Corporate governance refers to formal and informal structures and processes that exist for oversight roles and responsibilities in organisations and institutions. Until the 1990s, the term ‘corporate governance’ was rarely uttered outside of law school texts and the academic world. Since the 1990s, there have been reforms in governance, but these have not been generally referred to as innovations, which is what they are. The general public hardly questioned the rules and behaviour governing organisations and institutions. The corporate scandals of the 1990s changed this complacency and corporate governance issues have come under increased scrutiny. The central challenge in corporate governance is how to make leaders accountable to their stakeholders while still having the freedom, incentives and control over resources to achieve the goals. Good corporate governance practices encourage institutions to create value whilst ensuring accountability using control systems commensurate with the risks involved.
Innovation is the adoption of a new tool, system, process or product/service stemming from entities need to change which is driven by the quest for improvement. The innovations in governance have already shown themselves in the evolution from:
- The preoccupation on mechanisms to mitigate the agency problem between shareholders and managers to tensions amongst stakeholder interests;
- From attention being skewed towards shareholders now to broader stakeholders;
- From emphasising financial measures to the triple bottom-line reporting, amongst others changes.
Innovation is one of the most difficult and elusive processes to manage. It is important that there is a balance between stability and continuity. Leaders have the responsibility of determining priorities for innovation based on changes in economic and competitive circumstances. It is important to accept that innovation inevitably involves a degree of risk. This risk is amplified when innovation in products, services and processes is encouraged with no commensurate oversight in the manner, processes and the rules in which these institutions are managed and regulated. This is an opportunity for innovation in governance to create greater alignment. Innovation in governance needs to become the core value and behaviour of both leaders and institutions - part of their DNA. A word of caution: the high uncertainty of radical innovations and their associated ambiguities can provide opportunities for unethical individuals to camouflage greed under the pretext of innovative strategies - such as what happened at Enron. Individuals in the private and public sectors should be guided by their conscience and the organisation’s values to always do the right thing, even in innovation.
Innovation better serves the world if it focusses on what really matters. The global economy is still reeling under the catastrophic consequences of innovations in the financial sector such as the collateralised debt obligations (CDOs). When innovation is left unharnessed, it can implode. Innovations should help maximise the utilisation of resources and capacities for stakeholder value, to encourage a transparent culture of disclosure and thereby improve good governance in general. However, shortcomings in corporate governance cannot be prevented through increased transparency and compliance - as the 2008 financial crisis showed, despite the innovations in Sarbanes-Oxley. Innovations in governance should be about better rules and practices promoting investment and growth. Globally, the domain of corporate governance is in flux as globahisation poses new challenges of how to regulate and manage entities across jurisdictions without undermining national sovereignties and due to the evolution of organisational and societal norms and values.
Systems of corporate governance vary from country to country and change over time, as they are influenced by the interplay between economic and political forces, legislation and regulatory agencies, the media and other factors. The next opportunity for innovation in governance is to find cross-border solutions which George Soros, the multi-billionaire and financier is a passionate proponent in terms of global governance reform. There is a new need for innovations to regimes of global regulation, global supervision and global risk management for global institutions (which most companies are now with the Internet). This new system of governance must simultaneously satisfy the interests of individual countries whilst maintaining effective oversight and control.
I would be very interested in your thoughts on global governance reforms and how you think it can practically work.