Guide to Corporate Governance

GUIDE TO

CORPORATE GOVERNANCE

WHAT IS CORPORATE GOVERNANCE? It’s the exercise of power over corporate entities. It determines how businesses are directed and controlled by: Specifying the distribution of rights and responsibilites among the different participants in the organisation: boards, shareholders, employees, etc.

WHAT IS THE PROBLEM? The current model has led to an excessive focus on maximising shareholder value.

This has often resulted in short-term decision making within the company creating perverse incentives that encourage problematic practices such as stock buybacks.

Laying down the rules and procedures for decision-making.

Giving a structure through which the objectives of the company are set.

WHY IS IT RELEVANT TO SOCIAL JUSTICE? 500 corporations control about

70% world trade

The way corporations are managed can affect the potential for either positive or negative change.

The current default is to regulate corporate behaviour through external reguations such as environmental law, human rights standards, tax laws, accounting norms, etc. These are indeed crucial to mitigate acute problems but reforming corporate governance enhances regulations by going straight to the core of business. Reducing the pressure on companies to blindly prioritise short-term profits can affect the way they subsequently reinvest and deal with many critical social issues, such as:

Inequality e.g. supply chains Sustainabilty e.g. companies’ carbon footprints Poverty e.g. causes and effects of the

financial crisis

THE CONSEQUENCES Dividends to shareholders (UK) Pay gap (USA) Stock holding period (S&P 500)

In 1970

£10 of every £100

Today

£70 of every £100

CEO pay in 2014 was

204 times

that of an average worker In 1960 the average was

8 YEARS

Today the average is

4 MONTHS

REAL-LIFE EXAMPLES Enron: Top executives lied about financial results for years to inflate the value of their personal stock options. The firm spectacularly imploded into bankrupcy in 2001.

LuxLeaks scandal: European companies including Shire and Ikea entered into tax agreements with Luxembourg to reduce their tax burden.

Deepwater Horizon oil spill: BP’s culture of cost-cutting reduced safety oversight and resulted in the largest accidental marine oil spill in the history of the petroleum industry.

Irresponsible supply chain management, particularly in the garment and electronics industries: The drive to reduce labour costs has led to the outsourcing of production. This has led to a pattern of human right violations in several low wage countries. The most recent tragic example has been the collapse of Rana Plaza in Bangladesh.

WHO ARE WE? The Purpose of the Corporation Project (an initiative

by Frank Bold) provides a strategic, open-source platform for leading experts and organisations interested in promoting the long-term health and sustainability of publicly listed companies, policy-making and business management.

The Project works with academics and practitioners to develop new options for corporate governance models.

We also liaise with business, policy makers and civil society organisations to encourage them to engage in an open public discussion with all stakeholders to properly consider the question of the purposes of the corporation.

Frank Bold is a purpose-driven law firm using the power of business and non-profit to solve social and environmental problems.

www.purposeofcorporation.org @purposeofcorp

OPPORTUNITIES FOR CIVIL SOCIETY ENGAGEMENT This debate can be fostered and harnessed through two main strands of work:

1 REFRAMING THE DEBATE

Refocus the debate based on a new vision of corporate purpose.

Hold conversations and conferences with business leaders and policy makers.

Respond in the media to economic, environmental and social crises explaining how they are connected to the dysfunctional behaviour of business.

2 PROPOSING POLICY REFORMS

Promote concrete measures to counterbalance the short-term influence of capital markets in policy making processes such as: the UK Stewardship Code or the OECD Principles for Corporate Governance.

Advocate for the integration of corporate governance elements into policy plans in the sustainability, business and human rights areas.

Advocate to change the definition of corporate purpose in company law as well as associated directors’ duties to reflect broader societal purpose and environmental responsibility.