Guiding Corporate Governance back to the Fundamentals

Prof. Patricia Charléty

Patricia Charléty, Professor of Economics and Finance at ESSEC Business School, scientific adviser to the French Security and Exchange Commission (AMF) and specialist in questions of corporate governance, calls for a return to the basics for governance.

 Why we need to guide corporate governance back to the basics

Are businesses accountable only to shareholders, or society as a whole? While the topic is not new, the surrounding debate has been thrown into high-gear recently. Indeed, corporate governance – the way in which businesses are governed by the relationships between management, board, shareholders and outside stakeholders – has a major impact on many of the challenges faced by society as a whole today: challenges like the struggling global economy, deterioration of the natural environment, depletion of resources and human rights.

“Corporate governance and Corporate Social Responsibility are increasingly important subjects of discussion for business leaders, policy makers and academics alike,” explains Professor Patricia Charléty, head of ESSEC’s Economics Department, scientific adviser to the French Security and Exchange Commission (AMF) and specialist in questions of corporate governance. “Realities are changing. In the past, those wanting to address issues have relied heavily on codes [voluntary governance recommendations]. Today I think it’s time to go back to the fundamentals. Codes of course play a role in regulating corporate governance, but they’re not enough.”

The concept of corporate governance: an evolution in progress 

The debate over how companies are governed is likely as old as companies themselves. Corporate governance codes, on the other hand, have developed in our more recent history, in the wake of a handful of corporate scandals in the 1990s.

Today, there are well over 100 codes internationally related to issues of corporate governance. But while these tend to converge on key issues – ensuring shareholder rights, financial transparency, accuracy of disclosure, and accountability of the board – the ways in which they came to fruition and the firms they intend to regulate are strikingly different.

As Professor Charléty explains, the issue of corporate governance has been dealt with by academia for the longest period of time in the United States, with an active academic reflection taking shape after the crash of 1929. So while the Enron crisis in particular helped spur on the debate much later in the century, the concept of corporate governance had already been many years in the making.

In Britain on the other hand, the first codes grew more suddenly in reaction to the corporate governance crisis created by the Robert Maxwell scandal.

In France, corporate governance codes were nurtured over this same period by major French companies themselves – by representatives of the CNPF (Conseil National du Patronat Français) and the AFEP (Association Française des Entreprises Privés).

“So what’s really interesting when we look at this phase of development is that the actors behind each set of codes are very different, from country to country,” Professor Charléty goes on to explain. “The question has been taken on by different people, with different points of view. Nevertheless, the codes converge on key issues, particularly on financial issues.”

This would appear to indicate a kind of consensus on these matters. Nevertheless, in the wake of the financial crisis of 2009, things have gone terribly wrong despite the codes. Why? To answer this question, Professor Charléty would argue that the focus needs to move away from codes to look more closely at internal governance mechanisms.

Suffice it to say, having effective corporate governance mechanisms is essential to reducing investment risk and therefore maintaining competitive in the current economic climate.  But core governance issues are not only financial. There is an increasing focus on intangibles including environmental, social, and ethical issues, all indicators of overall corporate performance. Indeed, these factors can have tremendous impact on financial liabilities and corporate reputation.

A fresh approach to give the analysis new life

These new factors coming into play call for a fresh approach to the problem. What’s encouraging is that the Corporate Governance debate today is becoming more proactive, where historically codes have developed as reactions to corporate excess. The atmosphere is evolving. Businesses are beginning to understand that their shareholders demand more accountability in terms of governance mechanisms as well as social responsibility.

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