Corporate governance

What is Corporate Governance?

Corporate Governance is a set of standards and rules that define the relationship between the executive management of a company and its boards, shareholders and stakeholders. It also encompasses definitions of a structure that is used for setting goals, the means for their achievement and their measurement. Good Corporate Governance also sets up appropriate incentives for board members and executive managers so as to motivate them into achieving objectives that are important for the company and its shareholders. Corporate Governance should also support the effective monitoring of aims, and thus put pressure on for the efficient deployment of company resources.

Corporate Governance is only a part of a larger economic context in which the company does business that includes, for instance, macroeconomic policy and the level of competition. The framework of the Corporate Governance depends also much on legislation, regulations and the institutional environment. The reputation and the long-term success of a company are also influenced by business ethics, as well as the respect to social interests in communities in which the company is active.

There are various recommended Corporate Governance rules, that are voluntarily applied by companies to the extent and structure that best fits their way of doing business. Thus, no one single Corporate Governance rule exists. However, if a company does not use some of those generally accepted rules, it should disclose the reasons for this to the public, preferably in its annual report.

Why is Corporate Governance important?

It is a given fact that the overall management quality and styles in a company are reliant much on the way the various administrative bodies operate. There are various models of a board's function in the world, the most common are referred to as Anglo-Saxon and German models. Each of them has certain benefits and some drawbacks, and it is therefore necessary to decide which of them is better for the company in question. Important is also compliance with national legislation. For a sustainable company development, it is important to define internal rules of procedures and an ethical codex.

The application of internationally acknowledged Corporate Governance standards makes communication with foreign business partners easier; both in common trade relationships and in the case of mergers and acquisitions.

What is the subject of Corporate Governance?

Each company doing business has applied some type of management and operating principles. There may arise two reasons for the need of a Corporate Governance project:

- The company wants to change existing Corporate Governance either to increase its competitiveness or, to gain access into an international business community;

- A new company is being set up, mainly following restructuring as a consequence of a merger or acquisition, both local and cross-border.

The process in both cases is the same; it is based on the analysis of expectations of the shareholders, corporate strategy, industry specific requirements and current status. The proposal of the "to be" status is then focused on, - in particular:

- The most appropriate model for organising corporate entities, their decisive rights, and the composition and function of board committees that support the decision making of board members;

- Proposal for a number of members, and of the expertise of the board members, the ratio between executive and non-executive board members, and their incentives and rewards;

- Framework for the company's organisational structure;

- Key processes for the transfer of business objectives from the board to the entire corporate hierarchy;

- Basic principles for corporate behaviour towards stakeholders, such as shareholders, employees, business partners and public institutions.

What is Corporate Governance's deliverable?

The key deliverable is a recommendation of a new style of Corporate Governance that reflects internationally acknowledged standards. Then, shareholders and managers have to decide, to what extent they will implement them in the company.

Application of Corporate Governance has to be followed by relevant Articles of Association, Agreement on Governance if applicable, Codes of Conduct, Authorisation Rules, detailed organisational structure, job descriptions, a corporate codex and so on.

What benefits can you gain from Corporate Governance?

The main benefits from the application of international Corporate Governance frameworks is the simplification of organisational structures, efficient transformation of corporate goals into all management levels, and an environment for corporate culture improvement. Another benefit is a more transparent decision making process which is important for shareholders, lenders and business partners. The particular level of compliance with Corporate Governance standards is an important piece of information for all potential investors.

Why engage a consultant?

Any consultant has a great advantage in that he is independent on personal relationships that have developed in the past. He proposes a solution that is optimal for the company in question in its stage of development. He should have previous experience with such projects, and have knowledge of international Corporate Governance standards.

My own experience

- Corporate Governance design for a large Czech chemical holding company;
Centralisation of key decision processes in a Czech manufacturing group, orgchart of the Group Headquarters, design of Corporate Governance policies;
- Design of a management model for a Czech spa operator group.