Modern Organisational Governance

Shahla Seifi, David Crowther, David Crowther

• Publisher: Emerald Publishing Limited
• Year: 2017
• Print ISBN: 9781787146952
• eBook ISBN: 9781787430099
• Topic: Business
• Subtopic: Business General
• Index: Business

It is apparent that all forms of organisation have governance requirements and procedures but too often we just consider governance in a corporate environment. Equally it is accepted that the concept of governance is concerned with the relationship between the organisation and all of its stakeholders but is too often interpreted as a concern for the relationship between a corporation and its investors. Still this is essentially true as far as most corporations are concerned. Such narrow views are unrealistic and are inappropriate in the modern global world which we inhabit and many would blame problems with governance for the economic and financial turmoil which the world has experienced during the last decade. Much analysis has been undertaken about governance but little in the way of change is manifest and few seem to recognise both the need to consider radical changes in the modern global environment and the opportunities and possibilities presented by the current environment. In this book therefore we take a broad (and possibly radical) approach and consider governance requirements in the modern world - not just for corporations but for all forms of organisation.

PART I
THEORETICAL PERSPECTIVES

MODERN ORGANISATIONAL GOVERNANCE: RE-EXAMINING GOVERNANCE: THE EVIDENCE

David Crowther and Shahla Seifi

ABSTRACT

In this chapter the operation of governance in a variety of contexts is shown to be both essential and problematic. Reasons involve contextual and cultural differences as well as different understandings. This led to a consideration of the desirability of global governance and the problems in regulating international markets. The relationship of governance with sustainability and with corporate social responsibility is also examined. In doing so this chapter provides an introduction to the volume and sets the scene for the other contributions.

Keywords: Corporate social responsibility; governance; risk management; sustainability; stewardship

INTRODUCTION

Although it is universally accepted that the concept of governance has existed as long as any form of human organisation, this concept is merely to encapsulate the means by which that organisation conducts itself. Recently however the term has come to the forefront of public attention and this is probably because of the problems of governance which have been revealed at both national level and in the economic sphere at the level of the corporation. Thus the financial collapse which led to the economic recession starting in 2008 can be firmly attributed to bad governance in the financial sector – something which has not yet been adequately addressed. Equally it led to the deliberate misreporting of oil reserves by the Shell company in 2004 (Cummins & Beasant, 2005). More recently it has led to the corruption problems in FIFA which led to the resignation of Joseph (Sepp) Blatter, the president and his heir apparent, Michel Platini, in 2005. Many more problems with governance have similarly been revealed in recent years. These problems have thus created concern with a re-examination of what exactly is meant by governance and more specifically just what are the features of good governance.

Many systems of governance exist but all systems are concerned primarily with managing organisations and therefore with the governing of associations and therefore with political authority, institutions and, ultimately, control. Governance in this particular sense implies formal political institutions that aim to coordinate and control interdependent social relations and that have the ability to enforce decisions. Increasingly however, in a globalised world, the term governance is being used to describe the regulation of interdependent relations in the absence of overarching political authority, such as in the international system, in other words governance and regulation are becoming treated as synonymous. Thus global governance can be considered as the management of global processes in the absence of form of global government. There are some international bodies which seek to address these issues and prominent among these are the United Nations and the World Trade Organisation. Each of these has met with mixed success in instituting some form of governance in international relations but are part of a recognition of the problem and attempt to address worldwide problems that go beyond the capacity of individual states to solve (Rosenau, 1999).

When the term global governance is used this does not of course imply that such a system actually exists, let alone that the effectiveness of its operations is accepted. It is merely to recognise that in this increasingly globalised world there is a need for some form of governance to deal with multinational and global issues. The term global governance therefore is a descriptive term, recognising the issue and referring to concrete cooperative problem-solving arrangements. These may be formal, taking the shape of laws or formally constituted institutions to manage collective affairs by a variety of actors – including states, intergovernmental organisations, non-governmental organisations (NGOs), other civil society actors, private sector organisations, pressure groups and individuals as governance applies to all organisations (e.g. FIFA as an example of an organisation with problems caused by poor governance) and not just to corporations and states. The system also includes of course informal (as in the case of practices or guidelines) or temporary units (as in the case of coalitions). Thus global governance can be considered to be the complex of formal and informal institutions, mechanisms, relationships and processes between and among states, markets, citizens and organisations, both inter- and non-governmental, through which collective interests on the global plane are articulated, rights and obligations are established and differences are mediated.

When we mention global governance this is not of course the same thing as world government: indeed it might be considered that such a system of global governance would not actually be necessary if there was such a thing as a world government, as the law would enact these requirements. Currently however the various state governments have a legitimate monopoly on the use of force – on the power of enforcement. Global governance therefore refers to the political interaction that is required to solve problems that affect more than one state or region when there is no power of enforcing compliance. Improved global problem-solving need not of course require the establishment of more powerful formal global institutions, but it would involve the creation of a consensus on norms and practices to be applied. Steps are of course underway to establish these norms and one example that is currently being established is the creation and improvement of global accountability mechanisms. In this respect, for example, the United Nations Global Compact¹ – described as the world’s largest voluntary corporate responsibility initiative – brings together companies, national and international agencies, trades unions and other labour organisations and various organs of civil society to support universal environmental protection, human rights and social principles. Participation is entirely voluntary, and there is no enforcement of the principles by an outside regulatory body – indeed it is reasonable to argue that good governance needs no regulatory enforcement and it is only cultural problems which lead to lapses in governance. Companies adhere to these practices both because they make economic sense, and because their stakeholders, including their shareholders (most individuals and institutional investors) are concerned with these issues and this provides a mechanism whereby they can monitor the compliance of companies easily. Mechanisms such as the Global Compact can improve the ability of individuals and local communities to hold companies accountable.

