Corporate Governance | Should accountability, transparency and effective risk management be regarded as the most important principles of Corporate Governance? |

|

What actually corporate governance is and how it actually affects a corporation? What are the main players playing a part in corporate governance? These are the questions one must understand in order to see the role of principles like accountability, transparency and effective risk management in corporate governance. So corporate governance is defined as “the relationship between a company’s shareholders, directors, and management as defined by the corporate charter, bylaws, formal policy, and rule of law”. (Gallegos, 2004, p. 37). This definition clearly shows the relationship of a company’s shareholder, directors and management. But this definition is only limited to what are the main players of corporate governance.
In order to understand its impact on a corporation or company, ASX defines it as, “Corporate governance is the system by which companies are directed and managed. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized. Good corporate governance structures encourage companies to create value (through entrepreneurism, innovation, development and exploration) and provide accountability and control systems commensurate with the risks involved’. (ASX Principles of Good Corporate Governance and Best Practices Recommendations, 2003). This is a broader definition of corporate governance and explains the roles and functions of directors and management.
According to definition provided, clearly three major principles of corporate governance recognized here along with some other as well. So the major principles of corporate governance are as follows. * Accountability. * Transparency. * Risk management.
Accountability is one of the important principles of corporate governance. But it is also notable that who is accountable to whom. Brennan and Solomon (2008) states “In exploring the ways in which corporate governance research is broadening by incorporating a broader corporate accountability, researchers are starting to ask accountability to whom”. The managers are accountable to the board of directors and board of directors to stake holder. In earlier years, they were accountable to the shareholders but now to the stake holders. This can also be inferred from this discussion that accountability is also in the actual hierarchical way. But all of them are not only accountable to each other in the mentioned way but are also accountable to the society as well where companies are now also trying to be corporate social responsible as well.
Second, another major principle is transparency in corporate governance. It can be defined as “characterized by visibility or accessibility of information especially concerning business practices” (Merriam-Webster 2014). Transparency is an essential element of the well-functioning corporate governance system and is achieved by the adequacy of disclosures to the stakeholders (Solomon 2004). This principle is also linked to accountability as when there is accountability there should be transparency. Both of them go hand in hand as accountability will only be possible when there will be any transparency and every one would know who is actually responsible and who is accountable for them, either they are a matter of pride or shame.
Accountability and transparency roles are not only limited in corporations like public limited companies but is also very important for governments as well. Corporate governance and its principles are also guiding them. Even the President of countries issues memorandum on such matter. According to Barack Obama in his memorandum, “Transparency promotes accountability and provides information for citizens about what their Government is doing. Information maintained by the Federal Government is a national asset. My Administration will take appropriate action, consistent with law and policy, to disclose information rapidly in forms that the public can readily find and use. Executive departments and agencies should harness new technologies to put information about their operations and decisions online and readily available to the public. Executive departments and agencies should also solicit public feedback to identify information of greatest use to the public” (The White House 2014).
The third important and integral part of corporate governance is to have very efficient and effective risk management system which can help the corporation from eliminating any risk. But first of all, before assessing risk, we should know what is actually exposed to risk and can affected by it. According to business continuity institute (2009) they have detailed the risk into event impacts and these events impacts can be felt on the following. * Reputation. * Customer * Suppliers * Finance * People * ICT * Facilities
Similarly Control risk group holdings ltd have also categorized risk into three other categories as well. And these categories are * Integral risk. * Political risk. * Security risk.

Now since we have seen that a corporation can be affected in various ways, so effective risk management also holds a very vital role in corporate governance. Initially it was only associated to the financial risk but now it has shaped into the above mentioned categories. “Risk management was regarded as having the cost control implications over 50 years ago” (Gallagher 1956). But nowadays companies have to do a lot of risk management for their operations. It has been said about risk management that it should be proactive rather than reactive as one should be aware of the risk before hand and can evaluate possible outcomes related to it.
If not done properly, risk management can be very costly and fatal as well for the companies. But not only for the company or economy, but at times its effect are on a global scale. A recent example of ineffective risk management or corporate governance would be of Global financial crisis which caused a whole global financial crunch in many countries. It all started from selling bundles of sub-prime mortgages fund without any efficient and effective risk management and it caused millions of people all over the world to lose their jobs, stop their businesses and many of the majors investment banks to go bankrupt. The impacts vary from country to country. “Regions with strong economies heading to the crisis were least impacted, while regions with weaker export revenues, high pressures on current accounts and balance of payment, and low growth rates and high unemployment entering into the crisis most of it”. Douglas (2011).
Now it can be easily stated that accountability, transparency and effective risk management are the important principles around which corporate governance is revolving. So in order to have a successful entity either business or governing body it should have the right mix of what it takes to be right. Effective measure should be taken before hand and accountable and honest personal should be hired on board in order to have transparency and accountability. As far as risk management is concerned, a sound governing body i.e. board of directors should be there who has the experience and the expertise to calculate the risk and then try to eliminate it by having policies which can be beneficial and less risky for the company.
On the other hand, another school of thought is that if a company is looking for higher profits and more profit maximization for their stake holders, they have people who can take risky decisions as the riskier it is, more profitable it is. In order to achieve this successfully, some risk takers can be brought into the system and them they should be given freedom and independence in order to take the risk and bring profits to the organization.
References

ASX Corporate Governance Council 2014, Principles of Good Corporate Governance and Best Practice Recommendations, Australia Securities Exchange, Sydney.
ASX – see Australia Securities Exchange
Brennan, N.M. & Solomon, J. 2008, "Corporate governance, accountability and mechanisms of accountability: an overview", Accounting, Auditing & Accountability Journal, vol. 21, no. 7, pp. 885-906
Business Continuity Institute 2009, ‘Corporate Governance and The Financial Crisis: A response to the OECD online public consultation to the Business Continuity Institute’, Cawersham, UK.
Control Risks 2011, ’Risk Assesment: Assessing Corruption Risk’, Control Risk Group, London, UK, <http://www.controlrisks.com/services/integrity/SitePages/Home.aspx/services/integrity/SitePages/Home.aspx>.
Douglas, K.A. 2011, "The Recent Global Financial Crisis: Impacts On Selected Developing Regions", The
International Business & Economics Research Journal, vol. 10, no. 10, pp. 93-101.

Gallagher, R 1956, Risk management: a new phase of cost control, Harvard Business Review , Vol. 34 pp. 34–39

Gallegos, F 2004, Corporate governance practices must not compromise auditor independence. Internal Auditor
J Solomon. 2004. Corporate Governance and Accountability
'Transparency', in Merriam-Webster Dictionary, Merriam-Webster.com, place of publication, viewed on 19-06-2014, <http://www.merriam-webster.com/dictionary/transparent>.
The White House 2014, Transparency and Open Government, the White House, viewed on 19 06 2014, <http://www.whitehouse.gov/the_press_office/TransparencyandOpenGovernment>.