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What is Corporate Governance?

Penny Brooks

11th October 2017

Corporate Governance is the system by which companies are governed and controlled, and it extends to the legal responsibility that a Board of Directors has to provide an appropriate governance structure. That said, it can be a pretty nebulous concept that is hard to identify in detail. The Institute of Directors' 2017 Good Governance Report might help.

Quoted in the FT, Ken Olisa, deputy chairman of the IoD , said: “Corporate governance is about much more than compliance — it’s about achieving competitive advantage.” The Chartered Quality Institute (CQI) is also involved in this report, and point out that “When the connection between the board and operation of a business is lost, we all lose.” In other words, there is always the risk of the Divorce of Ownership and Control, and this report and the Good Governance Index is an attempt to correct that. Citing the example of Bell Potinger in South Africa, Estelle Clark of the CQI said society’s view of what constituted good governance was changing, moving away from the narrow definition of financial performance towards a broader definition that took into account an organisation’s impact on all its stakeholders.

This Good Governance Index was introduced in 2015 to help external stakeholders to assess the overall standard of corporate governance at the largest UK-listed companies. There are 47 indicators used in the Index which are grouped into five broad categories of corporate governance: Board Effectiveness; Audit and Risk/External Accountability; Remuneration and Reward; Shareholder Relations; and Stakeholder Relations. 

As the Executive Summary of the report says, while the highest rated company in the Index is Diageo, the average score of companies from the energy and utilities sectors is significantly higher than the overall GGI mean score. In contrast, the average score of the information technology sector is significantly lower. Could this reflect the level of scrutiny that has previously been brought to bear on those industries, by regulators and the media? If so, then the GGI might help to level the playing field of attention being focused on them.

Penny Brooks

Formerly Head of Business and Economics and now Economics teacher, Business and Economics blogger and presenter for Tutor2u, and private tutor

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