corporate governance - introduction

Corporate Governance is an increasingly significant aspect of business and organizational

management, extending to international politics and trade laws; and to globalized economics,
corporations and organizations, and markets.
Theories, standards and regulations relating to Corporate Governance began to develop properly
in the 1990s, so it is a relatively recent field of economic and management practice.
From a simple and minimal point of view:

 Corporate Governance is a specialized mechanism for regulating risk in corporate

activities, thereby (hopefully) averting corporate disasters, scandals, and consequential
damage or losses to investors, staff, society and the wider world.

More broadly:

 Corporate Governance is a very sophisticated and flexible concept which addresses

fundamental organizational purposes (for every type of organization - from a tiny corner-
shop, to the largest multinational conglomerate) together with the most serious
challenges arising from the globalization of corporate and organizational structures and
the markets they serve.

Corporate Governance has also become an instrument for understanding, questioning, and
refining some fundamental economic systems and philosophies, notably: capitalism, free
market/market forces economics, business ethics, corporate leadership, the Psychological
Contract, political economics, and globalization itself.
The emergence of Nudge theory in the 2000s - a powerful system for change/societal-
management increasingly used by governments to understand and alter group
behaviour/behavior - reinforces the principle that governance must be driven by needs of the
people being governed, not by the governing authority.
With special regard to globalization, the US economist visionary and author, Joseph Stiglitz,
winner of the Nobel Prize in Economics, noted the growing significance of Corporate Governance
relating to globalization, with these remarks in 2006: "...Corporate governance can recognize the
rights not only of shareholders, but of others who are touched by the actions of corporations... An
engaged and educated citizenry can understand how to make globalization work... and can
demand that their political leaders shape globalization accordingly." (Joseph Stiglitz, 2006.)
In recent and modern use the term Corporate Governance essentially refers to the actions of
directors who run publicly quoted companies.
Increasingly the principles of Corporate Governance also apply to public services
organizations, and can be adapted for small businesses and cooperatives and social
enterprises too.
In fact Corporate Governance is now a very flexible concept by which to examine, develop, and
establish the fundamental aims and rules for any sort of organization, and especially
organizations which serve multiple purposes (e.g., for owners, staff, customers, etc), as most do.
The concept of Corporate Governance and the term itself became prominent in the late 1900s
and early 2000s, in response to several corporate scandals and disasters of that period, which
did great harm to:

 company shareholders and stakeholders, and/or

 staff and pension-holders, and/or
 nations and economies, and/or
  the environment, and/or
 sections of society, and by definition also to
 the companies themselves (thereby reducing values for shareholders).

Many of these disasters and scandals involved criminal negligence or fraud by the directors
responsible.
These incidents occurred largely because directors and/or senior managers were able to act:

 with too much freedom,

 without reference to an appropriate transparent, firm, formal code of governance, and
 in ways that were hidden from scrutiny, especially from shareholders.

major factors driving need for improved corporate

governance
Since the late 1900s several factors enabled a marked increase in the frequency and scale of
corporate disasters and scandals. These factors include notably:

 Globalization - markets are global, and connected as never before; natural boundaries
and limits that existed before globalization no longer exist, so problems can reach and
spread far wider than in earlier times.
 Technology - the vast modern scale of technologies, and the sheer size of things that
organizations now create and process, in every sector, increases the scale of potential
damage of corporate wrong-doing. For example consider the enormous scale of
manufacturing, production, commodities, machinery, transport, construction, IT, the web,
etc., compared with a generation ago. The maxim: 'The bigger they are, the harder they
fall' is very apt. When something goes wrong in modern times, the impacts are potentially
bigger than ever in history.
 Population - volumes and densities of populations everywhere have increased
dramatically since the late 1900s. Where corporate scandals and disasters happen, the
potential to affect vast numbers of people has never been greater.
 Free Market - since the late 1900s the fondness of (mainly 'western') governments for
'free market' capitalist economics (basically the view that market forces should be kept
free from interference) has encouraged the development of unregulated major risk-taking
in organizational governance - and this style of running organizations has now become
deeply embedded into corporate attitudes. Most corporations are run in an extremely
selfish and greedy manner. Short-term gain, and the enrichment of directors and senior
staff continues to drive corporate strategy and decision-making everywhere. Combined
with the other factors, this creates a potent recipe for disasters of all kinds.

Given that these factors are likely to persist in offering progressively greater potential for the
negative impact of corporate activity on societies, economies, environment, etc., sensible people
are increasingly calling for substantially improved visibility and controls in Corporate Governance.

examples of corporate scandals and disasters

Here below are some notable examples of corporate scandals and disasters in the late 1900s
and early 2000s, which helped raise concern and pressure for improved Corporate Governance.
These examples contain various degrees of willful and reckless disregard for the proper
governance of a corporation. Collectively these events listed, and a few others besides, have
dramatically increased awareness and pressure surrounding Corporate Governance among the
general public, media, governments and regulatory authorities.
 Polly Peck Collapse - Polly Peck International grew rapidly in the 1980s from a small
British textiles company to a vast FTSE 100 conglomerate corporation, but imploded in
1990 with debts of £1.3bn amid claims of gross mismanagement and fraud. The founding
CEO Asil Nadir fled from prosecution to N Cyprus in 1993. Polly Peck was one of a few
scandals which prompted the 1991/2 Cadbury Committee and Code on Corporate
Governance, internationally the first of its type. Nadir returned to the UK to face the court
and was found guilty of £multi-million theft and sentenced to 10 years imprisonment in
2012.
 BCCI collapse - The Luxembourg-registered Bank of Credit and Commerce International
(BCCI) was founded in 1972 by Agha Hasan Abedi, with HQs in Karachi and London. By
1982 BCCI operated in 78 countries, with over 400 branches, and assets exceeding
$20bn, making it the 7th largest private bank in the world. Following regulatory concerns
and investigations BCCI was found to be established fraudulently, trading illegally on a
vast scale, including money-laundering, and in 1991 regulators raided and shut its
operations in seven countries. Legal actions involving $100s of millions persisted for
more than ten years including substantial damages settlements from BCCI auditors Price
Waterhouse and Ernst & Young. The BCCI scandal was a major prompt, along with Polly
Peck's collapse, for the 19991/2 UK Cadbury Committee on Corporate Governance.
 Guinness Scandal - A share-price manipulation fraud of the late 1980s, related to the
acquisition by Guinness plc of United Distillers plc drinks company, in which The
Guinness plc CEO Ernest Saunders and three others were convicted and (three of the
four) imprisoned for secretly and illegally inflating the value of Guinness shares to help
secure the acquisition. Amusingly, Saunders later gained early release from prison due to
contracting the incurable Alzheimer's disease, from which later he made a miraculous full
recovery. Guinness later changed its plc name to Diageo.
 Enron - The US energy company became in 2001 the world's biggest bankruptcy
(supposed assets of $63bn), due to the fraudulent accounting of chairman and a few
directors, and negligence of auditors Arthur Andersen (then one of the world's major five
accounting corporations), which also folded as a consequence of the scandal.
 BP Deepwater Horizon Disaster - This was the biggest-in-history 87-day 5million-barrel
oil spill following the Deepwater Horizon oil rig explosion, sinking, and worker fatalities, in
the Mexican Gulf in 2010. BP was convicted of 11 counts of manslaughter and other
crimes related to the disaster, including lying to US Congress. Fines exceeding $4bn
were continuing to increase at 2013, as were various criminal/civil damages and
compensation payments exceeding $40bn. Corporate failures in the disaster itself and
the aftermath were utterly catastrophic; for the local eco-system and economy, and for
BP, especially in the US.
 Mirror Group Pensions Scandal - Founder Robert Maxwell's death from drowning in
1991 exposed his theft of £100s of millions from his corporation's pension funds, leading
to the bankruptcy of the UK Mirror Group company and substantially reduced pensions
for thousands of workers even after compensation from public funds. This is quite aside
from the damage to shareholders arising from the corporate bankruptcy.
 Exxon Valdez Disaster - This was a huge oil spill off Alaska when the Exxon Valdez
tanker ran aground in 1989, resulting in protracted litigation and fines of $hundreds of
millions for ExxonMobil.
 Bhopal Disaster - A gas leak at US Union Carbide's joint-venture Indian plant in 1984
killed thousands of people immediately, and many thousands more subsequently,
producing fines of $hundreds of millions for the plant's US and Indian owners.
 Barings Bank Collapse - the oldest UK merchant bank collapsed in 1995 after its
unchecked maverick trader Nick Leeson lost £827m in progressively disastrous secret
trading at Baring's Singapore office. Leeson went to jail in Singapore. The bank's
directors escaped despite official inquiry condemnation for complete lack of the most
basic levels of governance.
 News International/News of the World phone hacking scandal - Investigations in
2005-12 found that Newspaper executives and other staff of the Murdoch news
organization had sanctioned/encouraged/conducted phone hacking of public figures and
private people in the news, including victims of serious crime and their relatives. The 168
 year-old News of the World newspaper was closed by its owners because of the
advertiser/public backlash, and at 2013 legal action persisted against executives and
associates for serious crimes related to the scandal including bribery of police.
 Global Financial Crisis of 2007-8 and resulting Global Recession of 2007-13 (and
for some nations far beyond this) - Corporate recklessless and negligence among
some of the world's biggest banks caused the worst global recession for decades,
including the effective bankruptcies of entire nations, such as Iceland, Ireland, Spain,
Cyprus, Greece and the UK. At 2013 no criminal charges had been brought against any
bank directors, although at least one knighthood was voluntarily forfeited, and a tiny
weeny fraction of a single percent of executive personal bonus payments and share
options rewards was returned. At 2013 much of the world was still awaiting full recovery
from the global financial collapse and the resulting full-blown economic depression, and
governments and regulatory authorities were continuing to debate how it all went wrong,
and how best to ensure that it could not happen again. Almost without exception the
scores of culpable bank directors continue to live in great luxury, apparently completely
free from risk of prosecution or any sort of retribution, holding on to their illicitly gained
fortunes and pensions, and many actually still working as corporate directors and
consultants being paid more in a year than most people earn in a lifetime. If ever there
were a warning that no amount of Corporate Governance legislation will ever prevent
gross stupidity and rampant greed among directors of banks, this catastrophic series of
corporate disasters is almost certainly such a warning.

corporate governance relates to..

