Measuring the Effectiveness of Corporate Governance

by Dr. Yilmaz Argüden for Insead Knowledge, April 15, 2010

 Trust is the foundation of sustainable development. As the world continues to get smaller, our mutual interdependence increases and we all need to be able to mobilise the resources and goodwill of others to achieve success. That can only be achieved through gaining their trust. Therefore, the ability to gain the trust of global financial markets and of all the stakeholders in the value chain is becoming the key to success.
The essence of good corporate governance is ensuring trustworthy relations between the corporation and its stakeholders. Therefore, good governance involves a lot more than compliance. Good corporate governance is a culture and a climate of Consistency, Responsibility, Accountability, Fairness, Transparency, and Effectiveness that is Deployed throughout the organisation (the ‘CRAFTED’ principles of governance).
Boards have the basic responsibility to ensure sustainable improvements in corporate valuations by providing strategic guidance and oversight regarding management decisions, as well as selecting and changing the management whenever necessary. Success can only be achieved on a sustainable basis, if boards behave as a role model for implementing the CRAFTED principles of governance in their own operations and ensure that the corporation follows these principles in making key decisions.
The board of directors is the most important element in corporate structures. The tone at the top determines the tune in the middle.*In particular, clear separation of management rights (taking initiative and implementation) and governance rights (guidance, approval, and oversight), is critical in minimising potential ‘agency’ risks of the management such as:
• fraud
• cronyism, building a personal fiefdom with company resources
• lethargy, focusing on excuses as opposed to results
• being too risk averse that may lead to overinvestment
• being too risk prone

….(continue reading)

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