independent of the executive directors, and of company operations as their role is to monitor performance.
• External auditors should be independent of the company, especially its accounting department and processes.
• Internal auditors should be independent of the company, as they are likely to be involved in monitoring systems throughout the company’s operations.

4 PROBITY/HONESTY

This is not just telling the truth, it also means finding out the truth, not ignoring it and not ‘turning a blind eye’.

In a company scenario honesty is required in financial reporting and should be embedded in the culture of the organisation.

5 RESPONSIBILITY

Directors should understand and accept their responsibility to shareholders and other stakeholders. They should act in their best interests and be willing to accept the consequences if they fail in this responsibility.

6 ACCOUNTABILITY

Directors must be willing to be held accountable for their actions so they must accept responsibility for the roles entrusted to them. They are accountable to the shareholders as the company’s owners and shareholders cannot exercise their own responsibility (as owners) unless they receive relevant information from the directors.

 7 REPUTATION

Directors must protect their own reputation, and that of the company they run, as damage to either is likely to lead to more widespread damage to the company. Accountants should protect their own reputation as well as that of the professional body to which they belong.

This raises an interesting debate about whether a director’s private life is in fact private – since a bad personal reputation is likely to affect their business reputation and hence that of the company.

8 JUDGEMENT

Directors must ensure they have all the necessary information and understanding in order to be able to make sensible business decisions that improve the prosperity of the company.

9 INTEGRITY

This is quite a general term and has a crossover with some of the other terms above. Integrity means honesty, fair-dealing, presenting information without any attempt to bias opinion and in a more general sense ‘doing the right thing’.