• Fundamental corporate governance reform required

    Posted on August 16, 2012 by in Strategic analysis

    Corporate governance has been reformed and improved, but recent evidence suggests there is more to do.

    Financial Services

    As Standard Chartered Bank and HSBC join Barclays in the rogues gallery of banks that have suffered severe failures of corporate governance, the reputation of commercial banks can, surely, only be recovered through fundamental reform of corporate governance rules, and the associated regulatory bodies for the financial services industry.

    Other industries

    Today’s revelation that Oracle Software will pay $2m (£1.27m) to settle federal civil charges of failing to prevent secret payments in its Indian sales operation and the recent fiasco here in the UK surrounding the inability of G4S to fulfil its contractual obligations to give security for the Olympic Games suggests that corporate governance issues extend to businesses in other industries beyond financial services.

    Corporate governance regulation and culture

    There have been number of actions in recent years that should have improved things. In the UK, for example, there have been changes to the regulatory bodies responsible for financial services, but the evidence suggests that there are too many cases of the FSA having to ‘cure’ problems and not having prevented the problems in the first place.
    In many cases of systems failure, the cause can be attributed to lack of commitment of people to, in this case, the regulatory regime and, therefore, the principles underpinning it.
    Cleaning up the behaviour of people inside businesses requires significant change to the culture of many corporations. The culture is informed by the values which, in young, small firms are set by the founder and in large, more mature corporations are set by the Board. In both cases, the existence of a culture that allows, or in extreme cases, condones bad practice is a failure of leadership.
    Reinforcement of the standards expected by society can be addressed, at least partly, by flies and regulation. In this case, the failure of regulation could also be a failure of leadership which, in this case, means political leadership. However, as the financial and political strength of corporations grows alongside their international reach, political failings aren’t always attributable to political leaders. In many countries the ability of national regulation to control global businesses is severely limited due to the relative political and economic weakness of small nation states relative to large, global corporations.
    If we take banking as a defined segment of the financial services market, it might be time for national governments to recognise that co-operation towards a unified international corporate governance framework of principles, regulation and enforcement backed up by co-ordinated action through national governments is overdue.

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