Corporate Governance relates to, and may be informed and guided by, many other areas of
management and business theory, for example:

 Leadership and Leadership Theories - how organizations should be lead.

 Ethical management and leadership - including corporate social responsibility (CSR),
social responsibility, the 'triple bottom line'
 Sustainability and the environment and climate change
 The Psychological Contract - mutual needs, obligations and expectations between
employer and employees.

corporate governance definitions

The term 'Corporate Governance' is defined in different ways, so care is required when
interpreting its precise meaning in different situations.
To begin with, literally, the term 'corporate governance' is by implication self-defining, on the
basis that:
Corporate means: 'relating to a large company or group' (Oxford English Dictionary). The word
came into English in the late 15th century, from Latin, corporatus and corporare, 'form into a
body', from corpor and corpus, 'body', which is the same origin as corpse, (dead body), and the
French-English word corps, (a military subdivision, or other group of select people, such as a
ballet troop).
Governance means: 'the action or manner of governing a state or organization, etc.' More
helpfully, the root word governmeans: 'conduct the policy, actions and affairs of (a state,
organization, or people) with authority. The word came into English in the late 1200s, via Latin
and French, ultimately from Greek kybernan, to steer or pilot a ship, and to direct something.
Therefore literally and essentially the definition of Corporate Governance is the directing of a
large organization.
And in more interesting detail:
In law the word corporate refers to (a large company or group) being able to act as a single
entity, and being recognized as such in law, i.e., the company or group stands alone as a
responsible accountable body, quite distinct from the people who work for it, or supply it, or own
it. This is highly significant. This constitutional situation creates enormous potential for problems,
because inherently such an arrangement offers a way for individuals to hide from or avoid
personal responsibility, within a protective cloak of 'the corporation', which in fact can only act
according to decisions/actions/inaction of its leaders and employees, and yet in law is treated as
a responsible accountable entity, as if it were a person. The concept and correct implementation
of Corporate Governance may be seen as addressing this vulnerability.
While the word governance in the context of Corporate Governance basically refers to directing
an organization, this short phrase implies very many component factors. Governance also
includes and extends to:

 policies and protocols

 leadership style and methods
 management structures and practices
 accounting and taxation
 organizational culture and habits
 systems and administration
 strategies and tactics, marketing and advertising
 buying, supply chain management
 manufacturing and distribution
 organizational purposes, aims and priorities - and how these are balanced against by-
products, effects, consequences
 the psychological contract
 decision-making and decision-making processes
 quality, safety, sustainability
 staff development, well-being and health
 equality, discrimination, human rights
 risk assessment of activities and decisions
 communications and public relations
 ITC - information and communications technology
 technology and innovation
 social and environmental responsibility
 finance, profit, remuneration
 shareholder relations and returns
 legality, probity, ethics and morality

Each of these factors has the potential to go badly wrong, so that people or planet or simply the
organization itself suffers in some way. And the larger the organization, then the greater the
potential for disastrous impact.
Here is the definition of Corporate Governance which appears in the 1992 Cadbury
Report, considered the first major official Corporate Governance code:
"1. Corporate governance is the system by which companies are directed and controlled. Boards
of directors are responsible for the governance of their companies. The shareholders' role in
governance is to appoint the directors and the auditors and to satisfy themselves that an
appropriate governance structure is in place. The responsibilities of the board include:

 setting the company's strategic aims,

 providing the leadership to put them into effect,
 supervising the management of the business
 and reporting to shareholders on their stewardship.

The board's actions are subject to laws, regulations and the shareholders in general meeting.
2. Within that overall framework, the specifically financial aspects of corporate governance (i.e.,
Committee's remit) are the way in which boards set financial policy and oversee its
implementation, including the use of financial controls, and the process whereby they report on
the activities and progress of the company to the shareholders.
3. The role of the auditors is to provide the shareholders with an external and objective check on
the directors' financial statements which form the basis of that reporting system. Although the
reports of the directors are addressed to the shareholders, they are important to a wider
audience, not least to employees whose interests boards have a statutory duty to take into
account.
4. The Committee's objective is to help to raise the standards of corporate governance and the
level of confidence in financial reporting and auditing by setting out clearly what it sees as the
respective responsibilities of those involved and what it believes is expected of them."
(N.B. the above numbered points were originally shown as points 2.5 to 2.8 in the Cadbury
report, formally titled Report of The Committee on the Financial Aspects of Corporate
Governance, 1st Dec 1992.)

Other definitions from different times reflect varying interpretations of the Corporate Governance
concept:
The Capstone Encyclopaedia of Business (2003) defines Corporate Governance as follows:
"Corporate Governance is the examination of the control of a company as exercised by its
directors. The directors of public companies are accountable for their actions to the company
shareholders. However, in practice, the power of the shareholders to affect the behaviour of the
directors is limited and rarely exercised. As a result, unlike a government that is restrained from
certain action by the people it governs and the institutions of government, directors are relatively
unfettered, with considerable power to act however they wish..."
The Oxford (University Press) Business English Dictionary (2005) defines Corporate Governance
as: "(Corporate Governance is) ...the way in which directors and managers control a company
and make decisions, especially decisions that have an important effect of shareholders."
Interestingly the Shorter Oxford English Dictionary (1922) does not list 'Corporate Governance'
but offers a definition of 'Governance' as follows: "Method of management, system of
regulations..." and fascinatingly says this this meaning is first recorded in English in 1660.
Now consider the Wikipedia definition of Corporate Governance (2013). Notice that it is much
broader than typical earlier definitions, particularly in its implications beyond responsibilities to
shareholders: "Corporate Governance refers to the system by which corporations are directed
and controlled. The governance structure specifies the distribution of rights and responsibilities
among different participants in the corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders) and specifies the rules and
procedures for making decisions in corporate affairs. Governance provides the structure through
which corporations set and pursue their objectives, while reflecting the context of the social,
regulatory and market environment. Governance is a mechanism for monitoring the actions,
policies and decisions of corporations. Governance involves the alignment of interests among the
stakeholders..." (Wikipedia 2013)

corporate governance history - codes, guidance,

regulations
This history of Corporate Governance contains a very strong UK bias because the UK has to a
great extent pioneered the development of Corporate Governance codes and standards.
This in turn is probably mostly because the UK has hosted some of the greatest corporate
disasters of all time.
The emergence and development of Corporate Governance as a concept and regulatory
consideration has largely been driven by events. Corporations have never, as a general rule,
been focused proactively on their own proper governance with the same enthusiasm as for
example they have tended to focus proactively on other corporate priorities, such as:

 expansion of market share,

 advertising, marketing and PR,
 cost control,
 and creative accounting and tax avoidance.

As a general rule, corporations, by their nature, tend not to self-regulate. And the more money
that's at stake then the more this tendency applies.
Certain types of corporations, banks for example, have tended to be led by men who in any other
walk of life would be regarded as emotionally-challenged greedy idiots, but because they like
numbers, money, and exploiting people, and crucially because they have a bit missing in their
brain that deals with empathy, ethics, love, compassion, etc., seem the ideal folk to run the
biggest financial institutions in the world. It all makes perfect sense.. who needs empathy or
ethics when you have an army of greedy reckless unprincipled henchmen who can make billions
overnight simply by moving other people's money around, mostly to and from other henchmen of
similarly misguided corporations?
So instead of self-regulating, big corporations, especially banks, have tended to bend rules and
push boundaries of all sorts, in pursuit creative profiteering and grotesque self-enrichment, until
an authority of some sort, often driven by news media, public opinion, and nowadays social
networks, finally attempts to control or prohibit the excessive or negligent activity.
Corporations - to one degree or another - have mostly always been like this. It is the nature of
corporations to focus mainly on improving commercial performance, and to maximize profit, so
naturally these are basic instincts of most entrepreneurs and corporate leaders. Sometimes, it
must be noted, this tendency to take risks produces good outcomes - for example great
technological innovations and inventions, and increased accessibility to life-improving products
and services. Also it can be argued that the world is in general more civilized and comfortable
than it was in the past partly because of corporate adventure and pioneering. Diseases and
illnesses that killed millions can now be treated. Our homes are warm and dry. Food is mostly
plentiful and safe and nutritious. We live longer than ever. We can do more than our ancestors
dared to dream. The skills and decisions of corporate leaders and the corporations they lead,
since the age of industrialization, have helped give people better lives, and it is important to
acknowledge that much of what is done by corporations and their leaderships is positive and on
balance has been good for humankind.
But risk and adventure must be appropriate for the situation. It is daft to experiment with matches
and petrol if you are standing in a big box of gunpowder.
When corporate risk is misdirected, and risks are permitted or ignored on a vast scale,
then there is potential for substantial harm.
The earliest significant government-level consideration of corporate behaviour (US-English
spelling: behavior), in relation to negligence of corporate boards and directors, began in the USA
after the 1929 Wall Street Crash, which prompted the great American and global recession of the
1930s ('The Great Depresssion').
While there was much debate as to the corporate responsibility for such a deep and enduring
social and economic crisis, no specific Corporate Governance legislation resulted.
Legislative reactions to the Wall Street Crash and Great Depression were essentially concerned
with the administration and sale of securities (assets such as money, bonds, stocks and shares,
debt, and financial derivatives), and the measures taken by the Hoover and Roosevelt
governments to push the USA out of depression.
The Securities Act of 1933 centralized and tightened regulation the American securities industry,
while the 1934 Securities Exchange Act created the US Securities and Exchange Commission,
both of which, subject to amendment remained in force, at 2013.
There was no specific legislative attention to Corporate Governance anywhere else in the world,
and the term itself at that time would not have been recognized, other than in a literal ad-hoc
sense.
Thereafter the chaotic industrial and military boom of the 2nd World War (1939-45), and its
challenging aftermath, generated entirely different priorities for governments and authorities.
In the 'developed world' after the wartime efforts and strains of the early 1940s a period of great
austerity and gradual recovery followed. The potential for major corporate disasters - by today's
standards - remained limited.
In the 1960s however, the shape of societies and economies across the world was changing fast
and radically.
Corporations began to organize themselves more globally, enabled by new fundamental drivers
of growth.
These growth drivers can also be regarded as contributory factors in the increasing awareness of
and need for improved Corporate Governance:

drivers and causes of globalization - 1960s to modern

times
 new technologies and technical innovations
 bigger faster transport systems
 better availability of fuel/energy/resources
 population growth and shifting demographics - the beginning of the mass-market
consumer society
 sophisticated marketing systems/methods
 liberation of finance, money supply, relaxed credit controls
 'free market' economic government strategies - the view that market forces must
determine how markets work
 a step-change in female liberation and equality - producing more workers and consumers
 emerging big new international markets
 dramatic improvements in corporate systems/efficiencies
 information/knowledge-management and the internet
 and social networking (an extremely relevant factor in the 2000s)

