Holistic approach to governance


MANY people view corporate governance as a means by which organisations can ensure their activities do not put at risk a key feature of business, that of reputation.  

Much of the literature addressing corporate governance focuses on the duties and responsibilities of company directors, members of company boards and those of the senior executives of organisations. 

This literature also tends to be around the appropriate financial structures and reporting mechanisms that need to be in place to ensure good decision-making and to minimise the occurrence of damaging behaviour such as fraud and corruption.  

There can be no doubt as to the need for organisations, and in particular the senior executives and directors of organisations, to take these duties and responsibilities seriously. However, solely financial or accounting based approaches to governance are a limited and incomplete approach. 

Organisations need to recognise that the financial and legalistic framework of corporate governance is in fact underpinned by ethics and morality. 

Every society codifies minimum moral standards as basic laws. It is the duty of every citizen to abide by those laws whether they refer to restrictions of civil liberty for the betterment of the common good, such as the imposition of speed limits on highways, or the duty of citizens to pay taxes for the provision of basic services.  

In the case of organisations, they are not a person in the true sense, yet society has conferred upon them the right to be seen as a legal person. With this privilege also comes responsibility to be a good corporate citizen. 

Organisations, unlike people, are not conscious entities in the same way that people are. 

Individuals within organisations are, in fact, limited in their ability to make decisions to only those that advance the interests of the organisation. This concept is known as agency. Once employed by an organisation, an individual becomes its agent and must make decisions consistent with its interests.  

Unfortunately, individuals sometimes misunderstand this important concept and may make decisions that appear to advance organisational goals in the short term, but undermine its duty to society by breaking laws or putting individuals in society at risk through unsafe work practices, products or services.  

These decisions – such as reducing costs, increasing profit, firing workers, cutting safety inspections or obtaining sales or contracts through corrupt practices – are often made in the belief that they advance organisational interest. In reality, these practices jeopardise the very basis of business activity, that of trust. Trust, in turn, is based on acting with integrity.  

Governance structures primarily address issues associated with financial reporting and following legal requirements. This can be seen as the minimum moral duty of any citizen, that is, to follow the law.  

However, simple legal compliance does not necessarily result in integrity. Organisations need to examine their relationship with a range of stakeholders in society and to truly act as a good corporate citizen by contributing to and advancing the common good.  

In addition, it cannot rely on an assumption that all of its employees or agents will automatically know what is the right thing to do. Organisations need to devise strategies that encourage appropriate internal behaviour. These strategies are most often referred to as organisational ethical systems. A common feature of such systems is the development of a code of ethics and code of conduct. 

Unfortunately, many organisations make the mistake of assuming that simply publishing a code of ethics is all that needs to be done. 

Research conducted by the Centre of the Business Ethics at Bentley College in Massachusetts, along with similar research conducted in Australia and Europe by various ethics centres, find that many organisations do not approach the issue of developing a culture that fosters integrity, to the same extent as planning marketing and advertising campaigns or expenditures on new technology.  

Moreover, the research shows that many organisations introduce incomplete ethical systems, often failing to communicate ethical standards, to train people in ethical decision-making and to adequately reinforce desired behaviours through appropriate reward systems. 

Such partial strategies are rarely successful and only serve to raise the cynicism so often found when discussing the issue of business ethics. 

The establishment of a holistic approach to governance needs to include systems that identify not just legal and financial reporting requirements but also the ethical duties of organisations. These must be developed within the organisation and reinforced through appropriate communication and training strategies. 

A substantial body of research into governance and integrity systems exists and is available to organisations as an aid in establishing world’s best practice approaches. 

It is the responsibility of managers, and in particular of senior managers, to be aware of this research and its importance as a strategy of enhancing organisational reputation. 

Educational programmes, in particular business courses such as the MBA, need to focus on these concepts in the same way that they address the functional areas of business; that of marketing, finance, accounting and strategy. 

Without such knowledge, managers and employees are likely to repeat the mistakes of the past, break laws, and engage in corrupt practices, thereby exposing companies to unacceptable risk.  

Being a good corporate citizen, being socially responsible, acting with integrity and good corporate governance must be part of a holistic strategy. 

Michael John Segon is with RMIT University’s School of Management, with which MIM collaborates on various Master’s and Bachelor’s programmes. The topic corporate governance is part of the curriculum of an MBA programme that MIM is launching. For details, call MIM Customer Service at 03-21654611, e-mail enquiries@mim.edu or visit www.mim.edu. 

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