The financial markets today are created or destroyed by the international institutional investor. These global giants have billions of dollars to invest and large part of their investment is in equities of companies spread throughout the world. The world of today, from an investment point of view, has no boundaries. With electronic communication and internet banking, an institution can instantly switch hundreds of millions of dollars from one market to another. It can disinvest with the click of mouse. These institutions make their decisions based on information furnished by companies. The only way of ensuring that there is quality information coming out of the company is for the institution to test the quality of the governance of the company.
Arthur Levitt, the former chairperson of the US Securities and Exchange Commission, has said: “If country does not have reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident at the level of disclosure, capital will flow elsewhere. If country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country, regardless of how steadfast particular company’s practices may be, suffer the consequences. Markets must now honour what they perhaps, too often, have failed to recognise. Markets exist by the grace of investors. And it is today’s more empowered investors that will determine which companies and which markets will stand the test of time and endure the weight of greater competition. It serves us well to remember that no market has divine right to investors’ capital.
Not only is it apparent from this that it is in company’s best interests to endeavour to practise qualitative governance, but it has now been empirically established by international consultants such as McKinsey, that those companies that do practise good governance compared with their competitors, attract cheaper capital when they have rights issues and have more sustainable business success. Consequently, it makes good hard-nosed business sense to practise good governance.
Whilst there has been this globalisation of economies – borderless world from an investment viewpoint and international corporate guidelines – each country has its own culture, its own values, its own societal norms, its own way of doing business and its own special circumstances. Consequently, when I was president of the Commonwealth Association for Corporate Governance covering the 56 countries in the Commonwealth, council recognised that, while we could write principles for the establishment of corporate governance codes in the Commonwealth, each country in the Commonwealth would have to develop its own code.
It was with this knowledge that we wrote The Principles for Corporate Governance in the Commonwealth in 1999. We pointed out that each country needed to establish its own guidelines having regard to its special circumstances, but proceeded to lay down 15 principles which would have to be contained in any code in order to obtain international recognition, and more particularly to attract the global institutional investor.
Principle 1 – exercise leadership, enterprise, integrity and judgement in directing the corporation so as to achieve continuing prosperity for the corporation and to act in the best interest of the business enterprise in manner based on transparency, accountability and responsibility;
Principle 2 – ensure that through managed and effective process, board appointments are made that provide mix of proficient directors, each of whom is able to add value and to bring independent judgement to bear on the decision-making process;
Principle 3 – determine the corporation’s purpose and value, determine the strategy to achieve its purpose and to implement its values in order to ensure that it survives and thrives, and ensure that procedures and practices are in place that protect the corporation’s assets and reputation;
Principle 4 – monitor and evaluate the implementation of strategies, policies, management performance criteria and business plans;
Principle 5 – ensure that the corporation complies with all relevant laws, regulations and codes of better business practice;
Principle 6 – ensure that the corporation communicates with shareholders and other stakeholders effectively;
Principle 7 – serve the legitimate interests of the shareholders of the corporation and account to them fully;
Principle 8 – identify the corporation’s internal and external stakeholders and agree on policy, or policies, determining how the corporation should relate to them;
Principle 9 – ensure that no one person or bloc of persons has unfettered power and that there is an appropriate balance of power and authority on the board which is, inter alia, usually reflected by separating the roles of the chief executive officer and chairman, and by having balance between executive and non-executive directors;
Principle 10 – regularly review processes and procedures to ensure the effectiveness of company’s internal systems of control, so that its decision-making capability and the accuracy of its reporting and financial results are maintained at high level at all times;
Principle 11 – regularly assess its performance and effectiveness as whole, and that of the individual directors, including the chief executive officer;
Principle 12 – appoint the chief executive officer and at least participate in the appointment of senior management, ensure the motivation and protection of intellectual capital intrinsic to the corporation, ensure that there is adequate training in the corporation for management and employees, and succession plan for senior management;
Principle 13 – ensure that all technology and systems used in the corporation are adequate to properly run the business and for it to remain meaningful competitor;
Principle 14 – identify key risk areas and key performance indicators of the business enterprise and monitor these factors;
Principle 15 – ensure annually that the corporation will continue as going concern for its next fiscal year.
In addition there are seven characteristics of good corporate governance:
•Corporate discipline, meaning commitment to the principles of good governance;
•Transparency in communication to stakeholders about the business of the company and its strategic decisions, meaning substance over form and communicating the negatives with the positives;
•Independence, which involves avoiding conflicts of interest;
•Accountability, which involves being accountable to the company as directors and awareness that directors’ duty lies to the company and the company alone;
•Whilst the director is accountable to the company, he/she must act responsibly towards and responsively to the company’s stakeholders, such as its employees, the community in which the company operates, its suppliers, etc;
•The company must be balanced and fair in its decisions which impact on its various stakeholders; and
•A well-managed company today will be aware of the triple bottom line which, in essence, is being aware of the non-financial aspects of the company’s business and acting in non-discriminatory, non-exploitative manner and with responsibility in regard to environmental and human rights issues.
In trying to establish code of best practice in country, one needs to be aware of these international principles and requirements and identify the special circumstances pertaining to one’s country. For example, there might be concentration of poor and wealthy families in small country or there may be dearth of executive skills and availability of experience in regard to outside directors or the so-called independent non-executive director. It would be futile in country having these special circumstances to provide guidelines defining the independent non-executive director in the same terms as the Sarbannes Oxley Act on non-execut
