Have you ever pondered on the significance of governance and its influence on sustainable development and economic stability? Governance is a comprehensive concept that reflects the effectiveness of systems within sectors. It is a vital element associated with achieving balance and harmony among the various aspects of political, economic, and social life.
The emergence of the governance concept recently can be attributed to several factors and developments in the economic and political world. These factors include issues related to unethical behaviors and poor management witnessed in large companies and institutions, prompting the public to demand an effective governance system that enhances transparency, and accountability, and combats these behaviors. Additionally, awareness of the importance of governance in achieving sustainable development and economic stability has increased. Regulatory and oversight measures on financial activities and companies have heightened after the financial crisis in 2008. The world has also witnessed a shift towards more corporate social responsibility, where governance plays a crucial role in promoting accountability and ethics in corporate management and decision-making.
In previous experiences, the Enron scandal in 2001 stands out as one of the largest energy companies globally, boasting revenues of $111 billion and a share price of $90. However, these numbers were inflated, prompting an investigation that revealed manipulation by board members to inflate profits and increase their shares. This led to the company's collapse and a loss of trust from customers and investors, affecting shareholders, creditors, clients, suppliers, and employees.
Hence, laws, procedures, and standards must be in place to protect stakeholders and parties associated with the company. These laws and procedures fall under the concept of Governance or "Good Governance." Here, we can define governance as the standards, systems, and laws that guide, regulate, and oversee institutions and communities. This involves the formulation and execution of policies, decision-making, resource management to achieve specific objectives, and ensuring accountability.
The origin of the term "governance" traces back to an ancient Greek word that signifies the shipmaster's ability to navigate the ship safely due to their skill and vigilance in preserving the lives and possessions of passengers. Governance encompasses various objectives applicable across sectors, including:
- Safeguarding the interests of shareholders and stakeholders associated with the institution.
- Striking a balance between the board's independence, expertise, and talents, aligning with the nature and scope of the company's operations.
- Ensuring the accuracy of financial reports.
- Internal control and risk management.
- Disclosure of all significant information.
- Enhancing accountability and functions of managerial oversight.
Furthermore, the importance of governance principles in controlling administrative processes and decision-making within institutions and organizations, whether governmental or private, is emphasized. Key aspects include transparency, accountability, integrity, risk management, and sustainability.
- Transparency: Governance plays a crucial role in promoting and disseminating the concept of transparency, enabling sectors to provide information and data openly and effectively to the public, ensuring that decisions and activities are comprehensible and visible.
- Accountability: In the context of governance, accountability is essential to ensure the exercise of power in a transparent, fair, and responsible manner. Governance provides mechanisms for accountability and monitoring to ensure that decisions and actions align with public interests and ethical standards.
- Integrity: Governance imposes on leaders and employees a commitment to ethical and legal behavioral standards and the avoidance of conflicts of interest. This requires implementing policies against unethical behavior and promoting a culture of integrity within the institution.
- Risk Management: Institutions must identify, evaluate, and manage potential risks that may impact their performance and reputation by developing a risk management framework and taking measures to address them.
- Sustainability: Sustainability refers to sustainable efforts to balance economic, social, and environmental dimensions of work. Institutions must focus on reducing their environmental impact and enhancing sustainable and socially responsible practices. It also includes institutional responsibility towards local communities, participating in their social and environmental aspects to achieve sustainable development.
The term "governance" refers to the principles and practices that govern the management processes and decision-making in both the public and private sectors. While there is some similarity in governance principles between the two sectors, there are also key differences regarding the objectives, structure, and implementation.
In the public sector, governance aims to achieve the public interest and enhance transparency, accountability, and fairness in governmental decision-making. It is applied at the state level and encompasses principles such as the separation of powers, political accountability, and civic participation. Governments strive to balance conflicting societal needs and meet citizens' aspirations. Governance structures in the public sector are associated with executive, legislative, and judicial bodies, including the constitution, laws, government legislative bodies, ministries, executive bodies, oversight, and auditing. All these elements interact in a governance system to work together to achieve stability and comprehensive societal development. This structure should be balanced and rely on transparency, accountability, and effective citizen participation to ensure the best outcomes in serving the public interest.
On the other hand, governance in the private sector is centered around achieving the financial interests of companies and private institutions. It aims to increase transparency, enhance competitiveness, and achieve sustainable growth. Governance principles in the private sector include roles and responsibilities distribution between the board of directors and the executive management, as well as establishing financial accountability standards and public disclosure of information. The structures of the private sector are linked to the management of commercial enterprises and companies. In the past, projects referred to simple manual crafts or small-scale business ventures. However, with the emergence of the Industrial Revolution in Europe in the 19th century, giant projects and factories requiring huge capital emerged. These projects had shareholders and investors seeking to maintain the stability of their businesses and funds. However, the problem arose in determining who would manage these projects, as there was no agreement on a single person capable of managing the company.
Here, the Agency Theory emerged, reflecting the concept of separating ownership from management. This theory appoints non-shareholders (stakeholders) through an annual meeting known as the "Founding General Assembly". These individuals are chosen based on their experience and skills in managing the company, and they constitute the Board of Directors. Each of these parties has crucial roles, which involve ensuring the company's performance and proper management.
It's important to realize that governance is not just a theoretical matter; it's a practical approach that enhances institutional performance, protects shareholders' rights, and promotes sustainability. With effective governance, institutions can play a significant role in achieving sustainable development and economic stability.
ACG (Alokab Consulting Group) is a leading company in this field, fully recognizing the importance of governance in organizational operations. We are acutely aware of the need to develop and enhance the practices and mechanisms necessary to activate effective governance, and we are committed to providing all of this to our clients. Our consultancy team understands the impact of implementing governance on improving overall performance for our clients and enhancing the systems and efficiency of their organizations, specifically. ACG's focus on the sustainability of our client's businesses in a competitive environment has driven us to provide services and consultations that aim to implement the model of effective governance. Through this, we aim to support processes of mergers, acquisitions, partnerships, and risk reduction through asset diversification.
