A new body is seeking to promote good corporate governance across all businesses - large, small, public, private and non-governmental. Its head, Jerry Kelly, explains why.
Corporate scandals are often perceived to be afflictions of major companies such as Enron in the US or SocGen in France. Perhaps this is because these stories get media attention whereas similar happenings in smaller organisation do not?
However, what well-governed organisations, big and small, with or without a public profile, share in common is a culture of accountability, transparency and probity. Once such a culture is present the board and managers can get on with the primary business of the organisation without feeling unduly burdened by the impact of regulations.
Examples of organisations with such a culture can be found among many leading Irish PLCs. The development of the culture can be traced by reading their annual reports over the past five years or so. These reports identify how they have separated oversight from executive control, how they have restructured the operations of their boards including the formation of specialised committees, and regularly evaluated boards and board members.
Listed companies have always sought to exhibit such compliance but the combined code principles of good governance created additional requirements related to how the board was structured and operated. These issues are too often overlooked by small and medium enterprises (SMEs) as they struggle to meet the ever-increasing demands of statutory and regulatory requirements.
The good news for SMEs is that whereas many of their problems with legislation up to now have been caused by legislation being drafted with large organisations in mind, change is on the way. The new companies Bill, expected shortly, has been drafted for SMEs and extra requirements have been added for larger organisations.
This change in approach should eventually make life less onerous for SMEs and if followed in subsequent years in other segments of the regulatory environment would constitute a new era for them where perhaps regulatory compliance can become part of the culture more easily for many of them.
Governance problems in SMEs are often most visible in family companies. Irish courts have been called on to settle disputes in family companies such as Dunnes Stores and Comans. Behind the cases lie fractured family relationships which might have remained intact if better governance structures and procedures had been in place.
To address such potential problems many progressive family companies now have two independent directors on their boards as one director alone can get isolated, defeating the purpose of the appointment. The arrival of independent directors usually leads to increased attention to the structure and composition of the board, establishment of systems to ensure regulatory and statutory compliance, better succession planning and strategic planning, more active and penetrative oversight and monitoring of operations by the board, and clearer separation of the affairs of the family from the business.
Keeping the business separate from the family avoids misunderstandings which can result in resources being committed without proper authorisation to something which subsequently causes a family row. Money in a company owned 100 per cent by the family is not family money! Good governance structures and processes can also make it easier to set down clear conditions for participation by family members in a business.
The rise of entrepreneurism in Ireland, as evidenced by the rapid growth in company registrations, indicates the SME sector is headed for growth. This will be the area which will benefit most from improved governance standards.
The voluntary sector will enter a new era when the Charities Bill becomes law. The sector has not been without its problems. Media attention to governance problems in the aid body Self Help caused them to be quickly addressed by the appointment of a new chairman with considerable experience in the corporate sector. Groups which had criticised Self Help were brought back on board. Other voluntary bodies where governance may not be ideal could learn from this.
The Corporate Governance Association of Ireland (CGAI) and Dochas are finalising a code of governance which Dochas envisages recommending to its member organisations for adoption. Adopting such a code will create confidence among donors that organisations are appropriately governed.
The CGAI is working to develop a similar code for their members who sit on the boards of Ireland's growing investment fund industry. Codes tailored to the needs of other sectors of the economy are planned.
While good corporate governance is assumed in the operation of State bodies there are governance deficiencies which perhaps start with the appointment of directors and the reporting relationships.
Unlike the UK, appointments to the boards of State companies and agencies are very much still the preserve of individual ministers. While some appointments may indicate more attention to finding appropriately skilled directors there have been many which do not create confidence in adherence to best practice in the public sector. The Institute of Public Administration (IPA) now has an active programme to assist State companies and agencies to introduce improved governance structures and practices as envisaged by the Department of Finance guidelines.
So, most PLCs and many larger private companies have much improved governance today compared with a decade ago. Rather than leading the way, the public sector, regrettably, has a lot of ground to make up.
Jerry Kelly is chairman of the Corporate Governance Association of Ireland, whose formation will be announced this week; www.cgai.ie