Good Corporate Governance Hinges On A Number of Elements Such As Principles
Good Corporate Governance Hinges On A Number of Elements Such As Principles
Corporate governance (CG) is one of the most talked about topics in business
today.
There are many of you who, like me, recall financial failures in previous decades.
Scandals involving companies like BCCI, Baring, Sunbeam and Credit Lyonnaise.
What has changed? Well, the world has changed since the 1980s and 1990s.
More and more people have a stake in the performance and conduct of public
companies, through stocks, mutual funds and pension plans. Investing in public
companies has in many countries become an activity open to anyone with a
computer and a relatively few dollars.
This has greatly increased the political salience of capital market performance.
As well, the globalization of business and communications, increasing technology
and increasingly complex financial transactions, mean that a business failure
anywhere touches people everywhere. A failure in London impacts the markets in
Lagos. This is why a recent survey of business leaders by the Economist
Intelligence Unit found that the attention being paid to corporate governance is
increasing worldwide and will continue to do so into the future.Some of those
behind the scandals of the past two years were accountants. However, they were
not the only ones to blame. In fact, thousands of accountants like those of you
sitting in this room today are dedicated to providing quality work and to putting
your integrity ahead of short-term commercial interests.
Nonetheless, the scandals created a ripple effect for our profession -- accountants
who fail in London negatively affect the trust and reputation of accountants in
Lagos, and vice versa. To be sure, some of the criticism concerning auditors and
their role in these failures has been fair. Some of it was not. Part of our job, as
trained professionals, has been to see what we could learn from the events. I
want now to talk about some elements of IFAC’s response to these events,
focusing on those related to corporate governance.
IFAC took the approach of addressing this challenge on two levels: focusing on
improving the role of accountants in the governance and financial reporting chain,
and developing a plan of action to improve corporate governance as a whole. We
recognized that enhancing public trust through our commitment to the highest
standards of quality and integrity required real action as well as the ability to
effectively communicate that action to all of our stakeholders, including the
public.
While these corporate failures have placed the accounting profession under
unparalleled scrutiny, they have also provided us with unparalled opportunity to
effect reform and change. Obstacles to enhancing professional standards of
quality, integrity and independence have melted away. In a sense, Enron and its
cousins compelled us to take a hard look at our core values. What we have
relearned is that our profession is built on public trust. It’s all we have. But it’s an
awful lot. It’s what keeps the markets working. In order for the public to have
confidence in the quality and integrity of our work, we need to earn their trust
every day.
Now to the broad scope of corporate governance. As many of you know, IFAC has
taken a leadership role in responding to the crisis in corporate governance. We
regard this as a long-term challenge, one that will require long-term solutions, not
quick fixes. And we are far from alone in addressing these issues. Just last month,
the Organization for Economic Cooperation and Development – OECD – approved
a revised version of its Principles of Corporate Governance to address issues that
have undermined the confidence of investors in company management. The
revised principles include new recommendations for good practice in corporate
behavior. IFAC contributed to the process through which the OECD undertook the
revision and supports both the principles and the encouragement for
international convergence of corporate governance practices that are based on
these principles. I would encourage you all to go to the OECD website to view and
understand these principles.
The issuance of these new principles further reinforces IFAC’s position that to
rebuild and maintain public trust in companies and stock markets, action must be
taken at all points along the information supply chain.
Effective corporate ethics codes need to be in place and actively monitored; such
codes should be supported by training. Codes of conduct need to be put in place
for other participants in the financial reporting process - such as investment
analysts and lawyers - and their compliance should be monitored.
This Closer Look takes a broad view of the topic, with the goal of addressing the
following questions:
What are the key issues in CG, as regards business’ social and
environmental impacts and opportunities?
How do leading thinkers perceive the issue?
What is the current state of practice on MBA campuses?
What teaching resources are available to business school faculty?
Principles
Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability,
mutual respect, and commitment to the organization.
Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards
invested capital. Regular board meetings allow potential problems to be
identified, discussed and avoided. Whilst non-executive directors are
thought to be more independent, they may not always result in more
effective corporate governance and may not increase performance.[6]
Different board structures are optimal for different firms. Moreover, the
ability of the board to monitor the firm’s executives is a function of its
access to information. Executive directors possess superior knowledge of
the decision-making process and therefore evaluate top management on
the basis of the quality of its decisions that lead to financial performance
outcomes, ex ante. It could be argued, therefore, that executive directors
look beyond the financial criteria.
