What is Corporate Governance?

The practice of corporate governance has evolved, as Kiel and Nicholson remind us, with the growth of the capitalist system and the development of world economies.[1] In the current climate of corporate Australia, the close attention being paid to corporate governance issues is being driven by two key factors:

• Investors and shareholders increasingly hold directors directly responsible for company performance and any public controversy about the company.
• High-profile company failures have raised public awareness of the need for directors to be personally accountable for their company’s legal compliance and social responsibility.

Boards and their Directors now have to pay far more attention than they did in the past to the company’s strategic directions, processes, delegations, behaviour in the market place, and so on. All too often, deficiencies in corporate governance are only discovered after the company has filed for bankruptcy or is placed in the hands of receivers. And yet, corporate collapses are nothing new in Australia. Trevor Sykes’s study, Two centuries of panic, begins with the collapse of the Bank of New South Wales in 1826![2]

Corporate Governance has previously been defined as the following:

• Monitoring the business with the objective to enhance shareholder value.
• Establishing structure and process through which management remains accountable to shareholders.
• Effective management of relationships with integrity and whole company attitudes to produce enhanced company performance.
• Implementing a framework to assure stakeholders that the organisation is fulfilling its responsibilities with due diligence and accountability.

Risk Management is the process by which Directors can evaluate the management of risk to enhance shareholder value. Directors should also have an established framework for monitoring and maintaining internal controls to identify and reduce risks to the business.

Directors have the responsibility to ensure that their organisation has taken all reasonable measures to identify, control and finance risks. The ability to accurately assess risks, implement mitigation strategies and monitor compliance has become an essential function of good corporate governance.[3]

[1] Kiel, G. & Nicholson, G. (2003), Boards that work: A new guide for directors,Mc-Graw-Hill: Sydney, p 17.

[2] Sykes, T. (2003), Two centuries of panic: A history of corporate collapse in Australia, Allen & Unwin: Sydney.

[3] Kiel, G. & Nicholson, G. (2003), Boards that work: A new guide for directors,Mc-Graw-Hill: Sydney, p 210