These drivers of unprecedented growth and globalization enabled and fuelled huge increases in
consumer demand, and an inevitable enthusiastic capability among corporations and nations to
innovate, produce and supply, which was both driving and responding to consumption demands.
There was by the 1970s potential for corporate disasters on a wider and more serious scale than
ever before, and this potential continued to increase in scale and probability.
By the 1980s, globalization and its accompanying circumstances, had enabled several very big
corporate failures which were characterized by unprecedented levels of:

 executive recklessness, fraud, negligence, incompetence, etc.,

 a lack of transparency, combined with deeply hidden conspiracy, and
 immense scale of impact and harm, to investors, economic stability, society, the
environment, etc.
the Cadbury committee and report - 1991/92
The popularly named 'Cadbury Report' of 1992 provided the first substantial formal Corporate
Governance code.
Prompted by several major corporate scandals of the late 1900s involving UK corporations
(notably the collapse of public corporations Coloroll and Polly Peck), the Cadbury Committee
was established in the UK in 1991, and its report was published in December 1992.
The Cadbury committee, report and inferred code were informally named after the committee's
chairman, Sir Adrian Cadbury (b.1929), of the Cadbury's chocolate corporation. Adrian Cadbury,
and the Cadbury's business, founded on Quaker principles, had a long-standing reputation for
ethical and astute Corporate Governance, hence his appointment.
The committee's full name was The Committee on the Financial Aspects of Corporate
Governance. It soon became known as the Cadbury Committee. It was established in May 1991
by the UK's Financial Reporting Council, the London Stock Exchange, and the accountancy
profession.
The committee report gave its reasons for being established as follows:
"The Committee was set up in May 1991 by the Financial Reporting Council, the London Stock
Exchange and the accountancy profession to address the financial aspects of corporate
governance... Its sponsors were concerned at the perceived low level of confidence both in
financial reporting and in the ability of auditors to provide the safeguards which the users of
company reports sought and expected. The underlying factors were seen as:

 the looseness of accounting standards,

 the absence of a clear framework for ensuring that directors kept under review the
controls in their business,
 and competitive pressures both on companies and on auditors which made it difficult for
auditors to stand up to demanding boards.

These concerns about the working of the corporate system were heightened by some
unexpected failures of major companies and by criticisms of the lack of effective board
accountability for such matters as directors' pay. Further evidence of the breadth of feeling that
action had to be taken to clarify responsibilities and to raise standards came from a number of
reports on different aspects of corporate governance which had either been published or were in
preparation at that time."
The Mirror Group pensions scandal and the collapse of the the Bank of Credit and Commerce
International (BCCI) - both huge bankruptcies entailing criminal activities of directors - occurred
while the Cadbury committee was in process, and dramatically heightened awareness of and
interest in the Cadbury Committee's findings, together with the Corporate Governance issue as a
whole.
The term 'Corporate Governance' was relatively uncommonly used before the Cadbury
committee, and would not have been widely understood outside of economists and business
specialists. The Cadbury Committee and its report - and the surrounding publicity - effectively
popularized the term and established it as a generally recognized concept among business
people and students, and in mainstream media and among the general public too.

Cadbury report recommendations and corporate governance code

Here are the essential conclusions from the Cadbury report's summary of recommendations.
First are notes for compliance, followed by the Code of Best Practice (the 'Cadbury Code of
Corporate Governance').
While this code has since been updated it remains a highly significant and useful guide to
Corporate Governance principles. The Cadbury code provided the first serious template for all
other international Corporate Governance frameworks, including those which were to follow in
the European Union, the USA and beyond. It can therefore justifiably be described as a truly
substantial landmark in the history of business and economic management.
Compliance with the Code of Best Practice
1. The boards of all listed companies registered in the UK should comply with the Code of Best
Practice (set out on pages 58 to 60 of the report). As many other companies as possible should
aim at meeting its requirements.
2. Listed companies reporting in respect of years ending after 30 June 1993 should make a
statement about their compliance with the Code in the report and accounts and give reasons for
any areas of non-compliance.
3. Companies' statements of compliance should be reviewed by the auditors before publication.
The review should cover only those parts of the compliance statement which relate to provisions
of the Code where compliance can be objectively verified. The Auditing Practices Board should
consider guidance for auditors accordingly.
4. All parties concerned with corporate governance should use their influence to encourage
compliance with the Code. Institutional shareholders in particular, with the backing of the
Institutional Shareholders' Committee, should use their influence as owners to ensure that the
companies in which they have invested comply with the Code.
The report also recommended:

 establishment of a new Committee (1995) to review and extend the reach of the Code
(see next para)
 the UK Companies Act be amended to require shareholders' approval for directors'
service contracts to exceed three years
 tightening of requirements for corporate reporting of interim accounts and balance sheet
information
 tightening of rules to improve the objectivity and independence of the auditing of
company accounts, and the effectiveness of internal reporting systems
 tightening of rules concerning evidencing a business as a 'going concern' (i.e., trading
properly, viably and profitably)
 an obligation for institutional shareholders to disclose their voting policies
 the accountancy profession extends its auditing considerations to other illegal corporate
acts aside from fraud
 statutory protection for auditors when reporting fraud

Additionally the Committee noted points for consideration by its successor Committee:

 the application of the Code to smaller listed companies

 directors' training
 the rules for disclosure of directors' remuneration, and the role which shareholders could
play
 a requirement for inclusion of cash flow information in interim reports
 and the procedures for putting forward resolutions at general meetings
 nature and extent of auditors' liability

summary of the Cadbury code of corporate governance

1. The Board of Directors
1.1 The board should meet regularly, retain full and effective control over the company and
monitor the executive management.
1.2 There should be a clearly accepted division of responsibilities at the head of a company,
which will ensure a balance of power and authority, such that no one individual has unfettered
powers of decision. Where the chairman is also the chief executive, it is essential that there
should be a strong and independent element on the board, with a recognised senior member.
1.3 The board should include non-executive directors of sufficient calibre and number for their
views to carry significant weight in the board's decisions.
1.4 The board should have a formal schedule of matters specifically reserved to it for decision to
ensure that the direction and control of the company is firmly in its hands.
1.5 There should be an agreed procedure for directors in the furtherance of their duties to take
independent professional advice if necessary, at the company's expense.
1.6 All directors should have access to the advice and services of the company secretary, who is
responsible to the board for ensuring that board procedures are followed and that applicable
rules and regulations are complied with. Any question of the removal of the company secretary
should be a matter for the board as a whole.
2. Non-Executive Directors
2.1 Non-executive directors should bring an independent judgement to bear on issues of
strategy, performance, resources, including key appointments, and standards of conduct.
2.2 The majority should be independent of management and free from any business or other
relationship which could materially interfere with the exercise of their independent judgement,
apart from their fees and shareholding. Their fees should reflect the time which they commit to
the company.
2.3 Non-executive directors should be appointed for specified terms and reappointment should
not be automatic.
2.4 Non-executive directors should be selected through a formal process and both this process
and their appointment should be a matter for the board as a whole.
3. Executive Directors
3.1 Directors' service contracts should not exceed three years without shareholders' approval.
3.2 There should be full and clear disclosure of directors' total emoluments and those of the
chairman and highest-paid UK director, including pension contributions and stock options.
Separate figures should be given for salary and performance-related elements and the basis on
which performance is measured should be explained.
3.3 Executive directors' pay should be subject to the recommendations of a remuneration
committee made up wholly or mainly of non-executive directors.
4. Reporting and Controls
4.1 It is the board's duty to present a balanced and understandable assessment of the
company's position.
4.2 The board should ensure that an objective and professional relationship is maintained with
the auditors.
4.3 The board should establish an audit committee of at least three non-executive directors with
written terms of reference which deal clearly with its authority and duties.
4.4 The directors should explain their responsibility for preparing the accounts next to a
statement by the auditors about their reporting responsibilities.
4.5 The directors should report on the effectiveness of the company's system of internal control.
4.6 The directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary.
(Extracted and summarised from the Report of The Committee on the Financial Aspects of
Corporate Governance, ['The Cadbury Report'], Dec 1992.)
Further clear evidence of the huge significance of the Cadbury Report appeared in the 1998 UK
Hampel Report (Committee on Corporate Governance, 1998), which stated in its opening
section, point 1.5, "The Cadbury Committee - a private sector initiative - was a landmark in
thinking on corporate governance. Cadbury's recommendations were publicly endorsed in the
UK and incorporated in the [UK Stock Exchange] Listing Rules. The report also struck a chord in
many overseas countries; it has provided a yardstick against which standards of corporate
governance in other markets are being measured."
The Cadbury Report was followed by the Greenbury Report in 1995, sponsored by the UK
Confederation of British Industry, ostensibly to examine and make recommendations about the
remuneration of directors of UK plc. Titled 'Directors' Remuneration - Report of a Study Group
chaired by Sir Richard Greenbury' it was chaired by Richard Greenbury, chairman of Marks and
Spencer. Its main conclusions and recommendations basically asserted that directors'
remuneration arrangements (including salary, bonuses, pensions, and stock options) were
inadequately transparent, arbitrarily determined, often disproportionately generous, and should in
future be made properly and transparently linked to performance.
The recommended follow-up Committee to the Cadbury Report was the 'Hampel' Committee on
Corporate Governance, (chaired by Ronnie Hampel, chairman of ICI). Its report was published in
1998.
The Hampel Committee and report was sponsored by the original Cadbury sponsors, who were
joined by the UK Confederation of British Industry, sponsors of the Greenbury report on director's
remuneration.
The Hampel Committee and Report effectively reviewed the effects of, and refined and
combined, the Cadbury and Greenbury codes, both of which were strongly endorsed.
During the early 2000s the role of institutional investors (for example big pension funds) became
increasingly acknowledged as a major issue in Corporate Governance, and a significant change
in perception happened, which was later to be reflected in a dedicated separate code for the
conduct and responsibilities of these vast and highly influential shareholders. The change
effectively shifted part of the responsibility for Corporate Governance onto major institutional
shareholders, in recognition of, historically, a degree of apathy and tolerance on their part.
Regulators developed the view that if large institutional investors failed to scrutinize and apply
high standards to the conduct of corporate directors, then the investors were also at fault.
Despite these new codes and increased regulatory pressures, major corporate negligence
persisted, not least in the collapse of the global financial system in 2007/8, caused and illustrated
by the failures of several banks in 2007/8, starting with the recklessly over-leveraged Northern
Rock bank in the UK, followed by similarly over-exposed US banks Lehman Brothers, Fannie
Mae, Freddie Mac, Merrill Lynch, Citigroup, AIG and a few others. Many bigger banks, in the UK
notably, had to be saved by state nationalization, i.e., the taxpayer, causing vast national
financial deficit problems and economic austerity measures enduring long into the 21st century.
Following the global financial crisis of 2007/08, and especially the disastrous collapse of the UK
Northern Rock bank early in the crisis, the UK Walker Review/Report was commissioned in
February 2009 (by Prime Minister Gordon Brown) to examine board practices at UK banks and
other financial institutions. The review chiefly addressed the financial vulnerability and risky
behaviour of financial institutions, and concluded, (very basically) that:

