In relation to Corporate Governance, conventionally governance is focused on two main aspects, idiosyncratic (internal) and normative (external) matters. Idiosyncratic internal matters are mainly related to policies, diversity, management of international assets and ventures, M&As, codes of conduct and ethics, strategy, risk, organizational performance, efficiency, growth, financial structure and treatment of shareholders. While normative external matters relate to following rules under a jurisdictional framework where the corporation operates, for example, the fiduciary duties, legal system, compliance with duties related to a specific index where that organization is listed (e.g., quarterly and annual reports), and government regulation (e.g., tax). Both Corporate Social Responsibility and Sustainability are normally included.
The above encompasses what is known as an effective corporate governance framework, particularly at robust regulated countries such as Australia, the UK, and the USA. Usually the corporation complies systemically with normative external matters particularly where the headquarters of the corporation are based, in an effort to constantly increase successful capital for investment. Nevertheless, based on experience, for idiosyncratic internal matters the corporation is at constant risk for not complying effectively with recruitment and selection, policies, strategy execution, the risk management framework, fair representation related to ownership at international assets or ventures, which should be a due diligence process for M&As, common financial language with related lack of understanding of the financial structure, diversity, lack of awareness and understanding of the codes of ethics and conduct, and overall awareness of the business operations and commercialization. Furthermore, if the corporation has assets or ventures internationally or at different states where the headquarters are based, not only non-compliance for internal idiosyncratic matters may occur but also not complying with external normative matters are an important risk. In consequence, not complying internally with either normative or idiosyncratic matters could then trigger important adverse consequences for the corporation, specifically, financial and reputational liability.
In an effort to minimize and manage the financial and reputational risks associated with a lack of internal compliance for idiosyncratic or normative matters for the corporation, next I focus on recommending a conceivable effective approach for the corporation that could also serve to improve the corporate governance framework. Based on experience and a benchmark conducted globally mainly with International Oil and Gas Companies, presently the corporate governance framework is commonly managed by three entities, through the General Counsel (Law), through the Chief Internal Auditor (Internal Audit) or the Chief Financial Officer (CFO). Although these three positions have important access to the board and the chief executive, and their activities are critical for corporate survival, the most important disadvantage of these arrangements is the lack of operational, commercial and most relevantly behavioral knowledge required to successfully and comprehensively manage the corporate governance framework and subsequently decrease financial or reputational risks.
I argue that the corporate governance framework and its compliance, will be best managed by a stakeholder that not only understands thoroughly the operational model but also the specific commercial aspects of the business. That stakeholder should be supported by specialists in the field of governance, local and international regulation, international affairs, law, finance, internal auditing, risk and behavior. The office of the corporate governance framework should be also the entity accountable for:
Corporate local and international policy development and awareness
Nomination, allocation of competent staff to international assets or ventures
Dismissal of staff at international assets or ventures
Overseeing the fair representation of the company by staff at international assets and ventures
The corporate risk management framework – covering local and international assets and ventures
Internal local and international compliance, and related local and international communication
The codes of ethics and conduct and their continuous comprehensive redesigning
Overseeing the proper and comprehensive due diligence of M&As
Providing thorough and comprehensive awareness through training and development of all the above points
Supporting any corporate entity with adequate corporate awareness in relation to strategy, diversity, law, finance, and operational matters that could impact directly the corporate governance framework and its codes of conduct and ethics
I further propose that from a structural perspective, the office of the corporate governance framework should have three chains of reporting:
Reporting to the Chairman of the Board
Reporting to the Board Risk and Audit Committee
Reporting to the Chief Executive Officer
The above proposed structure is of main importance since the Board will be able to effectively comply with fiduciary duties and responsibilities related to the Corporate Governance Framework. Whereas, the Chief Executive Officer should provide critical input in relation to international operations and M&As.
Throughout my comprehensive corporate career, I have witnessed how the corporation and stakeholders in many circumstances have incurred reputational damage and how they suffer financially as a result of not understanding the role of an effective corporate governance framework and relevantly not complying appropriately with either normative external matters or idiosyncratic internal matters. Fixing reputation and recovering financially for lack of compliance related to the corporate governance framework, is a common and in many cases extremely expensive exercise influencing negatively capital investment, putting at risk the sustainability of the corporation, and most importantly not protecting shareholder interests.
I hope the above approach and propositions are helpful, and I look forward to discussing with you how your company, of any size, may benefit from an improved Corporate Governance Framework compliance.