Corporate governance: a compliance or business issue?

The Conduct of Financial Institution s (COFI) Bill is founded on culture and corporate governance.

April 2, 2024

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As highlighted in one of my previous articles, the Conduct of Financial Institutions (COFI) Bill is founded on culture and governance. Where a previous article focused on culture, this article puts the spotlight on corporate governance. It will show how, contrary to popular belief, it is not a compliance issue but a business issue.

Sadly, as a result of the wave upon wave of onerous rules-based regulatory reform that has challenged the financial services industry since the turn of the century, the concept of governance has left a stain of compliance in the minds of many industry stakeholders, instead of a set of best practice principles and guidelines. It may be a good idea to test your attitude towards governance.

If your first response is to associate corporate governance with compliance, it may prevent you from seeing governance as your friend instead of an enemy. If that is the case, one of the first things you will have to do is to adopt an attitude of best practice, not compliance. Generally, compliance drags you down, but the desire to be the best inspires you to succeed in every possible way. Replacing a compliance mindset with a best-practice mindset will go a long way to preparing your business for success.

What is corporate governance?

Corporate governance is the system of principles, best practices, rules and processes by which a company is directed, controlled and managed. It essentially involves balancing the interests of a company’s many stakeholders, which can include shareholders, directors, senior management, employees, customers, suppliers, lenders, government and the community. Corporate governance includes practically every aspect of management.

In his book, The Corporate Citizen, Prof Mervyn King defined good governance as fairness, accountability, responsibility and transparency on a foundation of intellectual honesty. In his view, in arriving at their decisions, directors have to thoroughly understand the duties of good faith, care, skill and diligence (1). According to King, it is not good governance when a compliance officer reports to a board that a company has complied with the code and the rules of governance, without the board applying its mind as to how the company should be governed.(2)

“Governance is about judgement calls and process.”

– Mervyn King (3)

The benefits of good corporate governance

Corporate governance is of fundamental importance to any business, big or small, simply because good corporate governance leads to sustainable business success that can benefit all stakeholders, while bad governance can lead to scandal and ruin. There are many, many examples of failed enterprises globally that confirm this fact.

There can be no doubt that sound corporate governance is good for business and that it lays the foundation for the sustainability of any financial services provider. In reality, most successful businesses strive to have exemplary corporate governance. For many, if not most stakeholders, it is not enough for a company to be profitable; it also must demonstrate good corporate citizenship through ethical behaviour; sound policies, procedures and corporate governance practices as well as environmental awareness.

Corporate governance guides the leadership of firms to align the interests of clients, shareholders, directors, management and employees, and it helps to build trust between all the stakeholders. Corporate governance can give all stakeholders a clear idea of a company’s direction and business integrity. It promotes long-term financial viability, opportunity and returns. It serves as a sound foundation to facilitate the raising of capital, if needed. Good corporate governance can translate to rising share prices and it can reduce the potential for financial loss, risks and corruption. It lays the foundation for resilience and long-term sustainable success as well as increased shareholder value.

Good corporate governance can translate to rising share prices.

How can the legislation help providers to succeed?

If you have a compliance mindset, you will probably only see the rules and obligations, as highlighted below, and not the sound, guiding principles that will assist you as a business to be competitive at the highest level in our industry. Hopefully, the comments in the next section of the article will help you to see how these principles, captured in the legislation, will help you to establish best-practice principles in your business that will give you a sustainable competitive advantage.

Obligations of the governing body

Section 15.4

The governing body of a financial institution is accountable for:

Best practice: Where there is no accountability, there is no leadership responsibility, and where there is no leadership responsibility, scandal and ruin usually follow.

(a) Compliance with the requirements of this Act;(5)

Best practice: Every game has its rules aimed at competing safely and fairly for the benefit of all. Every business must have a defensive strategy, which is equally important as an offensive strategy. Compliance with legislation usually reduces risk to all stakeholders.

(b) Approval of the governance arrangements referred to in section 16;

Best practice: The process before approval will serve as an opportunity to plan, consider, strategise, deliberate and agree on the best-practice principles that will enable your business to compete in a very tough and onerous industry. Approval will confirm the company policy and must be communicated to all the internal stakeholders. When you consider your governance arrangements from a best-practice point of view, you will comply with the legislation by default in most cases. If you approach it by asking, “What do I have to put in place to be the most honourable and fierce competitor in the marketplace?” you will set yourself up for success and comply at the same time.

(c) Overseeing the establishment, implementation, subsequent review of, and continued compliance with, the governance arrangements referred to in section 16.

Best practice: Approval of the best-practice governance arrangements without ensuring that the arrangements are properly implemented, maintained and reviewed from time to time will be meaningless.

Governance arrangements

Section 16:6

A financial institution must document, establish, implement, monitor and review the effectiveness of governance arrangements that are reasonably necessary to ensure compliance with the requirements in this Chapter and any related conduct standard or joint standards.

Best practice: To document conduct standards and governance arrangements that are reasonably necessary to ensure compliance with the requirements in this Chapter and any related standards can serve as a business manual for all the stakeholders – a common point of reference. It can also serve as a sound training manual for management, representatives and support staff.

2. The governance arrangements referred to in subsection (1) must:

(a) Promote accountability of key persons and address roles, responsibilities and duties of the governing body and key persons;

Best practice: Again, where there is no accountability, there is no leadership responsibility, and where there is no leadership responsibility, scandal and ruin usually follow. It is just a matter of time.

(b) Ensure that key persons possess the necessary skills, knowledge and expertise, and have appropriate resources, to fulfil their functions, and perform those functions in a manner consistent with Part 1;

Best practice: I believe that every key person would agree that possessing the necessary skills, knowledge, and expertise, as well as having appropriate resources to fulfil their functions, and perform those functions properly are basic requirements for any firm to be successful over the long term.

(c) Provide for mechanisms to identify and, where appropriate, remove practices that, or persons whose, conduct materially increases the risk of the financial institution not complying with Part 1;

Best practice: I firmly believe that the reasonable key person, who understands the principle of accountability to his/her firm, would want to reduce or eliminate risk to the business and its stakeholders. From a best practice point of view, to identify and, where appropriate, remove practices that, or persons whose, conduct materially increases the risk of the financial institution not complying, would be a basic part of the job description.

(d) Be proportionate to the nature, size, scale and complexity of the conduct risks or business model of, and activities performed by, the financial institution;

Best practice: Respectfully, the principle of proportionality is something that makes absolute sense, and looks good on paper, but it remains to be seen how exactly the regulator is going to apply it in practice. This aspect will be addressed in a future article.

(e) Provide for management processes and responsibilities and the establishment, implementation and management of control functions within the financial institution;

Best practice: Many respected and bestselling authors on business have made the point that bad systems will trump good people every time. It is a fundamental fact that sound systems and processes create effectiveness and efficiencies in the business that can be applied consistently. It is simple – sound policies and procedures in any business are good for business.

(f) Deal with internal and external remuneration and compensation practices in a manner that promotes compliance with Part 1;

Best practice: Best practice remuneration and compensation policies will establish an attractive employment value proposition and will ensure the sustainability of the business.

(g) Demonstrate how the licensed financial institution will comply with this Act; and

Best practice: Sound, written policies, procedures and oversight have many advantages for the business, as already highlighted above.

(h) Address and provide for any additional matters relating to governance arrangements required by this Act.

Best practice: Leading key persons will go beyond the obvious to ensure that they can create a very competitive and sustainable business.

There is no question in my mind that leading financial services providers will excel in corporate governance, not because they have to, but because they want to.