6 Corporate governance

As the world becomes one global market where capital flows and information can cross geographic borders with the click of a mouse, the reliability of the information will determine whether or not investors invest in an enterprise or country. Global investors are therefore not surprisingly promoting good governance in companies largely in their own self-interest. So, for example, the Association of Unit Trusts and Investment Funds in the United Kingdom requires member funds to inform their investors routinely in annual reports about their promotion of good corporate governance in the companies in which they invest. In the United States, the Employment, Retirement and Income Security Act requires the vote of the investor to be seen as a trust asset and to be treated with the same degree of diligence as cash and other assets under the management of the company. The International Trade Union movement, amongst many others, is mobilising labour-orientated funds as shareowners and activists to pool financial power across borders in order to press shared interests in corporate governance and social issues.

It is becoming increasingly difficult for companies to account for profitability alone. If there is a lack of good corporate governance in a market, capital will leave that market. Arthur Levitt, the former Chairperson of the US Securities and Exchange Commission stated: “If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular company’s practices may be – suffer the consequences. Markets must now honour what they perhaps, too often, have failed to recognise. Markets exist by the grace of investors. And it is today’s investors that will determine which companies and which markets will stand the test of time and endure the weight of greater competition. It serves us well to remember that no market has a divine right to investors’ capital.”

The significance of corporate governance is now widely recognised, both for national development and as part of international financial architecture, as a lever to address the converging interests of competitiveness, corporate citizenship, and social and environmental responsibility. There is consequently a move from reporting exclusively on the single bottom line to the triple bottom line, which embraces the economic, environmental and social aspects of a company’s activities. The economic aspect involves the well-known financial aspects as well as the non-financial ones relevant to that company’s business. The environmental aspects include the effect on the environment of the product or services produced by the company. The social aspects embrace values, ethics and the reciprocal relationships with stakeholders other than just the shareowners. There is an endeavour now through the Global Reporting Initiative to lay down guidelines on how a company should report on the triple bottom line.

The Investor Opinion Survey published in June 2000 by McKinsey & Co., working with Institutional Investors Inc., found that good governance could be quantified and was significant. The survey found that:

v      More than 84% of the more than 200 global institutional investors, together representing more than US$3 trillion in assets, indicated a willingness to pay a premium for the shares of a well-governed company over one considered poorly governed but with a comparable financial record; and

v      In developed markets the premium could go as high as 18%: in emerging markets or markets perceived to have poor governance practices, this premium escalated to 22%.

The implications for companies are profound: considerable shareowner value can be added by simply developing good governance practices. The creation of a good governance culture can make companies and countries, especially in emerging markets, attractive to global investors. Whilst there can be no single generally applicable corporate governance model, international guidelines have been developed by the Organisation for Economic Co-operation and Development (OECD), the International Corporate Governance Network, and the Commonwealth Association for Corporate Governance.

If the 19^th century was about entrepreneurs laying the foundations of modern corporations, and the 20^th century was about management and management techniques, then the 21^st century is about legitimacy. As the focus swings to the issues of legitimacy and the use and abuse of power by countries and corporations, the century ahead “promises to be the century of governance.”[10] Stakeholders will increasingly look for evidence of good stewardship by the directors of enterprises. 

The responsibilities of a board under the inclusive approach in the 21^st century will be to define the purpose of the company and the values by which the company will perform its daily existence and to identify stakeholders relevant to the business of the company. The board must then develop a strategy combining all three factors and ensure that management implements this strategy. The board will be required to monitor that implementation.

Inclusive corporate governance by definition addresses and encompasses the issues of sustainability. In the corporate governance context sustainability can be seen to focus on those non-financial aspects of corporate practice that, in turn, influence the enterprise’s ability to survive and prosper in the communities within which it operates, and so ensure future value creation. This represents the essence of corporate social responsibility: “Business decision-making linked to ethical values, compliance with legal requirements, and respect for people, communities and the environment [evidenced by] a comprehensive set of policies, practices and programmes that are integrated throughout business operations, and decision-making processes that are supported and rewarded by top management.”[11]

Architects and architectural practitioners, whilst falling outside of the direct gaze of investors, will nonetheless be expected to assist their client in adhering to the requirements of good governance. If corporate governance is about leadership, architects will have to accept the responsibilities associated with the trust placed in them. They too must exercise leadership: leadership for efficiency, leadership for probity, leadership with responsibility, and leadership that is both transparent and accountable.

Viewed from a holistic perspective, therefore, the environment should be classified as an interested and affected party in its own right within the category of stakeholders that have a non-contractual nexus with the company, i.e. society at large. Placing emphasis on the environment as a stakeholder in its own right should encourage all conduct to focus on the preservation all life.

Go to 7 Commonwealth response to sustainable development

Back to 5 Global agreements on sustainable development