 (unsurprisingly) Corporate Governance was inadequately developed and applied in many

banks,
 banking failures were due to individual recklessness rather than systemic problems,
 promotion of best practice would be a better remedy than increased regulation.
That such a crisis could develop, and that such a report could be required, is a telling comment
on how poorly certain very large corporations had actually adopted any sort of Corporate
Governance code or the recommendations of Cadbury and subsequent similar committees.
It is tempting to wonder why no official Corporate Governance committee has yet dared suggest
that there might be something wrong in the way that men of such genuinely limited sensitivity and
scruples could so easily climb to and remain at the top of such vast and important corporations.
Corporate Governance will surely fail while it ignores the need for corporate leaders to have
morality, humanity, and empathy for other people.
Whatever, corporate disasters continued to occur in the 21st century.
UK corporations had at this stage a long way to go in meeting Cadbury's 1992 standards, and
official surveys indicated substantial non-compliance among major UK listed corporations during
the early 2000s. Similar problems persisted in the US and elsewhere in the world, although
arguably not to the same extent as in the UK and US, whose financial corporations had for
decades been so dominant and powerful.
These failings were attitudinal, not systemic or procedural. Corporate Governance was
continuing to fail because corporate leaders continued wilfully to ignore it. You are free to
suggest your own explanations; I can best suggest that the wrong people remained in the top
jobs. Corporate bosses could make tons of money, but they could not be trusted to make
responsible decisions.
In this respect, many corporate leaders - again especially in the banking sector - were simply not
properly qualified to hold their positions. Moreover the corporations had grown so vast that no-
one in a regulatory authority anywhere seemed qualified to specify (let alone assess) what the
qualifications of a CEO of a vast multinational bank or oil corporation should be.
In 2010 all the previous UK Corporate Governance codes, plus a few other related interim official
committee reviews and reports concerning Corporate Governance, were combined into what is
known as the UK Corporate Governance Code (also called 'The Combined Code').

institutional investors - corporate governance

responsibilities
In the UK, which continued to pioneer Corporate Governance legislation and code-making (not
least because so many of its corporations were continuing to demonstrate a serious need for
improvement) responsibilities of institutional investors towards Corporate Governance became
subject to a separate code. This was called the UK Stewardship Code, introduced by the UK
Financial Reporting Council in 2010.
The Stewardship Code aimed to offer principles and recommendations to institutional investors
holding voting rights in UK companies. The main purpose of the UK Stewardship Code was to
improve the awareness of, and engagement in, Corporate Governance among institutional
investors (the managers of other people's money, via pension funds and other investment
mechanisms, etc) - specifically according to the needs of their own shareholders/customers.
Historically institutional shareholders had not exhibited very strong focus on these
responsibilities, and given their potentially great power, this was seen as a major opportunity to
improve financial responsibility in the corporate sector. Here are the main obligations of
institutional investors asserted by the Stewardship Code:

 transparent effective policy for stewardship

 transparent effective policy for managing conflicts of interest in stewardship
 adequate monitoring of companies in which investments are held
 system for escalating activity to protect/enhance shareholder value
 act collectively with other investors as required
 transparent effective policy on voting activity
  report regularly on stewardship and voting
 legal duty to report non-compliance in any of these obligations

The Stewardship Code built on and extended the UK's position as a pioneer of Corporate
Governance legislation, regulation and guidance.

QCA guidelines for corporate governance for small

public companies
A significant example of Corporate Governance regulatory guidance (not law), developed from
previous statute and official recommendations, was produced in 2010 in the form of the QCA
Guidelines (the UK Quoted Companies Alliance guide to Corporate Governance for small
publicly quoted companies).
The QCA represents the interests of the UK's small quoted companies - which in the UK (at
2013) equate to 85% of all quoted companies.
The key points of the QCA Corporate Governance Guide are extracted (2013) as follows:

QCA guide to corporate governance (UK Quoted Companies Alliance)

The UK Quoted Companies Alliance produced a guide to Corporate Governance for small
publicly quoted companies, first published 2010, revised 2013.
"...These 12 guidelines endorse the 'comply or explain' approach and represent minimum best
practice for smaller quoted companies. Boards should therefore consider each one carefully, and
provide a reasoned explanation for any deviations.

1. Structure and process. A company should put in place the most appropriate
governance methods, based on its corporate culture, size and business complexity.
There should be clarity on how it intends to fulfil its objectives, and, as the company
evolves, so should its governance.
2. Responsibility and accountability. It should be clear where responsibility lies for the
management of the company and for the achievement of key tasks. The board has a
collective responsibility for the long-term success of the company, and the roles of the
chairman and the chief executive should not be exercised by the same individual.
3. Board balance and size. The board must not be so large as to prevent efficient
operation. A company should have at least two independent non-executive directors (one
of whom may be the chairman, provided he or she was deemed independent at the time
of appointment) and the board should not be dominated by one person or a group of
people.
4. Board skills and capabilities. The board must have an appropriate balance of
functional and sector skills and experience in order to make the key decisions expected
of it and to plan for the future. The board should be supported by committees (audit,
remuneration and nomination) that have the necessary character, skills and knowledge to
discharge their duties and responsibilities effectively 2. Corporate governance and
smaller businesses Tim Ward, the Quoted Companies Alliance Introduction Page 12
Corporate governance and smaller businesses.
5. Performance and development. The board should periodically review its performance,
its committees' performance and that of individual board members. This review should
lead to updates of induction evaluation and succession plans. Ineffective directors (both
executive and non-executive) must be identified and either helped to become effective, or
replaced. The board should ensure that it has the skills and experience it needs for its
present and future business needs. Membership of the board should be periodically
refreshed.
6. Information and support. The whole board, and its committees, should be provided with
the best possible information (accurate, sufficient, timely and clear) so that they can
 constructively challenge recommendations to them before making their decisions. Non-
executive directors should be provided with access to external advice when necessary.
7. Cost-effective and value-added. There will be a cost in achieving efficient and effective
governance, but this should be offset by increases in value. There should be a clear
understanding between boards and shareholders of how this value has been added. This
will normally involve the publication of key performance indicators, which align with
strategy, and feedback through regular meetings between shareholders and directors.
Entrepreneurial management.
8. Vision and strategy. There should be a shared vision of what the company is trying to
achieve and over what period, as well as an understanding of what is required to achieve
it. This vision and direction must be well communicated, both internally and externally
9. Risk management and internal control. The board is responsible for maintaining a
sound system of risk management and internal control. It should define and communicate
the company's risk appetite, and how it manages the key risks, while maintaining an
appropriate balance between risk management and entrepreneurship. Remuneration
policy should help the company to meet its objectives while encouraging behaviour that is
consistent with the agreed risk profile of the company. Delivering growth in shareholder
value over the longer term.
10. Shareholders' needs and objectives. A dialogue should exist between shareholders
and the board so that the board understands shareholders' needs and objectives and
their views on the company's performance. Vested interests should not be able to act in a
manner contrary to the common good of all shareholders.
11. Investor relations and communication. A communication and reporting framework
should exist between the board and all shareholders such that the shareholders' views
are communicated to the board, and shareholders in turn understand the unique
circumstances of, and any constraints on, the company.
12. Stakeholder and social responsibilities. Good governance includes a response to the
demands of corporate social responsibility (CSR). This will require the management of
social and environmental opportunities and risks. A proactive CSR policy, as an integral
part of the company's strategy, can help create long-term value and reduce risk for
shareholders and other stakeholders. As well as setting out these guidelines, the QCA
Guidelines include examples of governance structures as well as minimum disclosures.

