Discussing Corporate Governance During a Pandemic

 

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Overview

The study of corporate governance has become a burgeoning field over the last decade and has sparked substantial interest in international comparisons. Early comparisons divided the world into two broad dichotomous systems: the Anglo-American corporate governance system, which is characterized by short-term equity finance, dispersed ownership, strong shareholder rights, active markets for capital control, and flexible labour markets; and the Continental European corporate governance system, which is characterized by long-term debt financing, concentrated block holder ownership, weak shareholder rights, inactive markets for capital control and rigid labour markets (Becht et al & Roell, 1999; Hall & Soskice, 2001; La Porta, Lopez-de-Silanes, Shleifer, & Vishny, 1998; Shleifer & Vishny, 1997) 

Corporate governance in today’s business setting cannot be ignored. Several businesses may focus on self-governing boards. However, some have adopted different methods of governance. E.g.  Terms of office or annual elections. It can be said the no two organizations are the same. Similarly, corporate governance policies may vary within several organizations. Corporate governance influences many facets of a business, these range from communication, leadership and strategic decisions. However, corporate governance mainly encompasses a board of directors and how they govern the business.

 

Corporate Governance

It has been stated that Corporate governance is influenced by multiple, functionally interrelated sets of institutions. The resulting clusters or configurations of institutions are more complex than simple bipolar models of corporate governance such as shareholder versus stakeholder, market versus bank, or outsider versus insider (Aguilera & Jackson, 2003). 

Additionally, it is noted that Corporate Governance refers to the way in which companies are governed and to what purpose. It identifies who has power and accountability, and who makes decisions. It is, in essence, a toolkit that enables management and the board to deal more effectively with the challenges of running a company. Corporate governance ensures that businesses have appropriate decision-making processes and controls in place so that the interests of all stakeholders (shareholders, employees, suppliers, customers and the community) are balanced. TCGI (2020) 

Furthermore, Governance at a corporate level includes the processes through which a company’s objectives are set and pursued in the context of the social, regulatory and market environment. It is concerned with practices and procedures for trying to make sure that a company is run in such a way that it achieves its objectives, while ensuring that stakeholders can have confidence that their trust in that company is well founded. TCGI (2020) 

It has been discussed that there are four Ps of Corporate Governance. These are considered as guiding principles of governance how it functions. The four Ps of Corporate governance refer to all people involved. People who perform several functions to achieve required outcomes. The second P refers to purpose which simply means governance occurs for a purpose. The third P refers to the process by which the organization accomplishes its purpose. This purpose is established by examining the organization’s performance. The final P refers to Performance. Examining performance is key within an organization. The capacity to analyse information and applying the results to the business is a key purpose of the governance. 

It has been stated that Good Corporate Governance is an expression of quality management to maintain checks and balances within the organisation, to increase transparency and preventing corporate abuse and misconduct. Good Corporate Governance also understands the importance of investors of long-term, persistent operating performance and tends to be inherently performance driven. Dasaraju et al (2011)

  

Learnings

Corporate governance can be roughly classed as the study of authority within organizations and the impact over decision making in an organization. It can be concluded that Corporate governance should integrate several elements. 

A main feature of Corporate Governance is corporate compliance. Organizations should adhere to required regulations. These regulations mould the structure of an Organization’s Corporate Governance procedures before it commences operations. Corporate Governance  assists organizations in avoiding compromise with regards to integrity and meeting the welfares of stakeholders. 

It is agreed that the first impulse for sustainable corporate strategies stems from the board of directors. The presence of a leader who raises followers’ commitment to achieve the organizational mission and objectives. Winston (2006) This is a prerequisite to transfer the principles of sustainability into the goals and behaviors of the whole organization. This determines a governance approach directed towards the growth of sustainable value over time. Eccles (2012)

 

Corporate Governance during the Covid 19 Pandemic

It is said that the COVID-19 pandemic is not the first crisis that corporate directors have faced, but in terms of its complexity, scale, economic impact and continued uncertainty, it’s unprecedented. Between shattered supply chains and the volatile stock market, organizations have looked to corporate leaders for effective responses and solutions. Schindlinger (2020) 

