The Strategic principles and importance of good corporate governance in a business

Many text books, scientific papers or corporate reports or even seminar handouts have presented and reported on the importance of good corporate governance a case in point we all believe to be important for executives to effectively run a business. In this post I feel no need to define it as you can find out it elsewhere at least from the sources I have mentioned above.

Companies interested in attracting foreign capital must be aware that compliance with the generally accepted principles of corporate governance is of paramount important for their business. In Indonesia the state owned companies or BUMN have achieved notable success in implementing good corporate governance codes over recent years at least from early 2000s.

Good corporate governance is so important for a corporation that it is believed to be a strategic system that instills policies and rules for maintaining the cohesiveness of an organization. My experience as an executive and board member in the private sectors in Indonesia proved so. Corporate governance is meant to hold a business enterprise accountable while helping its organization steer clear of financial, legal and ethical pitfalls that would potentially hurt its corporate reputation and weaken its competitiveness at the marketplace.

Corporate Governance ensures that all the key decision makers and executives such as board of directors are performing their duties and tasks in the best possible way to protect the best interest of the stakeholders especially the shareholders, investors and partners of the company.

Bad corporate governance was once blamed as one of the culprits contributing to the economic crisis in Indonesia in 1997 similar to a market crash that U.S. had experienced and forced the country to restructure its corporate governance systems in 1929.

Following are some of the strategic principles of good corporate governance in a business:

1.      All shareholders recognized.

More often than not, however, small shareholders with little impact on the stock price are brushed aside to make way for the interests of majority shareholders and the executive board. Good corporate governance seeks to make sure that all shareholders including those small or minority ones get a voice at general meetings and are allowed to actively participate. In many cases as the laws make it possible that presence of certain numbers of major shareholders can enable the meetings are held and then decisions made. In Indonesia as such is mainly regulated in the Limited Liability Law No.40 enacted in 2007.

2.      Stakeholder best interests.

In particular, taking the time to address non-shareholder stakeholders can help your company establish a positive relationship with the community and the press. As shareholders form integral part of the shareholder group then such other shareholders as local government & communities, suppliers, consultants, NGOs, just to mention a few, cannot be underestimated at all.

3.      Board responsibilities must be clearly outlined.

All board members must be on the same page and share a similar vision for the future of the company and act together for the best interest of it.

Board members are appointed to act on behalf of the shareholders to run the day to day affairs of the business. The board are directly accountable to the shareholders and each year the company will hold an Annual General Meeting of Shareholders (AGMS) and under certain circumstances Extraordinary General Meeting of Shareholders (EGMS) at which the directors must provide a report to shareholders on the performance of the company, incomes, future plans, budgets, investment, dividends, strategies and re-election of the board members.

4.      Business transparency.

This is the key to promoting shareholder trust to the executives. Financial statements, balancing sheets, contracts approved, decisions made, by the executive should all be clearly stated without exaggeration or “creative” accounting. Falsified reports not only can hurt the company’s reputation but also will cause shareholders lose their trust to the executives to run their business. If such a condition happens to a public listed company an immediately shaking impact on the share prices will hardly be avoided.

5.      Ethical behavior.

Violations in favor of higher profits can cause massive civil and legal problems down the road. Underpaying and abusing outsourced employees or skirting around lax environmental regulations can come back and bite the company hard enough if they are ignored. Codes of corporate governance on ethical decisions should also be established for all members of the board members.

Following are some of the strategic importance of good corporate governance in a business:

1.      Changing Ownership Structure.

In recent years, the ownership structure of companies has changed a lot. Public financial institutions, mutual funds and net worth families are the single largest shareholders in most of the large companies especially in Indonesia. They have effective control over the management of the companies and this is good for them.

In most cases in Indonesia they have good number of seats on the board structure thus making them easily control the business operations from time to time. They can effectively influence and put pressure on the management team to use corporate governance to become more efficient, transparent, accountable, and compliant.

I strongly agree with this action on the side of the shareholders as it is these groups who will be most severely impacted when companies face bankruptcy as a result of mismanagement by their appointed executives. Without any doubt the changing ownership structure has resulted in corporate governance that in turn sustains stakeholders’ trust and company’s reputation and competitiveness.

2.      Efficient Operations.

The activities of any company will not only depend on the right strategy, competent leadership, the availability of valuable resources and markets but also they will depend on the successful access to investment capital. As the British saying goes “money rules”.

Please note that it is extremely every important to understand that investors will not invest much in companies without an effective system of management and control over its activities. Most investors say they would pay more for the shares of a well-governed company than for those of a poorly governed company with even comparable financial performance.

3.      Importance of Social Responsibility.

Today, social responsibility is given a lot of importance. The Board of Directors have to protect the rights of the customers, employees, shareholders, suppliers, local communities, and shareholder groups at large.

This is possible only if they use corporate governance principles and adopt best codes of good corporate governance in managing the companies and in interacting with all the said stakeholders especially shareholders.

4.      Globalization.

Today most big companies are selling their goods in the global market thus having to attract foreign investor and foreign customers to their products. They also have to follow foreign rules and regulations and this requires corporate governance. Without Corporate governance, entering, surviving and succeeding in the global market even in the most corrupt country environments seems to be more mission impossible than mission accomplished.

5.      Corporate Governance as Risk Mitigation.

Good corporate governance is of paramount importance to a company and is almost as important as its primary business objectives, plans and strategies. When executed effectively, it can help prevent corporate scandals, frauds, corruptions including undesired civil and criminal liability of the company.

A corporation without a system of corporate governance is often regarded as a body without a soul or conscience. Good Corporate governance keeps a company honest and out of trouble. If this shared philosophy breaks down, then corners shall be cut and company management will grow complacent and corrupt. Dishonest and unethical dealings can cause shareholders to flee out of fear, distrust and disgust.

6.      Takeovers and Mergers.

Today, there are many takeovers and mergers in the business world. Corporate governance is required to protect the best interest of all the parties during takeovers and mergers. Stock exchange markets even make corporate governance compulsory for public listed companies or those intending to be ones. This is done to protect the interest of the investors and other stakeholders.

7.      Determining and managing risks.

Improving good corporate governance will increase company image and improve the operation to meet the goal, it also can reduce the cost of capital and prevent the financial crisis. For investors, it can help to make a protection, control their interests properly and increase the organization transparency.

It makes sense that the failed energy giant Enron, and its bankrupt employees and shareholders becomes a prime argument for the importance of solid corporate governance in this modern world.

Well-executed corporate governance should be similar to a police department's internal affairs unit that helps anticipate, detect and identify problems, avoid and remove potential dangers or harms accordingly.

Finally, good corporate governance is aimed to increase the accountability of your company, sustain trust and reputation hence keeping it away from massive corporate disasters before they occur or at least avoiding any recurrence if they have already happened and been successfully corrected.

Thank you,

Herpiani Ng