[The Guide concludes that]: One size does not fit all. While best practice should be a guide to
company governance and organization, it is not always the case that such practice should be
rigidly adhered to. Directors need to do what is right for the company in its own unique
circumstances and maintain an open and full dialogue with the company's shareholders..."
(QCA 2010-13. From the Quoted Companies Alliance guide to Corporate Governance for small
publicly quoted companies.)

corporate governance and non-listed corporations and

smaller businesses
Towards the end of the first decade of the 2000s, standards in Corporate Governance began
progressively to extend to non-listed (privately owned) corporations and smaller businesses,
notably demonstrated in documents such as the 2010 Corporate Governance Guidance and
Principles for Unlisted Companies in Europe, produced by the European Confederation of
Directors' Associations (ecoDa), in association with national member bodies such as the UK
Institute of Directors, which published parallel national versions of the Guide. Based in Brussels,
via its ten member (at 2013) national institutes of directors, ecoDa represents around fifty-five
thousand board members across the EU, collectively having major influence on national
economic policies and laws.
Here are main 'guidance code' points in summary from the 2010 EcoDa Corporate Governance
Guidance and Principles, which via its national membership bodies was published across much
of Europe, including UK, Germany, France, Spain, Finland, Norway, Sweden, Belgium, Slovenia,
Poland, Netherlands, Croatia, and Macedonia.
(N.B. The 14 essential guiding principles of the EU EcoDa version below are identical to the UK's
IOD [Institute of Directors] version except that the first sentence of principle 11 is omitted in the
UK version, presumably because it is irrelevant in a national context ["Board structures vary
according to national regulatory requirements and business norms."])

corporate governance guidance and principles for unlisted companies in

europe - (Ecoda, 2010 - key points are identical to UK IOD version)
"...Unlisted companies account for more than 75% of European GDP...."
"...this ecoDa publication creates a reflection platform that can be used by EU Member States to
develop or update national corporate governance codes for unlisted companies...."
"...Although only applicable on a voluntary basis, the Principles and Guidance included in this
document sets out the best practice governance recommendations of ecoDa for Unlisted
Companies in Europe...."
"...The principles provide a governance roadmap for family owners or founder-entrepreneurs as
they plan the development of their companies over the corporate life cycle. These principles may
be relevant for subsidiary companies and joint ventures as well. Even state-owned companies or
social profit organisations can be inspired by the best practices laid down here...."
Summary of introductory points:
Unlisted companies make a major contribution to economic growth and employment, however
corporate governance needs of unlisted companies have been relatively neglected by
governance experts and policy-makers. Many unlisted enterprises are owned/controlled by
individuals/families, in which good Corporate Governance is more concerned with
processes/attitudes that add business value, build reputation and sustain success, rather than
(as in previous codes for listed corporations) relationships between boards and shareholders and
compliance with formal rules and regulations. Shareholders of unlisted companies do
nevertheless have strong dependence on good Corporate Governance because ownership
stakes are typically more committed and long-term than for equity in listed holdings. External
reputation and stakeholder opinions also increasingly depend on transparent and appropriate
Corporate Governance. Smaller companies particularly must demonstrate that the business is
not merely regarded as the personal property of the (typically founding or principal) owner-boss.

Ecoda's guiding 14 principles of good corporate governance (EU/UK):

(Presented as a "...dynamic phased approach, which takes into account the degree of openness,
size, complexity and level of maturity of individual enterprises. A dynamic approach towards
governance is essential, since governance frameworks must evolve over the life cycle of a
business...")
Phase 1 principles: Corporate governance principles applicable to all unlisted companies
Principle 1: Shareholders should establish an appropriate constitutional and governance
framework for the company.
Principle 2: Every company should strive to establish an effective board, which is collectively
responsible for the long-term success of the company, including the definition of the corporate
strategy. However, an interim step on the road to an effective (and independent) board may be
the creation of an advisory board.
Principle 3: The size and composition of the board should reflect the scale and complexity of the
company's activities.
Principle 4: The board should meet sufficiently regularly to discharge its duties, and be supplied
in a timely manner with appropriate information.
Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives
and non-executives of the quality required to run the company successfully.
Principle 6: The board is responsible for risk oversight and should maintain a sound system of
internal control to safeguard shareholders’ investment and the company’s assets.
Principle 7: There should be a dialogue between the board and the shareholders based on the
mutual understanding of objectives. The board as a whole has responsibility for ensuring that a
satisfactory dialogue with shareholders takes place. The board should not forget that all
shareholders have to be treated equally.
Principle 8: All directors should receive induction on joining the board and should regularly
update and refresh their skills and knowledge.
Principle 9: Family-controlled companies should establish family governance mechanisms that
promote coordination and mutual understanding amongst family members, as well as organise
the relationship between family governance and corporate governance.
Phase 2 principles: Corporate governance principles applicable to large and/or more
complex unlisted companies
Principle 10: There should be a clear division of responsibilities at the head of the company
between the running of the board and the running of the company’s business. No one individual
should have unfettered powers of decision.
Principle 11: Board structures vary according to national regulatory requirements and business
norms. However, all boards should contain directors with a sufficient mix of competencies and
experiences. No single person (or small group of individuals) should dominate the board's
decision-making.
Principle 12: The board should establish appropriate board committees in order to allow a more
effective discharge of its duties.
Principle 13: The board should undertake a periodic appraisal of its own performance and that of
each individual director.
Principle 14: The board should present a balanced and understandable assessment of the
company’s position and prospects for external stakeholders, and establish a suitable programme
of stakeholder engagement
(EcoDa 2010. Summarised from the Corporate Governance Guidance and Principles for Unlisted
Companies in Europe, produced by the European Confederation of Directors' Associations).
N.B. The European Confederation of Directors' Associations website offers helpful links to its
national member bodies' websites and pdf documents of the full national versions of the
Corporate Governance Guidance and Principles for Unlisted Companies.

USA Corporate Governance legislation/regulation -

summary
The Sarbanes-Oxley Act of 2002 is generally considered the first major Corporate Governance
legislative measure in the USA.
Also known as the 'Public Company Accounting Reform and Investor Protection Act' and
'Corporate and Auditing Accountability and Responsibility Act' (respectively in the Senate and
House of Representatives), the legislation is also known informally as Sarbanes-Oxley, Sarbox
or SOX.
The act is named after its instigators: Senator Paul Sarbanes and Representative Michael G
Oxley.
As in the UK, legislative pressures grew from the outcry by media, public and politicians in
response to corporate scandals, specifically and notably the criminal and vast failures in the late
1900s and early 2000s of Enron, Tyco, and WorldCom, which caused losses of $billions for
investors, and severely undermined US economic stability, and in other major markets too.
The consequential Sarbanes-Oxley Act became federal law aimed at establishing standards for
public company boards of directors, management, and the accounting firms responsible for
auditing public corporations.
The act chiefly:

 increased the responsibility of management to certify accuracy of financial information

 increased penalties for corporate fraud
 increased necessary independence of auditors
 increased the formal legal responsibility of corporate boards of directors for the oversight
of their corporations' activities, decision-making and accounting.

Significant US legislation followed in 2010 with the Dodd–Frank Wall Street Reform and
Consumer Protection Act.
It was named after Barney Frank, Chairman of House of Representatives Financial Services
Committee, and Chris Dodd, Chairman of Senate Banking Committee, who had together
overseen the refinement of original 2009 legislation proposed by President Obama.
The legislation was a response to the 2007/8 global financial collapse and resulting recession,
chiefly to address the financial regulatory environment.

EU Corporate Governance legislation/regulation -

summary
The European Union authorities tended through the late 1900s and early 2000s to encourage
member states to develop their own Corporate Governance standards and regulatory
instruments, rather than intervene directly or produce mandatory standards.
Differences in national corporate laws - notably concerning company incorporation and investors
- are naturally obstacles to the development of Europe-wide Corporate Governance rules.
A wide and varied range of laws, codes, and institutional bodies therefore became established
across Europe on an individual nation basis to address Corporate Governance. These
instruments will continue to be refined through the 2010s and 2020s, perhaps longer, until
standards of Corporate Governance, and mechanisms for compliance/monitoring/remedial
action, are established adequately in response to the challenging dynamics of globalized
commerce.
The inability through the 2010s of international governments to counter large-scale corporate tax
avoidance accounting schemes is a prime example of how globalized business is several steps
ahead of globalized regulatory control.
During the early 2000s and 2010s EU commissioners began to produce reports, codes, and
guidelines aimed at influencing and coordinating Corporate Governance regulations and and
instruments at national level.
EU interest and (non-enforceable) guidance during this period focused chiefly on:

 Directors' remuneration
 Non-executive directors selection and appointment
  Auditing
 Corporations' commitment and adherence to transparent published statements of
Corporate Governance

During the early 2010s, in the aftermath of the global financial crisis, especially in response to a
perceived absence of remorse and remedial action among major banks, the European Union
indicated increasing desire to regulate the high risks and 'cap' bonus-driven practices of major
banks.
Progressive EU centralization and enforcement of Corporate Governance standards is virtually
certain to continue.

departmental governance - for example 'ITC

Governance'
'Departmental governance' refers to the responsibility of corporate departments and functional
disciplines to follow the Corporate Governance standards and policies of the corporation
concerned, and increasingly to adhere to discipline-specific standards that may be developed or
defined by professional institutes.
This is an emerging aspect of Corporate Governance, and while the detailing of Corporate
Governance implications/standards at a departmental level is useful, any suggestion that
responsibility for Corporate Governance might devolved or delegated to departmental staff is
very wrong.
So for the avoidance of doubt:
"Departmental governance is the ultimate responsibility of the board of directors, and must not be
delegated to departments or departmental heads."
The above maxim is crucial in understanding, developing and ensuring compliance with 'sub-
category' codes of Corporate Governance.
Departmental governance standards and compliance are implicitly an extension of
Corporate Governance.
So the responsibility for appropriate departmental governance and compliance ultimately
belongs to the board of directors.
Directors who seek to delegate responsibility for Corporate Governance, or any element
of Corporate Governance, are in neglect of their duties.
These principles are ignored by many corporate directors, most obviously when in the aftermath
of a disaster or scandal, there is no acceptance of culpability by the board of directors, and all
blame and punishment is carried by departmental personnel.
During the 1990s and through the early 2000s-2010s, sub-categories of Corporate Governance
began to emerge and be defined.
Most prominently, the area of 'IT governance', or 'ITC governance', was defined and variously
represented by new 'ITC Governance' institutional bodies.
Detailed definitions of IT/ITC Governance vary, and are generally statements of the obvious.
Here is a blended interpretation of the many typical definitions available: "...IT/ITC Governance is
the management of design, processes and activities of Information and Communications
Technology within a corporate or organizational situation, ensuring appropriate safety, security,
and responsibility for investors, users, society, and the wider environment..."
The ITC departmental function arguably warrants dedicated governance attention because the
design and operation of computer systems is highly challenging, is very prone to failure, and
carries risks on a truly vast scale.
The same can be said however of many other departmental functions of a corporation, for
example: HR (Human Resources), manufacturing, environment and sustainability, transport and
distribution, marketing and advertising, research and development, etc.
The following and most significant point about ITC Governance therefore applies to all other sub-
categories of departmental governance:
Departmental governance is the ultimate responsibility of the board of directors, and must
not be delegated to departments or departmental heads.
Neglect of this principle unavoidably creates two very serious Corporate Governance
risks/failings, which are also major failings of leadership:

1. The board of directors must be ultimately responsible for departmental governance

standards and compliance - otherwise standards and compliance will be disconnected
with, and uninformed by, corporate leadership and overall Corporate Governance.
Governance does not work in isolation from corporate leadership.
2. Departmental failure - especially catastrophic disaster - is ultimately the responsibility of
the board of directors. Disasters become scandals when directors seek to pervert this
principle. A disconnection between departmental governance (standards and
compliance) and the board of directors will always deflect blame and punishment for
disaster away from directors to departmental personnel, which is grossly wrong.

