Corporate governance for the small business

All the recent business failures happened in an era when corporate governance was almost a household term. Why?
Issue date : 28 November 2008

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Peter Hughes

Do these names ring a bell – POLY Peck, Enron, TWA, Arthur Andersen, WorldCom, Parmalat, Fidentia? They were all massive enterprises that collapsed in a spectacular fashion in recent years, leaving tens of thousands of employees without jobs and hundreds of thousands of investors much poorer. Added to these we now have the many recent bank failures. We now know that the global economic collapse that triggered these latest failures was due to poor corporate governance, which allowed the unbridled greed and lack of integrity of traders to make themselves and their bosses rich, without any thought of the consequences.

This all happened during an era when the concept of corporate governance has become almost a household term and has been given much attention. But it seems it was all just lip service. he term “corporate governance” was first coined in the early 1990s in the UK, which witnessed a number of corporate scandals and disasters including the collapse of the Maxwell Group, BCCI and the above-mentioned Polly Peck. A committee chaired by Sir Adrian Cadbury was appointed to address the issue. report was issued in 1994 and was updated by the Turnbull Report in 1999. fter the high-profile collapses of major companies in the US, the federal government passed the Sarbanes-Oxley Act in 2002 intended to restore public confidence in corporate governance.

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South Africa has been at the forefront of the issue and the SA Institute of Directors set up a committee under the chairmanship of Mervyn King, which issued the King l report in 1994, followed by the updated ll in 2002. further update, lll, is due for release early in 2009. But despite all this effort, businesses continue to fail. he International Federation of Accountants has been working with members in 118 countries to find out what’s going wrong. They identified five key issues that contributed to these business collapses: B ad culture and “tone at the top” where those at the top of an organisation, by their own poor example and failure to uphold ethical standards, allowed a culture to flourish in which secrecy, rule-breaking and fraudulent behaviour became acceptable or at best, ignored. he chief executive was a dominant, charismatic character who was able and permitted to wield unchallenged influence  and authority over managers and directors. he board of directors failed to oversee the chief executive sufficiently, who failed to adopt a questioning and independent approach to all material presented by management, and failed to take necessary action to avoid factionalism in the board. Internal control weaknesses were a logical outcome of the above three factors.

Poorly designed remuneration with excessive emphasis on short-term incentives distorted management behaviour to chase short-term earnings at the expense of the long-term interests of shareholders. You may feel these issues don’t apply to you, but you couldn’t be more wrong. Many small family businesses have come apart due to precisely the same failings. You might be the owner, director and chief executive of a business, but ignore good corporate governance at your peril. – Peter Hughes ([email protected] or call (013) 745 7303). |fw