Recent events have shown us that good governance is important in every sphere of the society whether it be the corporate environment or general society or the political environment: equally such events have shown us the problems which arise due to failures in governance. Good governance procedures can, for example, improve public faith and confidence in the political environment. When the resources are too limited to meet the minimum expectations of the people, it is a good governance level that can help to promote the welfare of society (Crowther & Seifi, 2010). Of course a concern with governance is at least as prevalent in the corporate world.

Governance is frequently considered for corporations but it applies equally to all forms of organisation and this is one of the themes of this book, to consider governance for all organisations. At the level of business good governance is essential for good corporate performance and one view of good corporate performance is that of stewardship and thus just as the management of an organisation is concerned with the stewardship of the financial resources of the organisation so too would management of the organisation be concerned with the stewardship of environmental resources. The difference however is that environmental resources are mostly located externally to the organisation. Stewardship in this context therefore is concerned with the resources of society as well as the resources of the organisation. As far as stewardship of external environmental resources is concerned then the central tenet of such stewardship is that of ensuring sustainability. Sustainability is focused on the future and is concerned with ensuring that the choices of resource utilisation in the future are not constrained by decisions taken in the present. This necessarily implies such concepts as generating and utilising renewable resources, minimising pollution and using new techniques of manufacture and distribution. It also implies the acceptance of any costs involved in the present as an investment for the future.

Ever since the financial and economic problems which started in 2007 a great deal of concern has been expressed all over the world about shortcomings in the systems of governance in operation and its reform has been the concern of business managers, academics and government officials all over the world, sadly with little positive result. Often companies’ main target is to become global – while at the same time remaining sustainable – as a means to get competitive power. But the most important question is concerned with what will be a firms’ route to becoming global and what will be necessary to get global competitive power. There is more than one answer to this question and there are a variety of routes for a company to achieve this. Corporate governance can be considered as an environment of trust, ethics, moral values and confidence – as a synergic effort of all the constituents of society – that is the stakeholders, including government, the general public, etc., professional/service providers – and the corporate sector.

Of equal concern is the question of corporate social responsibility (CSR) – what this means and how it can be operationalized (Seifi & Crowther, 2012). Although there is an accepted link between good corporate governance and CSR, the relationship between the two is not clearly defined and understood. Thus many firms consider that their governance is adequate because they comply with The Combined Code on Corporate Governance, which came into effect in 2003. Of course all firms reporting on the London Stock Exchange are required to comply with this code, and so these firms are doing no more than meeting their regulatory obligations. Many companies regard corporate governance as simply a part of investor relationships and do nothing more regarding such governance except to identify that it is important investors/potential investors and to flag up that they have such governance policies. The more enlightened recognise that there is a clear link between governance and CSR and make efforts to link the two. Often this is no more than making a claim that good governance is a part of their CSR policy as well as a part of their relationship with shareholders.

It is recognised that these are issues which are significant in all parts of the world and a lot of attention is devoted to this global understanding. Most analysis however is too simplistic to be helpful as it normally resolves itself into simple dualities: rules based versus principles based or Anglo-Saxon versus Continental. Our argument is that this is not helpful as the reality is far more complex. It cannot be understood without taking geographical, cultural and historical factors in to account to understand the similarities, differences and concerns relating to people of different parts of the world. The aim of this book is to redress this by asking subject experts from different parts of the world to explain the issues from their particular perspective.

One of the consequences of a concern with the actions of an organisation, and the consequences of those actions, has been an increasing concern with corporate governance. Corporate governance is therefore currently a fashionable concept over the world. It has gained tremendous importance in recent years. There is a considerable body of literature which considers the components of a good system of governance and a variety of frameworks exist or have been proposed. This book examines and evaluates these frameworks while also outlining the cultural context of systems of governance. Our argument in this book is that corporate governance is a complex issue which cannot be related to merely the Anglo-Saxon approach to business; indeed, as already stated, it cannot be understood without taking into account many cultural and contextual factors to understand the similarities, differences and concerns relating to people of different parts of the world.

One of the main issues, therefore, which has been of pressing concern for business managers, accountants and auditors, investment managers and government officials – again all over the world – is that of corporate governance. Probably since the mid-1980s, corporate governance has attracted a great deal of attention. Early impetus was provided by Anglo-American codes of good corporate governance.² Stimulated by institutional investors, other countries in the developed as well as in the emerging markets established an adapted version of these codes for their own companies. Supra-national authorities like the OECD and the World Bank did not remain passive and developed their own set of standard principles and recommendations. This type of self-regulation was chosen above a set of legal standards (Van den Berghe, 2001). After big corporate scandals corporate governance has become central to most companies. It is understandable that investors’ protection has become a much more important issue for all financial markets after the tremendous firm failures and scandals. Investors are demanding that companies implement rigorous corporate governance principles to achieve better returns on their investment and to reduce agency costs. Most of the times investors are ready to pay more for companies to have good governance standards. Similarly a company’s corporate governance report is one of the main tools for investor’ decisions. Because of these reasons companies cannot ignore the pressure for good governance from shareholders, potential investors and other markets actors.

At the same time banking credit risk measurement regulations are requiring new rules for a company’s credit evaluations. New international bank capital adequacy assessment methods (Basel II) necessitate that credit evaluation rules are elaborately concerned with operational risk which covers corporate governance principles. In thi...

Table of contents

• Cover
• Title Page
• Part I Theoretical Perspectives
• Part II The Role of Stakeholders
• Part III Governance Issues
• Index