Corporate governance is an integrated culture and work approach which is not simply an adherence to a set of rules and can not to be interpreted narrowly and literally.
Corporate governance is a culture that must stem from the company itself and commensurate with it. For each stage of company life cycle, a governance system must exist to help the company in meeting its objectives and to develop and grow, hence, effective governance ensures the achievement of the results.
The definition of corporate governance is not restricted to mature companies only; it is defined as “a group of foundations and principles governing the relationship between the owners of companies and all other stakeholders, in order to achieve company objectives and preserve rights of all stakeholders.”
Governance evolves as company grows
Companies and organizations are always looking for the best and working hard to enhance their competitiveness and aspire to continuity in a complex and rapidly changing business environment. This environment is often characterized by emergence of new risks and legislations enacted recently that must be committed to. The corporate governance system must be developed to be in line with company needs. As governance begins at organization establishment and develops gradually with its development – at different stages – in a way that allows it to apply appropriate rules and practices of governance. Hence, it can develop future plans, with medium and long term rules, so as to be completed. Therefore, governance becomes an integral part of organization culture and not just independent rules and practices.
Stages of company growth and role of governance
All companies, whether small, medium or large go through the same development stages, usually referred to as “life cycle”, as this cycle varies from one company to another with minor differences, and with different stage periods.
The following figure illustrates the stages of company life cycle:
The extent of applying governance practices in guidance and control varies for each stage of a company life cycle. The following explains importance of practices for each stage:
Foundation or establishment stage:
The first stage (foundation or establishment stage) is one of the most stages affecting the corporate governance culture. Applying governance principles during this stage means that governance becomes an integral part of company business and becomes a firm belief in employees’ mind, not a mere of laws and legislations to be followed. Governance practices at this stage require clear company strategy and good choice of resources to achieve this strategy as well as considering risk identification, which company may face during its journey, and response plans. Guidance practices must be strongly present at this stage, while control practices may not have been formed, yet.
Governance practices at this stage must be supportive for any growth in order to generate greater revenue by broadening the customer base. The required governance practices must take into account a proper company guidance to achieve its strategy and maintain a supportive supervisory level. Guidance practices must be present strongly at this stage, taking into account a greater presence of control practices than that of the previous stage.
Stability and maturity stage:
This stage is characterized by enhanced performance and improved operational efficiency. During this stage, governance structure is clearly shaped and its practices are promoted. Consequently, those practices should support company credibility and reputation; hence, it is, indeed, a supporter of company presence. Control practices must be mature and effective at this stage to strengthen the required efficiency with less presence than those of previous guidance practices.
Renewal and innovation stage:
During this stage, companies seek to venture with the goal of increasing revenue and gain access to new markets or create new products. Governance practices need to be strong at its two sides, guidance and control, to ensure company continuity and not to take any ill-conceived adventure.
As in many cases there will be a fifth stage, i.e. regression stage. As the company profits and growth begin to decline, here, control governance practices must be effective to protect the rights of all parties from exploitation if the company is no longer able to continue. Sometimes the cycle may continue again if the company is bought by new investors to start the cycle again and start with a new governance culture.
At the end of this article, despite the existence of rules and laws for some governance practices, corporate governance is a practice that may vary to the nature of each company. No one corporate governance system that fits all companies.
However, the first stage of establishing a firm has a significant impact on shape and culture of governance. At beginning of a company, practices will not be a burden, as it does not mean that there are committees such as the Nominations Committee, Audit and Risk Committee, or even an internal audit in place.
What that stage requires is a proper guidance to ensure company continuity and build a governance culture in order to achieve an effective and mature governance system in the future, and it develops along with it.
Effective risk department, strong control environment, readiness to deal with future adventure and process integration are all required to achieve goals and governance principles, which are related to responsibility, accountability, transparency and justice.