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Tighter standards
The phone hacking scandal has quite rightly outraged the public and Parliament but on the positive side it should result in corporate governance standards being tightened. However it shows just how damaging a lack of corporate governance can be to a business.
Corporate governance is about transparency, accountability, integrity, honesty and control. Companies that have strong corporate governance know what they are doing and aren’t doing and so do their shareholders and the public.
The UK was the first to introduce corporate governance guidance for businesses in 1992, since when others have followed. In the UK the approach is principles-based rather than rules-based, as is much of the FSA’s approach these days. This places responsibility with the company which makes the principles wide ranging and more effective than a rules-based system. It also leaves a company with few places to hide if they are found wanting.
Active shareholders
Shareholders increasingly value good corporate governance and more readily challenge boards about their activities and the way that companies are managed. Shareholder activism is greatest in the US but is now gaining strength in the UK. Challenges can be made about any concerns from human rights abuses, the environmental impact of a company, political donations, labour relations and of course directors’ remuneration.
Pressure groups such as Greenpeace are also actively pressing companies to become more accountable and to change their damaging environmental activities. Recent campaigns have focused on Mattel, Lego and Hasbro, companies that still use packaging materials for their toys made from tropical rainforest wood. Greenpeace has also challenged Volkswagen recently about their lobbying of the EU Parliament for weaker CO2 emissions standards and less efficient cars.
Pressure groups and active shareholders are pushing more companies towards better corporate governance and of course there are some companies moving in this direction of their own accord too. This leads to benefits for shareholders because greater transparency and less contentious business practices reduce investment risk.
Importantly better corporate governance is reflected back onto society through improved social conditions and greater environmental protection, a win/win situation for all. So the sooner all companies raise their corporate governance standards the better.
