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Corporate governance

I recently attended an annual awards presentation for the best published governance prose. It was refreshing to hear different views and it got me thinking why some firms struggle to go beyond conceptual high level discussions about business ethics. Investopedia defines corporate governance as "the system of rules, practices and processes by which a firm is directed and controlled. Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. Since corporate governance also provides the framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure." I find this as the most comprehensive definition since it captures "action" components that goes beyond the conceptual nature of accountability, fairness, transparency, assurance and leadership.

This definition suggests that lots of efforts are required to make corporate governance effective, it has to take on an operational nature. Therefore many companies struggle beyond conceptual discussions, it is easier and cheaper just to talk about it and leave it to the staff, audit, compliance and external stakeholders just to go about the business of business. In addition it takes independent high skill and deep thinking to build a corporate governance framework. This skill is in short supply and sometimes shunned since those in the power seats want to maintain the status quo. With the many corporate scandals how often have you asked yourself where was the board, where were the auditors, etc.

Also the employer/employee relationship often juxtaposes the duties of the employee with that of the ideal corporate citizen. With staffer's performance and promotion only linked to accounting return often unbalances the interests of other stakeholders. Recall employment means that the employee offers his/her labour to be directed by the employer in exchange for compensation. In the extreme, impressionable staff are misled by senior executives in their pursuit of further bonuses and stock options, this often leads to a toxic workplace . I have seen this (with a few personal anecdotes too) in banking and asset management where accounting standards, due diligence and client rights were liberally interpreted to suit the manager and the firm. The Code of Ethics and Standards of Professional Conduct published by the CFA Institute has guided and conveyed a sense of discretion to me. I use the code and take the practice papers annually to keep abreast.

I like the operational approach to corporate governance. However you need the right people to drive it to prevent it from descending into a bureaucratic tangle of systems on systems, this will just take the firm backwards to layers of managers of managers. In my view the board should empower the compliance unit, HR, internal audit and super senior staff to team up on occasion to conduct corporate governance seminars and training regularly. Unfortunately it has to be conducted by internal staff since it just demonstrates "leading by doing". Yes there are software solutions available but a pure rules based system may extend the grey areas, the goal is to minimise grey areas. For example a big grey area that everyone knows and its rather innocent, is it okay to have a few drinks with clients or colleagues occasionally during work hours?

Most industries have a best practice global body that provides industry specific corporate governance guidelines. In my industry, financial markets, I rely on the BIS, IOSCO, IMF and CFA to guide my conduct. For individuals who want to get an alternative perspective (other than the employer's) on corporate governance they should follow their respective global bodies' publications. The awareness of best practice can only make for a better corporate citizen.

Well that is just my small addition to the conversation.

Happy trading! Markets are volatile right now but I am positioning for a Santa Claus rally.

*I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company/government mentioned in this article. This does not constitute investment or management advice.


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