Corporate governance myths exposed — Part 2

Following my previous article busting the myths that corporate governance is complex and only big companies need corporate governance, it’s now time to unravel two more common corporate governance myths:

• that there is no clear definition of corporate governance
• the question of whether international corporate governance exists.

Myth 3: There is no clear definition of corporate governance

Although there has been plenty of academic and practitioner focus on the meanings of governance and corporate governance, there are generally some accepted industry-wide (and academic) definitions of corporate governance.

Despite the fact that governance and corporate governance is hundreds of years old, the reality is that for the last 30 years, there has been research on corporate governance which has led to the production of accepted definitions.

Not every definition is the same, and there is sufficient consistency to say there is a clear definition of corporate governance. Corporate governance is not a new concept. Time and again, bad governance seemed to be complicit in corporate failures, creating much fanfare and misconception about this issue. Along with the emergence of competing theories, various disciplines have all together saturated and obscured the debate as to the real meaning of governance.

So what are the definitions of corporate governance?

In 1992, the famous Cadbury Report took a simple approach, proposing that corporate governance is ‘the system by which companies are directed and controlled.’

A broader definition is found in Cochran and Wartick’s 1988 publication Corporate Governance: A Review of the Literature, which suggest that corporate governance is ‘an umbrella term that includes specific issues arising from interactions amount senior management, shareholders, boards of directors and other corporate stakeholders.’

The ASX Corporate Governance Council definition is:

Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved.

So how can you bust this myth in your organisation?

Tip #1: Find a definition that applies to your organisation. There are a variety of definitions for ASX listed companies to not-for-profit organisations – find the right definition for your organisation

Tip #2: Aim for a clear and simple definition. The easier a definition can be understood, the more likely it will be applied within an organisation.

Myth 4: Does international corporate governance exist?

If it is accepted that corporate governance is not complex (see Myth #1) and that there are clear definitions of corporate governance (as outlined in Myth #3) then what do we mean by international corporate governance?

What is international corporate governance?

There is no formal definition. However, as corporations around the world have grown, many operate at a size, complexity and with an impact as if they were sovereign states (the same as a country).

This has meant that the corporation must comply with laws and regulation in many languages, countries, currencies, and other controls. It is easy to imagine a UK incorporated company that is listed on the New York Stock Exchange and securities exchange. They operate with a Brazilian-based board of directors, that manufacturers product in China, through a joint venture, but also import components from its German subsidiary. The company ends up with a consumer who resides in Australia, which opens it up to many legal challenges.

Different countries have different legal jurisdictions and thus different systems of law. Therefore, countries under the common law system (such as Australia, UK, USA, New Zealand) are very different to the European Civil Code system of law countries (such as France, Germany, Russia, and China).

Logically, different countries will adopt different approaches to corporate governance. If you are mostly a domestic organisation, this is not an issue, but if you are a global company, your governance structures must comply with all the laws of the country you operate within.

Which governance jurisdiction/s should I adhere to?

Tip #1: Determine which jurisdiction for governance. It is important to distinguish if you are within one legal jurisdiction for governance or whether you cover many jurisdictions.

Tip #2: If domestic stay domestic. If you operate solely within Australia, you would adopt an Australian approach to corporate governance

Tip #3: If international, select a governance structure. It is common to adopt the jurisdiction of governance where the head-office is based, or the location of the stock exchange where your company is listed, but you must still comply with your own local laws and governance principles.

About the author:

Professor Michael Adams FGIA(Life) FCG is an internationally recognised specialist in corporate law, governance, securities markets regulation, and legal education (especially e-learning). Michael has been writing, teaching and regularly presenting on all these topics for over 20 years. He is a Fellow of the Australian College of Educators (FACE), as well as the Australian Academy of Law (FAAL), and is also a Fellow of the Governance Institute of Australia. Professor Adams is also a brand ambassador for Governance Institute.