Corporate Governance and Sustainability in the Context of Contemporary Organisations
The contemporary world shows the importance of corporate governance and sustainability with global issues such as Covid 19. It is a very tough time for businesses to survive. Firms working only with the profit motive face many difficulties when managing the organization in the long run and its ability to gain sustainability. Sustainability is a predominant concept in the last few years due to natural disasters such as wildfires, global warming, ozone depletion, ocean acidification, biodiversity losses, climate changes, and pandemics. (Mason, 2021) Sustainability means meeting our own needs without compromising the ability of future generations to meet their needs. The three pillars of sustainability are Economy, Society, and the Environment. Companies must set their strategies considering those 3 pillars when attaining sustainable growth.
Why do we need Corporate Governance?
Large corporations are owned by shareholders while it manages by their agents, board of directors. The investors expect the board of directors to govern the organization while meeting their expectations. As the management have their own interest as well it creates the agency problem. Bigger the organization, the higher separation between them. That is where corporate governance comes to play its role. (Chen, 2021) Corporate Governance is the set of rules, processes, and practices by which a firm is directed and controlled. Ensuring the corporate governance in the firm is the duty of the board of directors. Corporate Governance shows how to meet the interest of different stakeholders (parties who has an interest in the business) of business such as customers, suppliers, investors, employees, government, and the community. It is not compulsory to follow corporate governance by law in some countries. There are 3 categories, comply, rule-based, or mix of rules and principles. Corporate governance mainly improves investor confidence and supports the market to thrive.
Absence of Corporate Governance
(SEGAL, 2021) Enron Scandal is the biggest scandal that shows the value of corporate governance. Enron, one of the largest companies in the USA CEO and CFO window dress their financial statement by showing the mark to market value instead of historical cost accounting. By this method, they showed projected profits while they are lost in the business. Even after that, they use special purpose entities (SPE) to hide their debt and losses from the investors and to get investments. This SPE was capitalized by the Enron stock which shows the risk of falling share prices would fall the value of SPE too. When the analysts questioned Enron's transparency by 2001, the stock prices started to drop down from $90.75 peak to $0.26. After the Enron scandal, President George W. Bush signed Sarbanes-Oxley Act in July 2002 by adding compliance rules into the law. As a result of this scandal, Enron went bankrupt while the Arthur Anderson audit firm which was in the big 5 audit firms shut down. This situation shows the importance of good governance within the organization. In America, the corporate governance rules were enforced by law after the Enron scandal through Sarbanes-Oxley Act. While in the United Kingdom, Sri Lanka and many other countries practice mix form of rules and principles of corporate governance. Even with the rule-based corporate governance America reports the highest number of breaches in corporate governance which questions the power of law. (Abid and Ahmed, 2014) In most of the past scandals such as in the Maxwell case, Ahold supermarket chain scandal, Siemens case, Olympus case, and Glaxo China case, management held responsible for cooking the books fraudulently against corporate governance. In the largest corporations, the performance of top management, internal and external audit committees disappointed the stakeholders due to failure to meet their expectations and falsification of financial reports. Due to the greediness of the top management, there were many fraudulent actions and those scandals ended up closing businesses. These scandals prove corporate governance is a necessity for the survival of the businesses in the world.
Corporate Governance and Sustainability to meet the interests of stakeholders.
(Team, 2021) Corporate governance can break into 4Ps People, Purpose, Process, Performance. Under people how to manage every stakeholder in the business. The purpose is the mission of the firm where all the objectives are focusing on. The process is how the company achieves its purpose and this will be monitored and must change as required. Performance is looking at the results of work and again improving the existing process. Practicing good corporate governance ensures sustainability while bad corporate governance will affect the stability of the organization.
