Corporate governance and business conduct

Governance is the term used since the Middle Ages1 to indicate the rules of conduct for an individual, family, political system or even the cosmic relationship between the divine and nature.

Over the centuries, the concept of separating the running a business from its strategic and control guidelines has developed, with an increasingly clear and sophisticated definition, generally in the aftermath of large scandals, from the mercantile companies of the 17th century2 to the Enron scandal3.

It has, in this way, become a set of legislative and internal rules, relationships, processes, systems and responsibilities to be followed not only in the pursuit of the organisation’s objectives but also in the methods used to achieve them.

The engine behind this development can be summarised in the words of Adam Smith4. Prudent management of others’ interests cannot come spontaneously to management, whereas the primary result is, undoubtedly, the segregation of duties, in which roles are assigned to separate parties to reduce or limit conflicts of interest, in conjunction with a series of controls that are as independent as possible.

The growing complexity of companies and the contexts in which they operate has led to the development of different approaches and frequently created excessive regulations surrounding the debate whether corporate governance should or should not be essentially by rule (as in the case of the SOX5 Act) or by principle (the UK system of comply or explain).

This debate continues, demonstrating how the issue has not been resolved with a system of rules, as necessary as they are, but is deeply rooted in company culture. We are convinced that it is through cultural entrenchment that terms like “transparency” and “integrity” resonate throughout organisations and are effectively implemented.

  1. Geoffrey Chaucer, The Canterbury Tales (1380), “Fragment VI”. ↩

  2. South Sea Company, 1720, insider trading by King George I’s chancellor. ↩

  3. Enron Corp. 2001 bankruptcy declared in the United States Bankruptcy Court. ↩

  4. A. Smith, The Wealth of Nations, 1776, “The directors of companies, being managers of other people’s money rather than their own, cannot well be expected to watch over it with the same anxious vigilance with which they watch over their own”. ↩

  5. Paul Sarbanes – Mike Oxley, Public Company Accounting Reform and Investor Protection Act, 2002.  ↩