Competition
debt covenants
demand for and assessment of performance information (especially
financial statements)
government regulations
managerial Labour market
media pressure
takeovers
Many factors are influencing enterprise governance in India, and it is becoming
imperative to implement IT governance practices Here . we talk about the various
regulatory requirements that are impacting the adoption of IT governance and
take a closer look at the Control Objectives for Information and related
Technology (COBIT) framework, which is extensively used in India as an IT
governance and IT assurance framework.
Why IT Governance?
Corporate governance in India is evolving, primarily due to regulatory
requirements, but also, to some extent, due to each enterprises specific needs
and context. The objectives of corporate governance are fulfilled by setting up an
appropriate structure and functioning mechanisms for the board of directors and
audit committees, as laid down by the Companies Act, 1956. It is critical for each
enterprise to establish its own specific governance system based on its own
specific constraints and business culture.
Listed Companies
SEBI introduced a mandatory audit to ensure that this is maintained as per its
norms by all listed companies as part of corporate governance and came up with
an updated Clause 49 to address this requirement. Although Clause 49 primarily
focuses on corporate governance, there are two key sections Clause 49 IV (C) and
Clause 49 Vthat make it imperative for listed companies to implement IT
governance.
The first step is to map the relevant business goal of an enterprise from the point
of compliance with the business goals provided in COBIT. For example, one such
business goal under the financial perspective category of such listed companies is
to improve corporate governance and establish transparency. This business goal
can be linked with two IT goal respond to governance requirements in line with
board direction and to establish clarity of business impact of risks to IT objectives
and resources. The selection of these IT goals provides the specific IT processes
(under the domains of plan and organize [PO] and monitor and evaluate [ME]) of
COBIT to be selected to meet compliance requirements:
The final step would be to select the relevant control objectives under these IT
process and use them as a benchmark for adoption/evaluation as required.
In the Government
The scope and coverage of IT in C&AG encompasses various types of information
systems audit, process approach, specialized audits, forensic audit, system
development life cycle approach, value for money (VFM) approach, financial audit
and performance audit. All of the IT audits by C&AG staff are based on COBIT as
the main audit criteria. COBIT is used as the umbrella framework under which
specific technology and business related controls are integrated.
The audit guidelines of the COBIT framework are suitably adapted to the specific
IT and business environment of the enterprise. The audit objectives are mapped
to COBIT, and the relevant high level control objectives are selected for
evaluation. C&AG has done excellent work in promoting IT governance among all
the government entities by using COBIT best practices as a benchmark for all the
IT audits it conducts.
Banking
The Reserve Bank of India (RBI) has been at the forefront of promoting IT usage in
India. It has issued regular guidelines on IT, IT security and controls, and IT
governance, and has been conducting IT audit as part of the regulatory review of
banks IT systems. RBI has used COBIT as a reference framework for issuing
guidelines to banks and also for conducting IT audits. Various components such as
pre-launch audit, post-implementation studies and regular IS audit follow
internationally accepted norms and approaches. The large scale use of IT in day-
to-day operations has also added a new dimension to the risks associated with
these activities, which has necessitated appropriate risk management systems.
In MNCs
MNCs use IT extensively for integrating their Indian operations with the global
operations. As part of the standardized global operations, these companies
mandate the implementation of global best practices. Hence, the adoption of IT
governance best practices is an accepted norm in these companies. Further, these
companies are subject not only to Indian regulatory requirements, but also to
regulatory requirements of their parent companies. Consequently, implementing
IT security and control practices based on globally accepted frameworks is
enforced.
IT Companies
Adoption of IT governance in IT companies is necessitated by a combination of
regulatory and management requirements. Most of the IT companies are at the
forefront of adopting global best practices as a business requirement, as this acts
as a differentiator in procuring clients and demonstrates the organizations
services and capabilities. Further, as the majority of Indian IT companies revenue
comes from providing software development, IT implementation and IT
consulting to companies outside India, they have to meet the relevant regulatory
requirements of their clients. These companies are also subject to regulatory
audits, such as a SAS 70 audit, which makes it imperative for them to adapt global
best practices. Many of the top IT companies have started IT governance
consulting services as one of their key offerings.
Conclusion
IT governance as a concept in India is not as widely known as it needs to be, but it
is being adopted and implemented to an extent as a result of various regulatory
requirements and effective best practices. IT governance is being implemented as
a subset of corporate governance due to the regulatory and assurance
requirements of SEBI, C&AG, RBI and the Companies Act. However, it is also
increasingly being recognized that the real benefit of IT governance is not just
implementing it from a compliance perspective, but from a performance
perspective also to ensure that the organization receives real business value from
IT.