Corporate Governance Revisited

By Sonny Zulhuda

(This constitutes the first section of the paper discussing on ICT risks management and corporate governance, presented in Brunei Darussalam, April 2007).

Corporate governance is now becoming a standard requirement for proper industrial conduct and effective organization. More so for micro and medium-sized enterprises (MMEs) vying for access to financial services, perimeters such as internal control, transparency, and disclosure of material information –among key areas of corporate governance– are something potential investors today would naturally like to see with particular interests. As Chapra and Ahmed (2002) argued, effective corporate governance is one of the most important pillars of the new environment that needs to be created to replace the old socio-economic environment that no longer exists. The functional definition of corporate governance is that it is ‘the system by which business corporations are directed and controlled’ (The Organization of Economic Cooperation and Development). This control requires an organizational framework that specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. The ultimate result of this framework is supposedly to provide the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.

Apart from that, corporate governance has wider implications and is critical to economic and social well being, firstly in providing the incentives and performance measures to achieve business success, and secondly in providing the accountability and transparency to ensure the equitable distribution of the resulting wealth.

The significance of corporate governance for the stability and equity of society is captured in the broader definition of the concept offered by the World Bank: “Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.” Indeed, this balanced relationship is the backbone of the harmony on which lies the fundamental social and moral values to be sought by corporations.Corporate governance is important, not just for investors, but also for the benefit of individual companies themselves. According to Teresa Barger, the director of Corporate Governance Department of the World Bank (2004), ‘good corporate governance in a business enterprise promotes operational efficiency, professional management, clear lines of authority and good risk management, all of which promote business success and improved profitability.’

On how it works, it was clearly demonstrable as to how a good corporate governance will have a direct impact to various stakeholders. To eternal investors, corporate governance is equal to operational success and lower investment risk. To governments, it means increased transparency, which leads to a more fair collection of tax revenues, and fair competition. Fair competition leads, ultimately, to faster economic growth as individuals and companies see that their investments will be protected, allowing better technologies, better products, increased employment and a growing economy better able to support an improving social infrastructure.

This is how corporate governance becomes part of a virtuous circle (Barger, 2004). The philosophy here is to instill a check and balance mechanism or system within the whole organization by faithfully complying with the legal and regulatory framework. And the objective is, as summarized by Chapra and Ahmed (2002), to ensure fairness to all stakeholders to be attained through greater transparency and accountability.

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