Corporate Governance is a topic on the rise – driven by scandal and crisis. The inability to steer large corporations or banks free of reproach has given rise to trends in shareholder activism over issues like executive compensation and the long-term stewardship of companies versus quick gains in stock price. For returning to a sense of mutual trust and adequate balances, a joint understanding of responsibility and business ethics would help.
Corporate Governance may not be regarded as the coolest, most popular topic on the agenda – with the inevitable principles of “accountability”, “integrity” and “transparency” seeming rather dry and cumbersome when it comes to making decisions in the best interest of the company. Yet is it really only about duties or could it be enjoyable, too?
Adam Smith’s expression of “using other people´s money” is an early illustration of the Principal-Agent Model that we use nowadays to explain that governing a company means realizing, acknowledging, negotiating, and monitoring the interests of various involved parties – shareholders, stakeholders, the board and management. Seen from that angle, Corporate Governance can give us a fascinating framework and guidance to balance relationships, install processes of decision-making and deliver effective leadership.
As the great pioneer of British Corporate Governance, Sir Adrian Cadbury, who died earlier this month, put it very simply: “Corporate Governance is the system by which companies are directed and controlled”. It is up to all parties to define the degree of complexity needed. In a start-up, for example, everything is done by the founder. Once the entrepreneur invites external capital into the company, managing that shift in interest and participation becomes an issue as well as the institutionalizing of a one-man band into a fully fledged company. With a growing investor base and a listing process, Corporate Governance becomes an important criterion on which investment decisions are based.
Companies can find guidance in national codes which vary from country to country, as do company structures. In a diverse Europe, one unifying factor in managing businesses effectively whilst protecting shareholder interests is the set of OECD – principles, which have very recently been revised. For German supervisory board directors and executive managers, knowledge about different perspectives of Corporate Governance helps in understanding foreign investors who hold more than half of the DAX shares. They may have different expectations towards Supervisory Boards and Executive Management than German investors.
If you want to learn more about how Corporate Governance principles and international best practice to help you structure or supervise a company, take a look at our seminar offerings.
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