Company directors, auditors, lawyers, financial advisors, senior company executives and regulators all know of the increased importance being given to corporate governance. Part of corporate governance is tied to specific rules, while other parts are tied to what may be termed as good practice.

These rules should apply and in fact do apply not just to licensed companies and listed companies, but also to private companies. In some cases they have become very onerous – and rightly so.

One may ask what corporate governance is. The very same people that corporate governance rules are meant to protect may not fully appreciate what such rules are and why they have been placed there.

A cursory look at the dictionary would describe corporate governance as the mechanisms (some written and some unwritten) by which a business organisation (irrespective of its shareholding) is managed and controlled, keeping in mind the various interests of its stakeholders. The reason for corporate governance rules can be traced to various events. However, in the last few years, corporate scandals have been the main drivers prompting legislators and professional organisations to introduce new rules to safeguard investors and customers and the public at large against complacent boards of directors and senior company executives whose only objective seemed to be making money for themselves and no one else.

The very same people that corporate governance rules are meant to protect may not fully appreciate what such rules are

We have read about these examples in the media and every time our reaction tends to be one of disbelief: “How could this have happened?”

So the purpose of corporate governance may be said to be the development of a balance between entrepreneurship, which is inherent in any business activity, and prudent management.

Some may find the rules of corporate governance to be a nuisance that gets in the way of running a business. They claim that corporate governance is resulting in lower and not higher profits. I do not believe that we should view corporate governance from the perspective of profits. We should view corporate governance from the perspective of what is right.

Abiding by the rules of corporate governance means good business. I equally believe that the old mantra that business is there to maximise profits is no longer valid. Business is there to maximise profits within the rules which society creates for its members. Such rules are there to create social cohesion and to regulate relations among us. Business organisations are not exempt from such obligations.

The benefits of good governance for business organisations as well as society are several. I will just mention two.

First, they promote trust between business organisations and the public at large. People are more likely to have confidence in business organisations if their decisions are made in a transparent and accountable way. Good governance encourages businesses to remember that they are acting in the context of a society, which has rules, and helps them to understand the importance of having open and ethical processes which adhere to the rule of law.

The creation of this trust between a business organisation and the public at large is known to bring in more customers and in the longer term, leads to increased business and increased profits.

Second, good governance supports ethical decision-making. It creates the environment where businesses ask themselves ‘what is the right thing to do?’ when making decisions. Making choices and having to account for them encourages honest analysis of the options facing those with decision-making responsibilities.

There may be the temptation to consider corporate governance as a luxury, something that big companies can afford, simply to enhance their image. In effect the economy and the society at large require good governance to ensure that honesty and hard work prevail.