You are here

How does the corporate governance cycle of companies work?

Posted by
Swiss Finance Institute
on
Wednesday, December 14, 2016 - 08:00

Corporate governance deals with the ways in which suppliers of financial and human capital to corporations assure themselves of getting a return on their investment within the evolving regulatory framework. Issuers and investors need to navigate the quickly developing legal and regulatory framework to design corporate governance to optimally support long-term value creation for a company, its investors, and its stakeholders. The most recent SFI White Paper―Corporate Governance: Beyond Best Practice―offers an integrated analysis framework for the core drivers of governance.

 

Who is driving the governance cycle?
Shareholders, who provide capital and vote on fundamental issues at firms’ annual general meetings (AGMs), build the basis for market discipline. They elect the board of directors, which defines the strategy and is responsible for the company overall. The board appoints executive management and sets the incentive system, which will affect the choice of human capital throughout the company. Executive management should, through value reporting, which is differentiated from the compliance-oriented term ‘disclosure’, provide a clear ‘value story’ that explains how the company creates value, an explanation that is more accessible both to internal decision-makers and to investors.


This governance cycle, while uniformly applicable to all companies, needs to be calibrated specifically for each company in order to reflect its individual situation. The figure below reflects the interconnectedness of the corporate governance drivers (as well as their interactions with the external environment).

Source: SFI White Paper―Corporate Governance: Beyond Best Practice (2016)

 

So, what should be considered with regard to how companies should be governed?

  • Corporate governance design can support value creation if it fits a company’s specific situation. Uniform best-practice recommendations, ‘box-ticking’, and too stringent ‘comply-or-explain’ approaches are, therefore, potentially harmful. One size does not fit all.
  • Corporate governance evolves from the interaction of many different agents, making it difficult to consider and rely on simple cause-effect logic. Regulation and soft law should, therefore, be approached carefully and with due consideration when developing new standards.
  • The development of a future version of a Swiss Code of Good Corporate Governance toward a widely accepted stewardship code would benefit from the inclusion of the domestic and international investor community.

Interested to find out more? Read the SFI White Paper and learn what investors think about potential additional regulation, what the role of self-regulation looks like, and why policy makers legislating ‘best practices’ can be problematic.