Of course departments may assist in the drafting and development of their own governance
codes and standards, however, the principle, that "...departmental governance is the ultimate
responsibility of the board of directors..." should be an absolute immovable feature of overall
Corporate Governance in all corporations and organizations.
And obviously, no department, just as no corporation, should ever be solely responsible for
monitoring its own compliance to its own governance standards, (which after all is one of the
fundamental concerns of the Corporate Governance movement).
Departments are responsible for adhering to governance standards (Corporate and
Departmental), which are established and maintained by the board of directors, according to
prevailing official guidance or law. Departments are not responsible for ensuring that
Corporate/Departmental Governance statements and standards at any level exist.
I repeat these points, and express them in different ways, because they are so fundamental to
the purpose of leadership and Corporate Governance.

bad corporate governance - examples of

actions/situations
There is considerable overlap with ethical and moral considerations when exploring examples of
poor Corporate Governance.
Strict legal definitions of Corporate Governance factors do not generally extend so far as ethical
and moral considerations.
There are many organizational leadership activities which most people consider unethical, but
which do not necessarily contravene a legally acceptable Corporate Governance code.
This listing attempts to convey the types of activities, behaviours/behaviors, policies, practices,
etc., of corporations, and/or of corporate officers, and/or of staff members acting for the
corporation, which would reasonably be regarded as breaching good Corporate Governance in
its fullest ethical and moral sense.
The terminology used below is not legal or definitive. It is designed as a simple guide to actions
and behaviours which are likely to breach good Corporate Governance to a lesser or greater
degree.
In other words, some of these factors do not necessarily contravene purely legal requirements of
Corporate Governance, but would contravene Corporate Governance standards defined more
fully to encompass ethical and moral considerations. Legal interpretations of Corporate
Governance can reasonably be anticipated to include progressively more of all these factors
below.

 anything unlawful (according to the territory or other laws applying)

 taking risks which have serious consequences
 failing to take action after serious failings
 dishonesty, withholding information, distortion of facts
 misleading communications or advertising
 deception
 exploitation of weakness and vulnerability
 anything liable to harm or endanger people
 avoidance of blame or penalty or payment of compensation for wrong-doing
 failing to consult and notify people affected by change
 secrecy and lack of transparency and resistance to reasonable investigation
 bribery, coercion or inducement
 harming the environment or planet
 unnecessary waste or consumption
 invasion of privacy or anything causing privacy to be compromised
 recklessness or irresponsible use of authority, power, reputation
 nepotism (the appointment or preference of family members)
 favouritism or decision-making based on ulterior motives (e.g., secret affiliations, deals,
memberships, etc)
 alienation or marginalization of people or groups
 conflict of interest
 neglect of duty of care
 betrayal of trust
 breaking confidentiality
 causing unnecessary suffering of animals
 'bystanding' - failing to intervene or report wrong-doing within area of responsibility (this
does not give licence to interfere anywhere and everywhere, which is itself unethical for
various reasons)

This is not an exhaustive list. Other examples exist, and more will no doubt emerge in future
corporate scandals.
Most of the above are subject to degree. Small isolated incidents of the above are common and
difficult to prevent at staff level at some time in large corporations, in which event such low-level
failings may not really be breaches of Corporate Governance. However big incidents, which
affect large numbers of people, or which have a major negative impact on just a single person,
and especially where recklessness or negligence of senior personnel is a factor, are likely to be
serious breaches of proper Corporate Governance.

businessballs corporate governance statement template

The Corporate Governance template below is designed as a simple guide and 'menu' for
producing Corporate Governance code or statement code for small businesses, and other types
of organizations for which conventional official standards may not fit. Big businesses too might
find it helpful, especially if seeking to produce a Corporate Governance statement which is more
accessible and far-reaching than official standards.
I am open to suggestions of improvements to the code below - Corporate Governance is a
complex changing area.
The complexity and changing nature of Corporate Governance means that finding suitable
guidance and how to interpret and apply it can be challenging. The emergence of 'departmental
governance' and 'stewardship' are further complications, as is the increasing range of differing
national standards, instruments, laws, guidance notes, committees, reports and
recommendations.
For those seeking a simple 'Do It Yourself' effective solution or a starting point, here's a basic
adaptable interpretation and 'menu' of the essential principles of Corporate Governance.
This code attempts to cover all the main points of best practice Corporate Governance, and
includes considerations enabling its use in organizations and businesses of all sorts; i.e., it is not
limited to public quoted corporations, or any other single type of organization.
This simplified code is based on Corporate Governance best practice and official guidance, laws,
etc., notably the original 1992 Cadbury Code and subsequent UK/European revisions. It's
designed both as a code and as a template, easy to understand, relate and apply, whatever the
size and type of your corporation, organization, or business - from a vast public utility, to a corner
sweetshop.
Importantly this code requires the clarification of the business/organization: its formation type,
and its aims and priorities, for example reconciling the potentially competing need to maximize
investor returns, while avoiding unreasonable risk, not exploiting staff, or neglecting social or
environmental responsibility.
Where corporate scandals and disasters occur there is commonly a failure to successfully
resolve conflict between competing interests.
Risks of Corporate Governance failures are greater where interests/aims are not reconciled at a
foundational level, and conversely risks reduce where interests/aims are balanced and
reconciled, clearly and transparently.
Please note:
1) Corporate Governance originally developed in relation to publicly quoted/listed corporations.
However Corporate Governance can apply to any type of organization, and in the code/template
below the term is used in relation to any sort of organization.
2) When adapting/completing the template below produce concise broad principles, not lots of
fine detail, or you will produce a document which no-one can be bothered to read. Test your draft
on staff who do not understand corporate language to ensure that the document is clear and
simple enough.
3) When adapting/completing the template below, items that are irrelevant may be removed.
4) This is a practical adaptable template for Corporate Governance. It is not a legal document,
and no liabilities are accepted for its use. If in doubt seek professional qualified advice (and
ensure that professional advisors use simple plain language, not complex legal terms).
The template is shown first in summary according to its main sections.

Corporate Governance template/menu - summary

section notes
1. Describe the Business/Organization - This is a crucial Corporate Governance in non-profit or non-i
area of clarification that traditional Corporate Governance organizations usually implies greater priority
codes ignore. It provides foundations for decisions and members, customers, etc. Public corporation
governance. Clarify your corporation/organization type, produce a dividend (profit-share) for shareho
ownership, structure, leadership, etc. A public quoted grow the value of the corporation via comme
corporation is very different to a charitable trust, or a social performance. Charities and trusts tend not to
enterprise. The nature and purpose of the organization greatly dividend for owners, instead they aim prima
influences its priorities and considerations in Corporate maintain and/or expand operations. Coopera
Governance. partnerships, sole-traders and social enterpri
generally established with stated financial ob
owner-members.

2. Board of Directors - Define appropriately the roles Major conflicts of interest exist if directors' m
(including a neutral chairperson), authority, processes, personally driven and uncontrolled, undermi
obligations, controls, contracts, rewards and controls of of organization and creating risks and harm
directors, especially so that personal needs do not conflict corporate responsibility.
with organizational responsibilities.

3. Non-Executive Directors - Non-executive directors are Also clarify appropriate policies for non-exe
crucial in moderating company boards, so these roles and directors independence, appointment, term, r
responsibilities must be clarified appropriately. appointment, and remuneration and duty to s
board and organizational conduct.

4. Reporting, Auditing, Controls and Transparency - This Main factors: the Corporate Governance stat
concerns the administration and transparency of Corporate appropriate transparent decision-making; tru
Governance, especially in financial reporting and auditing. reporting of organizational condition; and ap
and duties of auditors.

5. Responsibilities of Owners/Shareholders/Trustees Owners and trustees have a substantial respo

('Stewardship') - This is usually a separate code for the remain aware of, understand and control the
responsibilities of institutional investors of major public the board of directors, especially via meeting
corporations. It extends to trustees of smaller situations. voting.

6. Competence - Everyone responsible for Corporate This mainly concerns directors, non-executiv
Governance must be sufficiently competent to fulfil the role. chairperson and company secretary, and exte
Systems must ensure this is so, or corrected. auditors and major investors/shareholders an

7. Departmental Corporate Governance - Directors are There is a tendency for some directors to del
responsible for Departmental Corporate Governance. responsibility for Corporate Governance to d
Department heads and staff are responsible for operational heads or other staff, which is incorrect. Dire
duties which adhere to Corporate Governance standards. This ensure departmental heads and staff understa
especially concerns delegated responsibilities and decision- comply with the organization's Corporate Go
making. standards.

8. Ethical and Moral Standards - Standards of ethics and Acting within the law is not a justification fo
morality exist separately to laws and regulations. They must or immoral policies or decisions. There are s
be established, stated, followed and promoted by the corporate risks which are legal, but are uneth
directors. immoral.

© Businessballs Corporate Governance Template - summary 2013.

This template is designed to be adapted before developing your own Corporate Governance
policies and statements for each item.
Here follows the full template/menu. If you'd like to offer comments or improvements to these
guidelines please do so.

corporate governance statement template/menu

1. Describe the business/organization (its structure and type, including responsibilities to the following).
and sub-points crucially describe the organization type, aims and responsibilities in key areas, to create
against which potentially conflicting issues may be referenced and decided. This is important for all staf
directors. This is not a standard aspect of traditional Corporate Governance codes, although it should be
recommended here because this code/template is adaptable for all sorts of organizations, and so clarifica
fundamental aims and priorities is very important.

1.1 Owners/investors/trustees - Define the organization's responsibilities to its owners/investors/trustees - T

greatly depending on the type of organization.

1.2 Directors and senior staff - Define the extent of the organization's responsibilities to directors and senio
especially the scope of powers of these people, and the limits and controls applying to their contracts, re
and other rewards.