However, a Harvard business review article has stated that since the onset of Covid-19, corporate boards have faced a string of difficult decisions. Take the question of dividend payments: Ordinarily, the decision would be a relatively straightforward matter of applying a stated dividend policy, following past practice, or choosing an amount based on shareholder expectations and the company’s earnings for the period. But this year, with Covid-19 decimating the economy and looming uncertainty about the depth and duration of the crisis, the decision became a complex matter of weighing and balancing multiple factors, at least for companies flush enough to consider it at all. Paine (2020) 

Additionally, it has been stated that the pandemic and resulting shutdowns have made the complexity and interconnectedness of the global economy more obvious and tangible than ever before. For example, prior to the pandemic, roughly half of the world’s supply of N95 facial masks – life-saving equipment required by every health care worker fighting the virus – was being produced in China, which came to a halt as the country had to shut down factories to help slow the spread of the virus. The resulting shortage prompted companies in industries as varied as automotive and pet suppliers to begin producing masks. In our interviews, directors reflected on how this experience has demonstrated that there are no truly “local businesses” anymore; every enterprise, regardless of size, has been impacted profoundly by this global event. Schindlinger (2020) 

Furthermore, it is sated by Schindlinger that while the shift was sudden and dramatic, the move toward modern governance, which is hallmarked by agility in corporate leadership, has been gaining momentum over the last decade. Corporate directors leverage a variety of technologies, proactively seek data and insights and have more nimble communication and collaboration practices. Their governance practices and decision-making include a broader and more diverse group of stakeholders, with a more global set of perspectives. So, while this crisis was unprecedented, many of the directors we interviewed found they were at least somewhat prepared to respond to the pandemic and were able to stay nimble and adapt rapidly as the situation evolved. Schindlinger (2020) 

 

Conclusion

The essence of corporate governance comes down to the associations between management and shareholders and auditors all playing their part. Shareholders strive for maximum benefits. They require that management governs and achieves profitability without compensating themselves at the expense of shareholders.

Additionally, auditors ought to be relieved of any unwarranted influence by management. It is empirical that the welfare of all stakeholders is well-balanced. Good corporate governance is intended to bring in the highest return on investments and to preserve the organization’s affairs.

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References

Becht, M., & Roell, A. (1999) Blockholdings in Europe: An international comparison. European Economic Review, 43, pp. 1049–1056

Dasaraju H, Murthy L, Kota S (2011) Corporate Governance Mechanism and Issues In Emerging Economies A Case of India In Global Scenario, IJMBS Vol 1 Issue 3

Eccles, R. Miller, K. & Serafeim, G. (2012) How to become a sustainable company. MIT Sloan Managing. Rev., 53, pp. 43–50 

Hall, P.A., & Soskice, D.W. (2001) ‘Varieties of capitalism: The institutional foundations of comparative advantage’. Oxford: Oxford University Press.

La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R.W. (1998). Law and finance. Journal of Political Economy, 106(6), 1113–1155.

Paine S. L (2020) Covid-19 Is Rewriting the Rules of Corporate Governance

https://hbr.org/2020/10/covid-19-is-rewriting-the-rules-of-corporate-governance

(Accessed: 15 October 2020)

Price, N J (2017) Importance of Corporate Governance in an Organization https://insights.diligent.com/corporate-governance/importance-of-corporate-governance-in-an-organization

(Accessed: 10 October 2020)

Schindlinger, D (2020) How Does Corporate Governance Change in a Crisis https://www.corporatecomplianceinsights.com/corporate-governance-change-crisis/

(Accessed: 10 October 2020)

Shleifer, A., & Vishny, R.W. (1997) ‘A survey of corporate governance’. Journal of Finance, pp. 737–783.

The Chartered Governance Institute (2020)

https://www.icsa.org.uk/about-us/policy/what-is-corporate-governance

(Accessed: 10 October 2020)

Winston, B.E. and Patterson, K. (2006) An Integrative Definition of leadership. Int. J. Leadership Study, pp 6–66.