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  • Writer's pictureDr. Nora Szabo, LL.M.

Corporate Governance - Myth or Necessity

1. THE POWER OF CORPORATIONS


Leadership is not a position or a title, it is action and example.[1]

Whether we like it or not, fact is that corporations are a very essential part of our global society. Corporations create opportunity for employment; they manufacture and produce our food, our favorite clothing and other products, basically our every day necessities for modern day life. Ever since mass production was made available and possible due to the incredible developments achieved as a result of the industrial revolution dated around the 18th-19th century, the ever-evolving power exercised by companies has only increased more and more to the point where such strength needed to be framed by boundaries to be able to maintain the proper checks and balances which were in line with serving society as a whole.


Companies are led by groups of people working as an economic unit. Such economic units were shaped into “legal entities” or “legal persons” based on the corporate regulations of the place of their incorporation. Such separate and independent legal person status allows for the founders and members, such as the shareholders or the members of the board of companies not to be personally liable for debt or misconduct attributable to the corporation, which is naturally only applicable with the requisite set of exceptions.


It is a rather astonishing fact that some multinational enterprises or so-called “transnational companies” have more income or produce more wealth than many countries. Thereby the power of corporations is so enormous that their mere decision on where they locate their headquarters or registered seat may lead to such severe measures as governmental adjustments to political policies. Such examples are often seen in state aid related tax cuts being motivating factors in order for a factory or company located in a city providing a significant percentage of the population with employment not to relocate, as seen in the case of the illegal state aid case against Apple in Cork, Ireland.[2]


It must also be considered that under democracy, governments base their legitimacy pertaining to the right to govern the people under the given jurisdiction on the majority of the votes, which were granted by the people to be governed. In case of corporations this kind of legitimacy is very complex. It does not have such rigid basis for legitimacy, as we know from governments and constitutional law, since when dealing with corporations, in general (although exceptions apply in cases of state-owned companies) we are dealing with the private sector and non-governmental sphere of society.


2. THE BASIS FOR LEGITIMACY


The baseline for the legitimacy of corporations is founded in corporate law. These regulations give the set of rules as a framework to what conditions need to be met in order to have a legitimately operating company, which satisfies the requisites of the law to be incorporated by the court of registry or company registrar or other public authority in charge of supervision over the lawful and proper functioning of corporations.


Usually corporate law in general provides a very straightforward approach defining the forms of companies along with the exact content of their so-called by-laws, such as their deed of foundation, or in case of a multi-member company, their articles of association. These documents lay down the law given legitimacy basis of the corporation by defining the decision-making body and the process of passing resolutions, for example as one of the most important ones, the sharing of profit in form of dividends. It is customary to set a minimum registered capital amount for each company form. As soon as all legal requisites have been met and are properly documented, then the competent authorities register the company in its registrar with a company registration number and the company is ready to “get down to business”.


Apart from the general principles and the concrete provisions of corporate law however, there is a more practical tier to the functioning of a corporation, which gives way to its economic legitimacy, being a dominant perspective in the business world and the daily operations surrounding the company’s continuous activity.


Given that unlike the aforementioned democratic governmental bodies, corporations cannot claim such legitimacy from their consumers or end-users as a vote for their leadership, yet corporations have such power at their disposal that in some ways they do have the ability to govern, in many ways the lives and activities not only among their own employees and collaborating partners, but also of their competition and other market players. As such they create product and supply demand, which needs to be fulfilled. Thereby, whether we like it or not, ultimately corporations are empowered also by the members of society.




3. THE SIGNIFICANCE OF CORPORATE GOVERNANCE[3]


The term governance traces its roots to the Latin word “gubernare”, meaning to steer, as in to direct. Thereby, governance is setting direction. It is beyond doubt that next to the noble mission to fulfill entrepreneurial dreams and completing any desire, which may arise among the members of society, corporations are designed to fuel wealth creation and to make profit, mainly for the company’s ownership, that is its founders / shareholders usually by means of dividend distribution.


However, corporate governance is rather complex and it is hard to find only one definition, whereas it covers a company’s strategic set up, human resources, financial accounting, marketing, communications, organizational decision-making and all procedures and policies which provide for the companies’ operations to run smoothly and successfully.


Therefore, the question arises, if corporate governance is so complex, then how is the best way to govern such entities? The most important factor is to put functioning mechanisms in place in form of policies which realistically align with the company’s philosophy, what it represents and how it wishes to be represented by its products or services rendered but also by its employees. Therefore, the role of the board of directors is to set up the strategies, which need to be enforced and put into place by the management. The pressure is on the managing directors to show the achievement and results in the amount and in the form as is expected by the ownership of the corporation. The management will always be held accountable for the performance it must deliver and report to the board of directors, who sit at the very top of the corporation. As such the role of corporate governance is to maintain the checks and balances, which contribute to an economically healthy and well-functioning company and rather than just setting direction also to mediate between the many interests that usually clash among the various parties between setting out guidelines as well as directions and those enforcing the passed resolutions and strategic moves in practice.


4. THE CLASSIC AGENDA VERSUS THE MODERN APPROACH


The classic agenda of corporate governance is basically an internal mechanism, which serves the main goals of profit optimization along with maintaining checks and balances among the owners’ and the management interests.


The modern approach of corporate governance focuses more on a broader spectrum that became a true necessity as the power of the corporations grew over the past centuries, giving rise to a more external viewpoint.


In accordance with the aforementioned, stating that corporations do bear legitimacy both on a legal, corporate law related as well as a society given, corporate governance policy level, then the conclusion must be drawn that corporations must have a policy and strategy planned out to define how a certain company will relate to the broader society. Thereby, by now it is beyond question that corporate governance does not exists without ethical considerations as well, referred to as corporate social responsibility.


5. CORPORATE SOCIAL RESPONSIBILITY


How a company relates to the community in general, to environmental or socially sensitive issues, with special considerations to be granted to the corporation’s employees, the maintenance of their facilities, their suppliers, manufacturing procedures, the local governmental bodies and very importantly their customers is the heart and soul of the corporation. Thereby, corporate social responsibility nowadays is a huge part of corporate governance, although for some scholars it has risen to be an independent branch itself, next to the regulatory and accounting perspectives of a company, the question of what the right thing to do is in the course of conduct of a corporation cannot be answered without proper consideration to be given to certain ethical considerations. Society has given a strong market response as to how quickly a top brand of products or services can be boycotted, leading a formerly massively profitable and therefore successful business to the gateway of a foreclosure procedure.


Basically, the bottom line is that the vested power in corporations needs to be handled with due care and reasonable responsibility. As such, the conlusion we may draw is that corporate governance in fact is by no means a myth, but much rather a necessity.


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*ALL RIGHTS RESERVED. This blogpost may not be used in any way, shape or form, furthermore it does not serve as legal advice and does not constitute any kind of legal assignment agreement. In case of questions or remarks, please feel free to contact us at nora.szabo@noraszabolaw.com.





[1] Quote by Cory Booker [2] http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=3_SA_38373 [3] “Corporate Governance – Principles and Issues”, Donald Nordberg (2011) pages 4-7.

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