Corporate Governance is the nature and extent of accountability of people in the business. It includes the relationships with internal and external stakeholders. The current economic crisis and moreover it’s root causes, should urge companies to revisit their governance towards their stakeholders.
One of the main elements of governance is to serve the interest of external stakeholders. “Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.”
The other related element is: Integrity and ethical behavior. “Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making.”
The current economic crisis finds it’s causes in taking excessive risks and lack of transparency in financial products. Companies exposed the market to financial products which enclosed a severe risk. For years companies took benefit from these products in an upgoing market. But predictable, the bubble that was created finally collapsed. To what end can this be incorporated into governance?
Taking such large risks with a worldwide impact at own benefit, without considering the negative impact, is hardly proper business. The effects of the financial collapse has already led to various bankruptcies, loss of jobs and severe budget deficits at National level. Governments were forced to undertake large investments and put down guarantees to uphold the financial system. It is astonishing that many financial companies, which were saved at the last minute, now continue to pick up were they left off. As a result those companies pick up the profit as were the Government is taking the financial burden.
So much for corporate governance, which aims at a responsible way of doing business, which incorporates the interest of all stakeholders. Even though the market and financial laws permits such actions, it is not said the one should perform in such way. The often heard argument that competition is forcing your hand is flaw. If your business depends solely on what your competition is doing and is forcing your hand, your business strategy surely needs a revisit. Such strategy is bound to fail as that strategy fails to differentiate you from competition and it is a sure prove of lack of innovation. Was the hand of Steve Jobs forced by competition? Not at all. He found his own blue ocean, leaving is competition sinking in the red ocean.
And even if business is unwilling to pick up the glove of ethical and responsible behavior, it should be aware that due tot the severe budget cuts at national level, which finds it’s way into the pocket of citizens, corporate governance might end up being enforced by law. Already in Europe, various laws are prepared that will limit the irresponsible and risk-taking financial products. Transaction tax is underway, which will reduce the profitability of products and of companies. Financials might complain about that, but they should take a look into the mirror. In a global society one can not pretend to act solely and serving it’s own interest and expecting that the other stakeholders will accept such behavior. That is ignorance. Corporate governance is to ensure a proper balance between the various stakeholders. It is quite clear that we were out of balance for quite some time. And as the clock ticks, the pendulum waves from left to right. The stronger the movement towards one side, the stronger the pendulum waves back.