A great deal has recently been said and written about appointments of chairmen, board members, chief executives and many other matters related to government entities and authorities. This all relates to corporate governance, which is nothing more than the way power is exercised over corporate entities.
Corporate governance is totally different from management
Governance covers the activities of the board and its relationships with the shareholders or members and with those managing the entity as well as the external auditors, regulators and other legitimate stakeholders.
Corporate governance is totally different from management. This is a crucial point many overlook or fail to understand.
Executive management is responsible for running the entity but the governing body ensures that it is running in the right direction and is being run well.
Directors or board members are so called because they are responsible for setting the organisation’s direction, formulating strategy and policymaking. Furthermore, the board is responsible for supervising management and being accountable. Overall, the board is responsible for the organisation’s decisions and its performance.
Although the theoretical explanation of the subject is relatively new, the practice of corporate governance is as old as trade.
Shakespeare understood the problem in his play The Merchant of Venice where Antonio, the merchant, agonized as he watched his ships sail out of sight having entrusted his fortune to others.
Over the last years, various reports on corporate governance have been written in various jurisdictions and some noteworthy ones have been the following: the 1992 Cadbury Report UK; the 1997 Roundtable Report USA; the 2001 National Association of Corporate Directors USA and the 2010 Corporate Governance Code UK.
I have tried to summarise what I consider the most relevant and important principles:
Wider use of independent non-executive directors with ‘independence’ defined as one being ‘independent of management and free from any business or other relationship that could materially interfere with the exercise of independent judgement, apart from their fees and shareholding’.
Division of responsibilities between the chairman of the board and the chief executive or, if the roles were combined, very strong independent directors.
The duty of a board of a public entity is to select a chief executive officer and ensure the CEO and other senior management are involved in the competent and ethical operation of the entity on a day to day basis.
Board members should be appointed for different periods (say, some for two years and others for three etc) to ensure continuity and also to avoid sudden gaps as often happens in Malta with a change in government.
Performance-related pay should be aligned to the organisation’s business plan.
Good corporate governance should be integrated with the company’s business strategy and not viewed as a simple compliance obligation.
A critical component of good governance is transparency and many US and Canadian public entities publish their non-confidential version of the board minutes on their website.
Harvard Business School carried extensive research on corporate governance and identified six areas for improvement at board level in the USA, which could be applicable to most countries including Malta.
The six improvement areas were: clarifying the board’s role; acquiring deeper understanding of the entity; maintaining a sound relationship with management; providing oversight of a company’s or an authority’s strategy; assuring management development and succession; and improving risk management.
Good corporate governance of government entities seems to always be a controversial subject in this country. Therefore, the government should consider entrusting one of its departments or units to embark on a comprehensive development programme for all government entity board members and chairmen with the objective of improving the level of corporate governance.
Philip Micallef is a former executive chairman of the Malta Communications Authority.