It is clearly accepted that good corporate governance is fundamental to the successfully continuing operating of any company; hence much attention has been paid to the procedures of such governance. Often however what is actually meant by the corporate governance of a firm is merely assumed without being made explicit; often it is assumed to be concerned with how the company conducts its annual meeting, deals with auditors etc. Increasingly this has been extended into a more general concern with the management of investor relationships. In reality of course it affects all of the operations of a business and its relations with all of its stakeholders – a much more wide-ranging concern than is sometimes appreciated.
It is being recognised everywhere that good governance is important for corporate performance. Indeed firms are being expected to make statements about their governance as part of their annual reporting and every corporate website makes a statement about the company’s governance procedures. It is easy to claim that this is because of a reaction to all the corporate scandals which we have witnessed in the last decade, starting with the collapse of Enron.
Corporate governance is therefore currently an important concept the world over. It has gained tremendous importance in recent years. Two of the main reasons for this upsurge in interest are the economic liberalisation and deregulation of industry and business brought about through globalisationand the demand for new corporate ethos and stricter compliance with the law of the land. One more factor that has been responsible for the sudden exposure of the corporate sector to a new concern for corporate governance is that times have changed and there is a demand for greater accountability of companies to their shareholders and customers (Bushman & Smith 2001).
A significant part of the reason for this is due to the developments brought about through globalisation. The phenomenon known as globalisation is a multidimensional process involving economic, politic, social and cultural change. However the most important discussion about globalisation is related to the economic effect it has upon countries and the corporations operating within and across these countries. But this is not really the reason why governance has become so important. The reason is that investors are recognising that good governance leads to better financial performance.
The relationship is direct and the evidence is overwhelming. The evidence is so great that it is clear that investors are increasingly willing to pay a premium to invest in a company with good procedures for its governance. This is because they recognise that this will lead to expected improvements in sustainable performance which will, over time, be reflected in future dividend streams. In other words it is more profitable for an investor to invest in a well governed company and the benefits accrue both in the short term and in the long term.
There has been much written about globalisation – either positive or negative – and the effects which it is having. One consequence of globalisation though is manifesting itself in the structure and organization of corporations. This is concerned with the harmonisation procedures and structures which will manifest themselves through the emergence of global norms for corporate governance. One factor which is significantly affected by such governance is that of risk assessment and management. Good governance reduces and facilitates the management of risk. This is the focus of this book.