1.3 Staff - Define the organization's responsibilities to its staff, extending to agency workers and other indiv
contractors considered staff. See The Psychological Contract.

1.4 Customers - Define the organization's responsibilities to its customers.

1.5 Suppliers - Define the organization's responsibilities to its suppliers.

1.6 Society/social responsibility - Define the organization's responsibilities to society including local comm

1.7 Privacy/confidentiality/security/data-protection - Define the organization's responsibilities to privacy an

particularly electronic data storage and processing - of staff, customers, suppliers, and the public.

1.8 Environment/sustainability/planet - Define the organization's environmental responsibilities.

1.9 Marketing strategies, commercial and financial objectives - Define the organization's responsibilities to
strategic and financial aims as an organizational or business entity. (It is by meeting these aims that the
remains viable and solvent and therefore able to meet all its other responsibilities, in which respect this
particularly vital priority, i.e., the organization must remain financially viable or it will inevitably be un
its other obligations.)

2.0 Board of Directors - The roles of directors must be described, which should be appropriate (in number
more no less) for specialized control and knowledge of the organization's activities.

2.1 Meetings and controls - Meetings must be scheduled, regular (typically no less than monthly), fully atte
detailed and supported by accurate and timely notes and administration necessary for collective awarene
 activities, issues, plans, etc., and especially decisions involving main areas of corporate responsibility an
There must be deputization by properly qualified and briefed assistants for absence wherever possible, a
for extended absence.

2.2 Directors' specialised responsibilities - The board must be of balanced authority with no isolated powers
The board must include a dedicated neutral chairman/chairperson or other independent/neutral senior pr
to perform a genuine chairman role.

2.3 Non-executive directors - Non-executive directors must be of a quality and number sufficient to monito
required to influence the quality of the board's decisions.

2.4 External advice - There must be contingency and process for obtaining external expert advice on any m
which the board does not possess a sufficient and balanced knowledge.

2.5 Company Secretary (or equivalent post) - The board must contain a member with expert knowledge and
for informing board of corporate regulatory rules, responsibilities and implications.

2.6 Decision-making - Must be collective by the board, transparent, consultative and referred when required
duress. Fair and balanced in relation to the stated priorities and responsibilities of the organization.

2.7 Remuneration and reward - Rewards for directors and senior executives (salary, bonus, share-options, p
contributions, ex-gratia payments) should be transparent, and sufficient to attract and retain executives o
required to perform successfully, and must be overseen/controlled by a rewards committee formed from
executive directors, and also where rewards are beyond normal levels must be approved by investors. R
of directors and senior executives must always be based on performance. It is utterly unacceptable for se
executives to be well rewarded when incremental organizational performance fails to substantially over
executive reward.

3. Non-Executive Directors - Non-executive directors are vital in bringing experience and objectivity to c
boards. For organizations which do not ordinarily accommodate non-executive directors it is important
ways to achieve this sort of support.

3.1 Neutrality - Non-executive directors must be free from conflicting demands or interests so as to exercise
objective judgment and influence over organizational activities and board decisions.

3.2 Remuneration and reward - Non-executive directors may be paid at a reasonable rate based on workload
own shares in the organization, although financial reward must never be such as to compromise indepen
objectivity.

3.3 Appointment and term - Selection and appointment of non-executive directors must be a fair and open p
limited term generally not exceeding three years, and reappointment should follow broadly the same pro
appointment, and certainly not be automatic.

3.4 Proactivity - Non-executive directors must be proactive in scrutinizing corporate situations, proposals an
and must draw firm attention to any organizational activities or decisions which breach the terms of this
Governance statement, or which do harm or create risk to other corporate responsibilities which may be
 from this statement.

4. Reporting, Auditing, Controls and Transparency - These are crucial aspects of Corporate Governanc
in financial matters and other issues entailing major corporate risk.

4.1 Corporate Governance - This (adapted) statement of Corporate Governance must be kept up-to-date and
the organization's owners, trustees, leaders, staff; clearly and always, and to customers and other stakeh
demand.

4.2 Transparent decision-making - Decisions of serious nature (and related notes of discussions, consultatio
justification, etc), especially impacting on an area of corporate responsibility or risk, must be properly re
circulated and open to scrutiny by affected people.

4.3 Condition of organization - The board must at all times make available a balanced and understandable a
the organization's condition, especially its financial situation, and especially clarifying the detailed effec
financial accounting techniques designed to optimize profitability and values, actual or perceived.

4.4 Auditing - This is an absolutely crucial aspect of Corporate Governance, within which the board must e
auditors are appointed and act with utmost diligence and objectivity, and are adequately guided and mon
an audit committee of at least three non-executive directors (or equivalent), guided by transparent and a
terms of reference.

4.5 Audited accounts - The board must ensure that clear and appropriate responsibilities are stated (within t
in published accounts) for the board of directors and auditors in the preparing, reporting and auditing of
organizational accounts, and this must include the directors' responsibility to report on organizational in
controls; the condition of the organization as a 'going concern' (i.e., is operating/trading solvently), supp
evidence as appropriate.

5. Responsibilities of Owners/Shareholders/Investors/Trustees ('Stewardship') - Owners/trustees and

institutional shareholders of organizations (especially large ones) have substantial responsibilities for m
and controlling the conduct of the organization's board of directors or equivalent, and thereby the condu
organization that they own. Therefore comprehensive Corporate Governance must include clearly stated
responsibilities for owners/trustees/institutional investors.

5.1 Ownership/trusteeship responsibility - Owners/trustees of the organization have a duty to monitor and c
conduct of the organization's board of directors or equivalent. The Corporate Governance statement is a
instrument in enabling this to happen. Accordingly Corporate Governance is strengthened where owner
are actively involved in its formulation and monitoring; and conversely, Corporate Governance is seriou
undermined where owners/trustees neglect these duties.

5.2 Voting - Owners/trustees have a duty to use their voting powers in controlling the conduct and staffing o
of directors.

6. Competence - The extent of Corporate Governance effectiveness is determined by the competence of th

responsible for its design, implementation, monitoring and improvement (therefore..)

6.1 Competence, commitment and training - Any person with responsibility for Corporate Governance (not
directors, chairman, non-executive directors, major shareholders/owners/trustees, and auditors) must be
and committed to exercising their specific Corporate Governance duties, and process must exist to asses
 competencies/commitments and to correct shortcomings via appropriate training or other remedy (N.B.
who lacks commitment/competence in exercising his/her responsibilities for Corporate Governance is e
unfit for their role, and any organization which retains such people in situ is negligent and creating a ser
liability).

7. Departmental Corporate Governance - By definition, Corporate Governance - and any sub-category

departmental level of Corporate Governance - is the responsibility ultimately of the board of directors, a
specifically appropriate, of the appointed auditors or trustees or owners. Departments and departmental
may certainly be responsible for their operational duties as implied or stipulated by a Corporate Govern
but are not responsible for organizational adherence to its Corporate Governance standards.

7.1 Departmental Governance - The directors are responsible for ensuring that departmental heads and staff
aware of their responsibilities as affected by, and also affecting, the organization's Corporate Governanc
This especially concerns employees' and contractors' authority for decision-making, and processes for c
and referral where departmental actions/decisions have significant implications for corporate responsibi
Corporate Governance.

8. Ethical and Moral Standards - Ethical and moral considerations have potentially huge impacts on cor
responsibilities, and therefore on Corporate Governance. While ethics and morals are open to interpreta
be difficult to define legally, there are standards and principles of ethical and moral conduct which orga
must observe, and which may be different to limits imposed by law. Observing the law is not the limit o
Governance. Acting within the law is not a justification for acting unethically or immorally. Besides wh
changes. What is unethical or immoral today may be unlawful in the future. Organizations and organiza
leadership should advance ethical and moral standards. They should absolutely not seek to use legal lim
loopholes to permit or instigate unethical or immoral policies, actions, or decisions.

8.1 Directors are responsible for establishing, maintaining, and transparently stating the highest possible org
ethical and moral standards. This especially applies to how organizational responsibilities are defined an
so that standards and parameters are set according to ethical and moral standards rather than (typically l
demanding) legal requirements.

© Businessballs Corporate Governance Template 2013.

P4 management model and corporate governance

Here below is a simple graphical guide (useful for presentations, etc) for fundamental leadership
principles for the 21st century.
It is summarised here because it is strongly relevant to Corporate Governance.

the P4 (PPPP) organizational model

Purpose, People, Planet, Probity (or Purity or Principles).
The P4 diagram right and summarised below advocates four
principles or 'cornerstones' of sustainable and responsible success in
modern organizations: Purpose, People, Planet, Probity.
Probity means honesty, uprightness (from Latin probus, good).
'Purpose' is a broader term than 'Profit', which encourages
consideration of other organizational purposes, which always exist and
must be balanced with the focus on profit. 'Purpose' is also a more
appropriate concept for not-for-profit organizations.
This model is not a process or technique - it represents and guides the
character or personality or underpinning philosophy of a good ethical
organization, or indeed of a manager or leader.
The aim of a good modern organization - and of effective Corporate
Governance - is to reconcile the organizational purpose (whether this
be profit for shareholders, or cost-effective services delivery, in the
case of public services) with the needs and feelings of people (staff,
customers, suppliers, local communities, stakeholders, etc) with proper
consideration for the planet - the world we live in (in terms of
sustainability, environment, wildlife, natural resources, our heritage,
'fair trade', other cultures and societies, etc) and at all times acting
with probity - encompassing love, integrity, compassion, honesty, and
truth. Probity enables the other potentially conflicting aims to be
harmonised so that the mix is sustainable, ethical and successful.
See the full P4 model diagram explanation. For attribution purposes
this model was created by Alan Chapman and first published on this
website in April 2006.
This P4 model is not to be confused with the traditional Four P's of
Marketingwhich is a different thing.

corporate governance - summary, implications,

obstacles
For the foreseeable future into the 21st century, globalized business is likely to remain relatively
weakly regulated.
By implication, so too will Corporate Governance.
There are two main reasons for this:

 Free market economics and 'market forces' - and their effects.

