Monday, November 28, 2011

The Historic View of Corporate Governance

 

Traditionally organisations held the view that capital markets were only interested in the share price. Corporate governance was therefore considered a necessary evil at the cost of developing business. As it concerns financial reporting, achieving compliance was deemed the responsibility of the finance function, which in turn adopted the view that governance could best be achieved through internal audits.

According to research by consultants McKinsey, good corporate governance practice is now strongly tied to investment decisions the world over. The group's 2002 Global Investor Opinion Survey showed that an overwhelming number of investors were prepared to pay a premium for companies with high governance standards. In North America and Western Europe purchase premiums averaged 12-14 per cent, in Asia and Latin America 20-25 per cent, and 30 per cent in Eastern Europe and Africa. Institutional investors have also begun to look closely at the corporate governance records ofcompanies they invest in.

 

 

Case Study: What Good Corporate Governance Means to a Company like Shell

Upholding the Shell reputation is paramount. We are judged by how we act. Our reputation will be upheld if we act with honesty and integrity in all our dealings and we do what we think is right at all times within the legitimate role of our business.

(Extract from Shell's Statement of General Business Principles, 1997)

NGOs (non-governmental organisations) and ethical share­holders have in the past taken a poor view over the business operations of oil companies like Shell. Since 1976, however, the petrochemical giant has gone to great lengths to achieve high levels of corporate governance, corporate social responsibility and socially responsible investment (SRI).

The company, which is spending considerable time and effort into developing its alternative fuel operations, now tops CG and CSR ethical investment indices, including the FTSE4Good Index. It works closely with the UN Development Programme and NGOs on proposed projects. Extensive environmental and social impact studies are always carried out prior to any project start.

 

Shell is also addressing the HIV/AIDS pandemic by working in partnership with other organisations to help reduce the spread of the disease. Throughout sub-Saharan Africa, the company runs AIDS prevention and care programmes for employees and their families. Free treat­ment is also offered to employees infected with the disease.

Its high level ofcorporate transparency and 'honesty' has been achieved through its Statement of General Business Principles (SGBP) — a guiding framework based on the core values of honesty, integrity, and respect for people, as well as openness, trust, professionalism and teamwork. Included in those principles is a clear and unequivocal stance on the non-acceptance of bribes or facilitation payments, or the support of political parties in any way.

The SGBP, which was the first statement of its kind made by a quoted organisation, has been revised five times since its first publication in 1976, with the most recent revision in 1997. In that year, further focus was placed on human rights issues and sustainable development, transpar­ency and implementation. Successes and failures of KPIs (key performance indicators) set within those principles are printed in the annual Shell Report. The report, which Shell plans to include as part of its financial results, highlights environmental, social and economic performance. Readers are encouraged to make comments on the company's progress by using the 'Tell Shell' facility on the corporate website.

The company uses a combination of 'soft' and 'hard' implementation tools to create an integrated approach. Measurement of set Assurance Policies is achieved by a combination of internal audit, an assurance questionnaire (Assurance Collection Tool), and a free-format assurance letter, which is written by the chairman of each country operation each year. Responses are evaluated by Shell's Committee of Managing Directors and local KPIs are mutually set. The company has also introduced an employee Reputation Tracker survey, which judges the level of compliance within each individual operation. This not only maintains a high level of internal control, but also gives a good picture of the overall health of the company. Additionally, Shell uses the Global Reporting Initiative guidelines to measure the success of CSR policies and materiality.

The company also strongly believes in training, both for senior and middle management positions. A web-based self-teaching program is used for training on issues ranging from human rights to health and safety. Managers take an exam once they have completed the program and are then expected to impart their knowledge to their fellow employees. Access to information and clear communication are of key importance to Shell. For example, the company is planning to create a website detailing successful risk manage­ment solutions implemented by the company over its corporate history to help managers deal with 'unplanned' events. Shell is also looking at making a number ofits internal learning resources available to an external audience.

'These are the ''heart and mind'' systems of corporate governance,' says Albert Wong, Shell global policy advisor. 'Upholding our reputation and protecting our brand is of great importance to Shell. We have a duty to our shareholders, many of whom have pensions linked to their investment, to our employees, customers, business partners and to society as a whole.

'We know that wherever we operate we will have an impact. From day one we want to balance any issues in order to minimise negativity and maximise positive impact. This is all part of the decision-making process.'

Mr Wong adds that good corporate governance also acts as reassurance to the governments of developing nations. This in turn allows Shell to pursue opportunities with the co-operation of all parties involved.

'You can have the best business plan in the world, but if you do not have co-operation on the ground level, it will be useless,' says Mr Wong. 'We are increasingly being pushed to help develop developing nations, which often have weak levels of corporate governance. Our experience and track record has led a number of governments to approach us for advice on this subject.'

He adds that Shell's existing corporate governance measures mean that it is already Sarbanes—Oxley compliant. In fact, the company welcomes the Act, which it claims will help level the energy industry playing field.

'Bidding for a contract is a very stressful time. In the past we could not be sure of the ''honesty'' of a rival bid. With Sarbox, the assurances are in place.'

Note: Issues that emerged in 2004 surrounding the over-reporting of oil reserves by Shell caused considerable damage to the company's reputation, led to the dismissal of senior executives and the company was forced to pay substantial fines. This serves to highlight that despite the best intentions, processes and systems in the world, corporate governance must be adhered to at every level in order to maintain and not destroy stakeholder value.

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