Good Corporate Governance

In modern times, businesses are engaged in the constant pursuit for higher profits and better returns to shareholders. But in doing so, businesses tend to lose sight of balancing the interest of corporate bottom lines against the needs of other stakeholders such as employees, customers, suppliers, society and the communities in which the companies conduct their business.

Though famed economist Milton Friedman advocated that “the social responsibility of business is to increase its profits”, doing so is counterproductive. Good corporate governance is crucial to establishing a competitive advantage and profitability based on long-term thinking.

A CAUTIONARY TALE

In the 1980s, there were a number of highly publicised failures of large companies in the United Kingdom. Some of them were a result of large-scale fraud by their directors, including the publisher Mirror Group (debts vastly outweighed assets, company pension fund used to disguise debts) and textile company Polly Peck (reporting healthy profits one year, declaring bankruptcy the next).

These failures reduced public confidence in financial reporting and auditing. Directors were pressuring auditors to accept the use of ‘creative accounting’ schemes. As the auditors often received extra remuneration from the company for consultancy work, disagreement with the directors in the audit process could result in the loss of this additional income.

It was clear that corporate governance needed to be strengthened. Many of these issues arose because of the separation of ownership and control in large companies – directors run the company on behalf of the shareholders but may not always act in the shareholders’ best interests.