Thoughts on Global Governance Standards
Posted on March 27th, 2008 by Julie Garland McLellan »Permalink
The general idea behind global governance standards is that, if all companies either adhere to the same standard or are measured against the same standard, then investors and other observers will be able to assess how well they are governed.
Governance is important because well governed companies attract a premium to their share-price, and poorly governed companies should attract a discount. This is because good governance reduces risks by improving accountability, transparency and decision-making.
Global investment funds like the concept of global governance standards because it means that they don’t have to try to analyse each company’s governance and apply their own judgement as to what is acceptable in each individual case. National managers and boards of directors prefer to have standards that have been developed locally to take account of local preferences and practices. They tend to resist standards imposed by overseas interests.
There are currently many different standards, codes and guidelines that boards can use to assist them to design their own governance structures, processes and practices. The UK Combined code, ASX Corporate Governance Guidelines, OECD Guidelines and, of course, Sarbanes-Oxley are all good examples of governance guidelines that are used internationally as well as in their countries of origin.
However, these codes emphasise issues such as the structure of the board, the number of committees and the independence of board members. Whilst conforming to the recommended aspects does increase the independence of the board, it does not guarantee good board-room behaviour or good corporate outcomes. If the individual directors are not tough-minded and independent, then these structural aspects of governance can simply mask the problems.
What investors really need to know is whether one or two powerful individuals are running the company and could be favouring their own, rather than general shareholders’, interests or whether the board is ineffectual and has abdicated in favour of management. This is only apparent through special qualitative disclosures, such as the discussion on corporate governance, or to people who know the calibre of the individual directors and can assess their likely behaviour under pressure.
global governance standards, corporate governance,
corporate boards
