The MT Essays 40th Anniversary: Corporate Governance - An end to guesswork

Companies now have to contend with with much tighter procedural rules, but things are stabilising. Making efforts to achieve proper compliance will bring rich rewards.

by Graham Walter, Cognos
Last Updated: 31 Aug 2010

The phrase 'corporate governance' and stories around it regularly feature on the business news pages. But what does it actually mean for UK companies? According to a definition from Sir Adrian Cadbury in 2000: 'Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. (It exists) to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources.' Although this definition still holds true six years on, what this means in practice for businesses and managers today is a different story.

Cast your mind back 10 years: large and successful companies happily managed corporate governance and business performance using home-grown applications. Spreadsheets were the darlings of the CFO's world, and statutory regulations were low down the priority list. Managing corporate governance wasn't easy, but it certainly didn't dominate the board's agenda.

What a difference a decade makes. The backdrop for dealing with corporate governance today, compared to 1996, is almost unrecognisable. First, the business world has become increasingly aggressive, with greater emphasis on time-to-market and maintaining the competitive edge. With globalisation, more companies are working alongside external partners and suppliers to streamline costs and achieve competitive advantage.

Second, making business decisions on the basis of a single version of the truth and ensuring that all employees understand their contribution to business objectives is no longer just a nice-to-have but critical to success. Third, corporate scandals such as Enron and Parmalat have led to a growing list of financial regulations for listed companies to adhere to.

Put simply, the bar has been raised on what is considered to be the 'efficient use of resource', while what is required for 'accountability' has grown exponentially.

The business world has had to adapt its culture and processes. Media coverage has highlighted the burdens on companies and their failures.

But I believe corporate governance underpins the performance of any organisation - tightening it up can only benefit an enterprise. In fact, the change has been a good thing for both individual companies and UK plc as a whole.

The levels of transparency and accountability required have improved reporting and decision-making. Business choices are now based on fact, not instinct or guesswork. Having up-to-date knowledge about a firm empowers its employees. Nevertheless, there's a difference in opinion about who should be responsible - if anyone. Research carried out by BARC Research among 150 companies across Europe shows that most of them take corporate governance and financial regulations seriously. Seven out of 10 assign clear respon- sibility for meeting regulations. Other firms have put an individual or a department in charge, or the board sees to it. Yet one in five companies have no-one in charge and no supporting technology plans in place.

Because the landscape has changed so quickly, these regulatory issues may seem daunting. After all, major regulations such as Sarbanes-Oxley and IFRS were introduced in a short space of time. However, the recent announcement from the International Accounting Standards Board that it won't require any new standards currently under development to be applied before 2009 shows a slow-down in regulatory introductions.

We are finally entering a period of stability in corporate governance.

Regulations may become more stringent, and competition is only going to get tighter, but the culture shock is behind us. Organisations that embrace this change in corporate culture and invest in appropriate modern technology will still be around 10 years from now. Those refusing to adapt will fall at the hands of their competitors, the regulators, or both.

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