 National economic interests vs Global Corporate Governance.
These issues are explained below in more detail. See factors limiting Corporate Governance
development/regulation.
Also for the foreseeable future into the 21st century, Corporate Governance is likely to remain
difficult to develop and enforce, and there will continue to be major corporate scandals and
disasters even where standards are extensively defined and established officially as lawful
requirements.
There is a big main reason for this (aside from the factors above):

 The leadership style within major corporations (effectively demanded/rewarded by

shareholders) commonly conflicts with the needs of good Corporate Governance.

Again this issue is explained below in more detail. See corporate leadership - implications and
obstacles.

factors limiting Corporate Governance development/regulation

Here is explanation of the two major factors likely to inhibit the development and application of
Corporate Governance - globally, and consequentially, unavoidably, nationally too.
Firstly, much the world remains committed to free market economics, which by its nature resists
interference and regulation.
Secondly, the world is governed on a country-by-country basis, and while there are lots of
international treaties and conventions, and international groupings with established rules
covering all sorts of activities on a global basis, laws are virtually impossible to apply and enforce
in a truly global sense, especially considering that fundamental corporate law varies
internationally anyway.
Moreover - where business and economic controls are concerned - while Corporate Governance
regulation will continue to be refined and tightened on a national basis in much of the
world, internationally individual governments will continue to face a dilemma in attempting to
balance the needs of:

supporting a national economy and its versus refining and enforcing corporate governan
corporations laws (usually claimed/perceived to hinder co
competitiveness and performance)

The question of whether to regulate bankers' bonuses, to help reduce risk-taking and fraud in
banking corporations, is a good example. Increasing Corporate Governance law relating to
bankers bonuses would logically tend to reduce risk-taking and fraud in banks, but also (it is
claimed, logically) would encourage banks and bankers to relocate to other nations offering less
Corporate Governance regulation and more freedom. For national regulators and governments
this is a dilemma that is difficult to reconcile.
The question of how to counter corporate tax avoidance is another example. Nations want to
attract corporations and corporate investment, because this increases economic performance,
employment, etc. Nations which offer attractive and flexible corporation tax rates/rules (which
equates to a relaxation of Corporate Governance laws and interpretation) tend to attract
corporations and corporate investment. However, offering attractive and flexible corporation tax
rates/rules also enables corporations to avoid or substantially reduce their tax liabilities, which
while being good for investors, is not very socially responsible or ethical.
So Corporate Governance, when seen in a global or international context, is not a precise
science, and on a big global scale is prone to potentially serious conflicting or influential factors.
These issues present real and very challenging obstacles to the development and application of
Corporate Governance in a firm global sense, and a consequence of globalization is that its
benefits and problems unavoidably affect nations on an individual basis.

corporate leadership - implications and obstacles

(See leadership theories and personality theories and multiple intelligences theory for useful
explanations relating to this section.)
Corporate leadership - more precisely the nature of typical corporate leaders - often involves a
paradoxical obstacle to improving Corporate Governance.
Specifically, leaders of big corporations commonly possess qualities that help them to rise to and
maintain a leadership position, but which are not naturally suited to prioritizing and exercising
good Corporate Governance. The same can be said of political leaders too, for whom Corporate
Governance (of their political party or government) is also a major challenge.
This is a deep and long-standing cultural phenomenon. It's been part of human nature and
organized human systems throughout history.
Generally corporate bosses have strong qualities and skills which enable them to maximize
profit. This is not be surprising as these qualities enable them to climb the greasy pole of
corporate leadership in the first place.
Other qualities featuring strongly in the make-up of many corporate leaders include dominance,
initiative, creativity, pragmatism, decisiveness, fast-acting, inflexible, low empathy, adversarial,
low regard for incidental detail, etc.
But personalities like this generally don't posses strong qualities and skills that are required for
understanding and exercising good Corporate Governance.
For example:

 Corporate leadership is generally characterized by a powerful outwardly-directed control,

with minimal regard for resistance or implications (which from the leader's standpoint
must be overcome or beaten). Achieving the targeted result is the sole
purpose. Everything else is secondary and (it is usually believed and asserted by the
leader) that consequential damage can be managed or cleaned-up or minimized
afterwards. The end result justifies the decisions and the methods.
 Conversely, good Corporate Governance prioritizes the quality of the result. A result
which produces damaging consequences is not an acceptable or good result. The end
result - no matter how profitable or beneficial to some - does not ever justify a decision or
method which does harm.

These two styles represent two quite different personalities. Leaders who possess the first
characteristic cannot truly adopt the other. It is not in their nature. (See the scorpion and frog
story, which illustrates the often permanent nature of personality).
Corporate leaders typically possess many highly effective and positive personality attributes for
achieving corporate results, but these attributes are to a great extent opposed to the ideal
characteristics for achieving good Corporate Governance. (See personality theory to understand
this better.)
This is not actually the fault of corporate leaders - they are doing and succeeding at what the
system requires them to do (i.e., maximise profit as quickly as possible); it's far more the fault of
how corporations and economies operate (which effectively values short-term financial results
more highly than good Corporate Governance).
The table below aims to show that skill-sets and personalities of corporate
leaders and guardians of Corporate Governance are quite different. The two lists compare
some key characteristics which broadly represent two personality types - for typical corporate
leadership, the other for good Corporate Governance. It is not a definitive or scientific analysis,
but it illustrates the point:

qualities typically found in corporate leaders qualities required for good corporate govern

arrogance humility

risk-prone and maverick risk-averse and careful

directing and persuading empathy and caring

drive and dominance diligence and caution

creativity and pioneering reactivity and awareness

dogmatic and focused adaptable and flexible

speaks and instructs listens and interprets

task/results-driven quality/integrity-driven

narrow-minded open-minded

win at all costs work together

combative and adversarial cooperative and synergistic

rule-maker/breaker rule-translator/follower

speed and force patience and balance

pragmatic moral compass

The table attempts to show that many characteristics typically possessed by corporate leaders
(and effectively demanded by shareholders and free market stock exchange culture) are radically
different to the characteristics required in appreciating, applying, developing and protecting good
Corporate Governance. In many cases the qualities are directly conflicting.
It's rather like expecting an artist to be a good research scientist, or a social worker to be a good
advertising executive. The skill-sets are quiet different.
The roots of this dilemma are deeply embedded in the human condition, society, corporate
culture, economics and politics. The causal factors are difficult to analyse, and
solutions/improvements are probably impossible to manage or regulate to any reliable extent;
human nature and big systems of people are so complex. Nevertheless these working style
conflicts certainly exist:
Many corporate leaders are simply not naturally skilled or inclined to be guardians of
good Corporate Governance.
A solution to this paradox must await ultimately a more fundamental shift in the attitudes and
design of corporate stock markets and related economic systems and laws, so that corporate
leaders are required to be and are therefore characterized in a far more rounded and grounded
way than has traditionally happened.
This is a complicated issue. People will have different views as to its significance and
interpretation. As earlier suggested see the following sections for useful references and
explanation: Leadership theories - Personality theories - Multiple Intelligences Theory.

free market economics and 'market forces'

Extending the last point, it is appropriate to revisit the effect of the free market capitalist
philosophy and its implicit faith in 'market forces' to resolve economic challenges.
Broadly this 'light-touch', 'non-interventionalist', 'minimal regulation' approach to economic
management has been preferred by governments in most of the 'western' world for the past
several decades, and certainly since industrial globalization.
Market forces of course encourage and reward above all else the maximizing of profits and
investment returns, cost reduction, improved efficiencies, increased scale, volumes, productivity,
etc.
So corporations seek leaders who are highly competitive and driven towards these things, and
for whom nothing matters more than maximizing profits, and the 'profit levers' which enable this
pursuit.
Moreover stock markets and influential financial analysts and commentators also demand
leaders like this.
In a game where there are no major rules other than producing maximum profits as quickly as
possible, a prospective leader who can do this will generally get the job ahead of a leader who is
works more carefully and thinks longer-term and about wider issues of responsible governance.
Particularly, leaders in the free market who have relatively low regard for people, planet, and
probity, will generally be preferred to leaders who take a more balanced approach.
And this is how tomorrow's leaders and students of corporate leadership mostly see corporate
leadership. The philosophy of market forces and the personality of corporate leadership is
passed down generation to generation.
Hence 'money talks'. He who can make the most profit quickest, tends to thrive and win.
And we are all collectively responsible for this.
As with pornography, alcohol, narcotics, and gambling, in the free market, consumers get what
they want.
If there were no demand for pornography there would effectively be no pornography. However
there is a lot of demand for it, so there is a lot of it. This is how the free market works. If there had
been no law to cease public floggings and executions in the civilized world, then there would still
be public floggings and executions in the civilized world.
Financial markets, notably stock exchanges, which basically represent the interests and
pensions of ordinary people - are a little like audiences at public executions - they demand
something which is not good, and if the supply is not regulated, they get what they want.
Of course when ordinary people are asked about how they want corporations to be run they will
generally suggest that corporations should have more consideration for people, plant and probity,
but in practice, most ordinary people (especially those with managed pensions) are happy to
accept the corporate conduct and results that are managed by the institutions on their behalf.
Mostly people will not instigate a sacrifice or delay in financial reward, especially if negative
implications requiring a sacrifice are remote or hidden. Turkeys don't vote for Christmas.
These are generalizations of course - many people invest only in highly ethical companies, just
as there are many people who would never want to attend a public execution.
But... (and this is the crucial point), there is sufficient general public acceptance, ambivalence,
ignorance and trust, equating to tacit approval, of how stock markets and pensions and free
market economics operate, to ensure that fundamentally nothing changes, and so market forces
continue to dictate the type of corporations and corporate leadership that succeeds, rather than
really important considerations. So major corporations will continue to be run with far too much
emphasis on profit, and far too little emphasis on good Corporate Governance, and people and
planet and probity, until and unless things change at a very deep level of society and human
organization indeed.

"The concept of free market capitalist economics may be viable or may be not, but what is
certain is that free market capitalism is much too volatile to put in the hands of emotionally
dysfunctional idiots, no matter how clever they are at making money."

Corporate Governance is a complex and changing subject. I welcome comments and

suggestions for improving this guide.

See also:

 Ethical Management and Leadership

 The Psychological Contract
 Nudge Theory
 Leadership Tips
 Leadership Theories
 Love and Spirituality in Management and Business
 Maslow's Hi