UCD: Understanding the importance of corporate governance

It’s a subject that has become even more important since the financial meltdown

Niamh Brennan: “Failures of corporate governance at every possibly level you can think of caused the banking crisis. That should be the strongest possible evidence of its importance.”

Niamh Brennan: “Failures of corporate governance at every possibly level you can think of caused the banking crisis. That should be the strongest possible evidence of its importance.”

Mon, Apr 14, 2014, 01:00

Until our dramatic financial crash, corporate governance didn’t set many pulses racing. Generally defined as the set of rules, practices and processes by which a company is directed and controlled it is not really a subject which very many people would find entertaining. But this doesn’t mean it is not vitally important.

“Surely we should have learnt something from the banking crisis”, says Prof Niamh Brennan of the UCD Centre for Corporate Governance. “Failures of corporate governance at every possibly level you can think of caused the banking crisis. That should be the strongest possible evidence of its importance.”

She points out that up until that juncture there were complaints that corporate governance rules were too restrictive. “Before the banking crisis we had captains of industry saying that corporate governance was getting in the way. Some people want to do what they want, whoever they want, completely unfettered by rules. But this is not possible; corporations are part of society and they must behave as responsible citizens.”

According to Prof Brennan, corporations have a duty to behave ethically and responsibly especially in light of the protections offered their directors and owners by limited liability. “This allows them to potentially become fabulously wealthy without personal risk.”

One of the problems she sees with corporate governance is that it is so poorly understood. The term is bandied around but people have different perceptions of it. On the one hand there are those who perceive it as a rigid, almost anti-business, set of rules which hold back progress and growth, and on the other extreme there are those who see it as merely paying lip service to decent behaviour.

Risk management
“You need to strike a happy medium between a total mess and being squeaky clean,” she says. “You have to have controls, but not so rigid or extreme that they would constrain entrepreneurship. You have to allow for profit, we want people to take risks. Part of the purpose of a company is to take risks and that’s why an essential part of good corporate governance is risk management.”

Good corporate governance is not simply a box-ticking exercise, however. “Companies can very easily exhibit the traits associated with good corporate governance but this doesn’t mean a lot. It’s not a case of the usual suspects. Even the worst companies can make everything look fantastic in the annual report, but you would never know if they were involved in practices like rigging Libor rates. The annual report can’t tell you about the culture of a company.

“For example, GM is at the moment having to answer questions about a fault they knew about in cars for years which has resulted in the deaths of several people. The GM case and the Libor rigging cases in the financial services sector are examples of companies where the management simply thought they would never be caught or if they were that they would have moved on by that time.

“The life cycle of executive careers with any one company is very short and in many cases they will have taken their bonuses and stock options and gone. Very often the people who cause the damage are not the same as the people who get punished for it. In Ireland, it was the taxpayers who were punished for the banking collapse.”

Prof Brennan believes that short-term thinking is one of the biggest enemies of good corporate governance. “This is why corporate governance is so endlessly fascinating; in many respects it is the same as the study of human behaviour. We tend to make regulations which expect good behaviour without taking into account the reality of human behaviour. And there are always dangers in how you incentivise good behaviour. For example, if a rich person needs a life-saving operation and offers a surgeon €1 million to perform it successfully, it might not achieved the desired result. The surgeon might be thinking too much about the money to work at their best.”

But corporate governance rules do not force good behaviour on people in any case. Much of it operates on what is known as “soft law” with companies either adhering to codes of good practice or explaining why they did not. According to Brennan, this means that companies can almost do what they want and the lack of oversight from institutional investors can mean that they may not be brought to account even when they do something extremely bad. “The media has an important oversight role in this respect”, she claims.

Right decisions
In the final analysis she believes that good corporate governance comes down to people. “If you have people who duck and dive around the boardroom table, that sets the tone for the whole organisation”, she points out. “The board appoints the CEO and what kind of person will it appoint if the board is made up of people who believe that the end justifies the means when it comes to making profits.”

Helping board members make the right decisions was partly what motivated her to establish the UCD Centre for Corporate Governance in 2002. The centre offers courses for Irish company directors covering all aspects of corporate governance, from the role of the individual director through to business strategy and company boards.

“At that time I was being offered a lot of board appointments and I realised that I hadn’t a clue what to do as a board member and thought that many other directors must be in the same position, so I set up the centre to address that issue. The centre offers short courses for directors, courses for specific company boards and a one-year diploma for people who are corporate governance addicts like me.”

Applications are currently being accepted for the next diploma programme starting in September. The course is designed to provide systematic education and training to current and prospective company directors of all types of companies and organisations. It provides participants with the knowledge and skills necessary to carry out the increasingly onerous duties and responsibilities of company directors and participants gain the technical competence to carry out the varied tasks required of them.

Unfortunately, while the harm that bad corporate governance can do has been clearly illustrated by scandals such as Enron and the near collapse of the global financial system the benefits of good corporate governance are less clear. “I wish I could tell you that there is a clear link between good corporate governance and firm performance but I can’t. If you relate it to long-term firm survival there is a link. It has a positive effect on that but not on short term profitability.”

With most ordinary shareholders, workers and citizens focusing on the long-term survival and sustainability of companies, this should be sufficient reason for all companies and society generally to pay more attention to this subject.