Corporate Governance

Ethical practice in business is easy enough to define, in a narrow sense, as adhering to and promoting accepted principles of right and wrong that govern the conduct of a company or professional office bearer. With the notable illustration of Enron, where all levels of the organisation seemed infected by unethical practices, sound ethical practice requires participation – and even leadership – from all ranks within a company. (See Minimise Risk by Maximising Accountability). It would be rare where the CFO does not occupy a focal point of that leadership. CFOs do far more than tend to finances and financial reporting and, increasingly, CFOs have a hand in a company’s strategic direction, providing a representative face to investors and the media. They are increasingly becoming an image of the guardians of company financial controls as well as occupying a role in disseminating ideas and attitudes on ethical practice throughout the business.

Read more about IT-related governance issues.

The challenge for CFOs is that in most cases they are not charged with strategic responsibility and often responsibility is couched in the context of the board as a whole or as part of the loosely termed , member of the “executive.” There is little doubt that regardless of this formal relationship to strategic responsibility, most CFOs place strong importance on ethical values at a personal level, with one CFO summing up the situation by saying “If a member of my staff was involved in an ethical transgression, I would feel accountable for it too.”

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as best as is humanly possible the interest of individuals, corporations and society at large.

Mixing the business leadership role with the governance role

While somewhat of a balancing act, where a CFO is often presumed to add value, there is the governance role of maintaining integrity above the noise and clamour of markets. This is especially the case in financial markets but is equally challenging in many other industry verticals such as food where labelling issues for example can present corporations with genuine ethical dilemmas, and in so-called ‘dirty’ industries where the emission of pollutants are present as a continuous ethical and governance challenge. It would be fair to say that a CFO’s words or statements today would be viewed as emerging through the prism of having gone through that governance mindset with the backdrop of all the clamour. So it is important for CFOs to keep that reputation.

The information font

Because most corporations today have a strong working team between the CEO and the CFO – mostly though years of experience working on various commercial issues that are not clear cut – the CFO is the repository of actual corporate information. Usually because of their training the CFO has the regulatory knowledge (even more than the CEO) and the closeness to the business to be able to judiciously use that knowledge to help the CEO form corporate decisions. This is of value in formulating and responding to governance issues.

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On emerging issues

Diversity and response to climate change are dynamic and evolving issues for corporate leadership. Diversity whether in relation to the role of women in senior positions or minority groups in the workforce require strong governance statements and positioning.

Governance has several cornerstone principles:

• The foundation of any effective structure of corporate governance is disclosure. Openness is the basis of public confidence in the corporate system. Companies that fail on the transparency and openness quality will not inspire trust
• CFOs could look out for corporate-governance weaknesses, say experts. Such weaknesses are red flags for large institutional investors, which have been more active in public statements
• There is a linkage between governance failures and exposure to class action that has been illustrated by the James Hardie case. Governance is a bottom-line issue
• Company owners and boards need to view their board of advisors and board of directors as representing the highest principles of corporate governance. Extraordinary skills are one thing but the appropriate public face matters too. While there is little a CFO can do directly to improve the quality of a board, a reporting the results of regular governance-risk benchmarking to the board is an effective communications strategy. Such reporting could also include, but not be limited to, benchmarking the board itself compared with competitors or industry leaders.

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