Seven Characteristics of Corporate Governance

Submitted by Kamal Wickramanayake on March 6, 2007 - 07:00

Though the origin could not be located correctly, the characteristics below seem to have appeared in CLSA Emerging Markets 2001 and gained more popularity after their appearance in what is known as the King Report on Corporate Governance for South Africa 2002:

  1. Discipline
    Corporate discipline is a commitment by a company’s senior management to adhere to behavior that is universally recognized and accepted to be correct and proper. This encompasses a company’s awareness of, and commitment to, the underlying principles of good governance, particularly at senior management level.

    “All involved parties will have a commitment to adhere to procedures, processes, and authority structures established by the organization.”
  2. Transparency
    Transparency is the ease with which an outsider is able to make meaningful analysis of a company’s actions, its economic fundamentals and the non-financial aspects pertinent to that business. This is a measure of how good management is at making necessary information available in a candid, accurate and timely manner – not only the audit data but also general reports and press releases. It reflects whether or not investors obtain a true picture of what is happening inside the company.

    “All actions implemented and their decision support will be available for inspection by authorized organization and provider parties.”

  3. Independence
    Independence is the extent to which mechanisms have been put in place to minimize or avoid potential conflicts of interest that may exist, such as dominance by a strong chief executive or large share owner. These mechanisms range from the composition of the board, to appointments to committees of the board, and external parties such as the auditors. The decisions made, and internal processes established, should be objective and not allow for undue influences.

    “All processes, decision-making, and mechanisms used will be established so as to minimize or avoid potential conflicts of interest.”

  4. Accountability
    Individuals or groups in a company, who make decisions and take actions on specific issues, need to be accountable for their decisions and actions. Mechanisms must exist and be effective to allow for accountability. These provide investors with the means to query and assess the actions of the board and its committees.

    “Identifiable groups within the organization - e.g., governance boards who take actions or make decisions - are authorized and accountable for their actions.”

  5. Responsibility
    With regard to management, responsibility pertains to behavior that allows for corrective action and for penalizing mismanagement. Responsible management would, when necessary, put in place what it would take to set the company on the right path. While the board is accountable to the company, it must act responsively to and with responsibility towards all stakeholders of the company.

    “Each contracted party is required to act responsibly to the organization and its stakeholders.”

  6. Fairness
    The systems that exist within the company must be balanced in taking into account all those that have an interest in the company and its future. The rights of various groups have to be acknowledged and respected. For example, minority share owner interests must receive equal consideration to those of the dominant share owner(s).

    “All decisions taken, processes used, and their implementation will not be allowed to create unfair advantage to any one particular party.”

  7. Social responsibility
    A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitative, and responsible with regard to environmental and human rights issues. A company is likely to experience indirect economic benefits such as improved productivity and corporate reputation by taking those factors into consideration.

Some more details on how these will apply in the real world are found here: Business and Investment in South Africa.