From 2019 onwards covid 19 proves the uncertainty of developed, developing countries, big corporations, jobs, and life. For a certain period, countries which affected by covid 19 closed their businesses and there was no income for the economies. It’s a very tough time for all businesses and people as well. Many people lost their jobs while some companies had to close their businesses. (Donthu and Gustafsson, 2020) Companies need to adjust to employee well-being and the HR team must practice relationship-oriented practices within the organization to keep greater satisfaction, performance within the organization. Providing training, socialization by face-to-face interaction is another important aspect of proper governance. While some people suffered after getting infected by a virus most of the people had to spend their time inside their home which causes huge mental pressure. The whole world had to adapt to this situation swiftly. Businesses had to investigate sustainable methods to govern businesses. Many organizations switched to work from home concept to keep the business running, employment, and to reduce social and economic impact. Many companies tried to pay their employees with some salary cuts to be responsible and the business running. Companies use technologies to improve processes, paperless work, and save power.
In addition to the employees, the businesses had to support the public. Alibaba co-founder Jack-Ma donated medical supplies around the world. (Ardill, 2021) Companies such as Accenture, Bristol Myers Squibb, Citi, Dropbox, Liberty IT, and other many more companies supported humankind to cope up with the covid 19. Understanding the needs of different stakeholders and making a positive impact on society as a corporate citizen ensure the sustainability of the organization.
Lloyd (2021) explained how to manage firms using the Doughnut Economics concept which was introduced by Kate Raworth. The concept mainly highlights balancing the organizations to meet the expectations of all the stakeholders.
Companies and individuals must focus on being in the middle of those 2 rings which are the ecological ceiling and social foundation. With the current situations when companies plan their strategies to grow it is crucial to consider the above doughnut structure. Since companies are a group of people it is important to structure the organization to protect every individual without falling into the inner hole or the outer. When applying doughnut economies, the following points must be considered.
· Encouraging strong internal and external networking.
· The value of the organization must be spread to all stakeholders for them to feel appreciated. The business design must be distributive and regenerative.
· Maintain a healthy working capital system, pay the suppliers on time to keep their businesses stable.
· Prepare a plan to have diverse funds.
· Motivate employees and ensure balance in ownership without getting diverted from the purpose and values of the business. Communicate the purpose of the business and values for others to focus on.
· Make sure to spend a fair share of profit with employees and the community.
· Most importantly companies should grow only if it helps the planet. If the growth of the business harm the planet the organization would fall down the outer ring which is very risky during this time.
Corporates and Individuals who are there in the green area can be called as “ecologically safe and socially just space”. By positioning companies and individuals in the safe zone, we can attain corporate governance and sustainability together.
Protecting Environment, Environment conservation is essential when setting the strategies of the company. Companies must focus on recycling, power saving, water conservation programs as well to be good corporate citizens to nature as well. Encouraging employees as well, starting from the top to protect the environment will make a great impact to be environmentally safe.
In the short run doing corporate social responsibilities will show as a cost for the organization. Implementing processes and adhering to all corporate governance practices will cost the firm. Looking into the long run the businesses with corporate governance will perform much better. Corporate governance will help the organization to gain the trust form the public. (Tiger, 2016) The four pillars of corporate governance are Transparency, Accountability, Fairness, and Responsibility. All the stakeholders expect companies to meet those basic pillars of corporate governance. Employees are willing to work in a supportive organizational culture with more transparency. Customers will pay premium prices for the products where the company is accountable and fair in business. The investors will invest their hard-earned money in a more reliable and responsible business. The government will encourage the corporations which pay their taxes on time, meet all the legal expectations, and support the communities as it brings a positive impact to the economy and society. Corporations that conserve the environment will face fewer legal issues and may be praised by the public, and as a company will attain sustainability which helps to thrive in the long run. Companies with sustainable strategies will secure their long-term profits and stability. Protecting the environment is a main component of sustainability in the modern world. While lack of corporate governance will cease business, maintaining positive corporate governance and sustainability will flourish the contemporary organization while making a positive impact on all stakeholders.
I would love to welcome your new opinions on how to improve corporate governance to attain our goal of Sustainability?
References
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