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Creating Value through Governance
by Paul Moxey, Head of Corporate Governance and Risk Management, ACCA | April 8, 2014 |
In February, the Association of Chartered Certified Accountants (ACCA) launched a consultation paper, Creating Value through Governance—Towards a New Accountability. It considers if corporate governance has helped business to create value or whether something has gone wrong. The paper suggests that corporate governance is vital to society’s creation of economic well-being.
Achieving good corporate governance is complex: it involves economics, politics and fundamental aspects of human nature, as well as business and markets. Ultimately, governance is about good decision making. As providers of financial information to support better decision making, accountants play a key role.
Capital markets, and attitudes toward them, changed radically in the 20 years since the present direction of governance was set. Therefore, the paper questions whether existing corporate governance and risk-management frameworks remain fit for purpose in light of current financial and economic conditions and our experience of how the frameworks have operated in practice over the past two decades.
The paper also discusses governance in the context of difficult topics, such as the nature of wealth, economic growth, value and money, and the challenges of measuring performance. It notes both that finding suitable measures of performance can be difficult and that measures can get gamed leading to untended consequences. It also discusses a concern that risk management in some organizations has become separated from management.
Creating Value through Governance argues that corporate governance is, or should be, about creating value and that governance codes should be evaluated on how well they facilitate this creation of value. It sets out how a framework of “performing, informing, and holding to account” can help assess and enhance how well governance is working:
- Performing: companies and those working within them, including the board, must perform, i.e., deliver performance that contributes value;
- Informing: companies and those working within them need to provide good information on their performance to those to whom they are accountable; and
- Holding to account: those who need to hold others to account (such as shareholders in relation to boards and boards in relation to executives) should actually do so.
The consultation highlights the problems with how all three elements work in practice—particularly with the last one. There are numerous examples of boards not having held executives to account and shareholders not doing as much as some people would like in holding boards to account. The paper analyses the issues and asks a number of questions to stimulate thinking and understanding.
The hope is that this inquiry will lead to a better understanding of the problems and, consequently, to some solutions.
ACCA welcomes general comments about the analysis and issues raised in the paper and responses to the questions asked.
Following the consultation, ACCA intends to publish an updated paper on the subject of governance and value creation, reflecting the responses received and discussions held. Additionally, ACCA intends to prepare separate, more targeted and brief papers for specific audiences, for example: boards, regulators and policy makers, investors, and savers.
Further details of the consultation, two videos, a questionnaire, and supporting information can be found on the ACCA website. Comments on the consultation paper are requested by August 31, 2014.
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