Conformance and Performance
Principles of corporate governance indicate the existence of two dimensions: conformance and performance. Conformance focuses on meeting the expectations of external scrutiny through compliance with various laws and following acceptable and defensible governance standards. Performance, on the other hand, provides expectations about the achievement of corporate objectives. It is associated with strategic activities and seeks to maximise the benefits flowing to shareholders/stakeholders. While the former focuses on accountability and responsibility to demonstrate due diligence under the law, the latter has a leadership role linked to the execution of business activities and, therefore, has more of a business orientation.
The conformance dimension is about value-protecting and follows the principles of disclosure and transparency (OECD 2004), accountability (UK Financial Reporting Council 2010), financial reporting and audit (US Business Roundtable 2010) and managed risk (Australian Stock Exchange Corporate Governance Council 2010). Performance governance, on the other hand, is about value-creating, reflected in principles such as developing structures that enable the board to add value to the organisation (Australian Stock Exchange Corporate Governance Council 2010), leadership (UK Financial Reporting Council 2010) and those more specific expectations of the US Business Roundtable (2010), namely to produce long-term value for shareholders and to develop and implement the corporation's strategic plans. Both dimensions of governance feed into one another, as shown in Figure 3.1.
Figure 3.1 Corporate governance framework
Checklist: Compliance with Corporate Governance Principles
• Is the term 'governance' clearly understood?
• Is there an acceptance to act in the best interests of shareholders and stakeholders?
• Are the principles of corporate governance applied?
• Is an effort made to interpret them in the context of the organisation?
• Are corporate governance principles developed in a transparent manner and disclosed?
• Does the composition of the board satisfy the 'effectiveness' criteria?
• Is there a clear distinction between board responsibilities and those of the executive to run the company's business?
• Are shareholders' rights protected?
• Is there a dialogue with shareholders to achieve a mutual understanding of the organisation's objectives?
• Do all classes of shareholders have equal rights?
• Does the organisation work with stakeholders to sustain financial viability?
• Does the board provide strategic leadership?
• Does the board monitor the performance of organisational management?
• Is the board accountable for its performance to the organisation and its shareholders?
• Is the composition of the board adequate to complete its responsibilities?
• Are board members elected in a transparent and open manner?
• Are board members inducted and undergo refresher courses?
• Are board members' remuneration packages disclosed and independently approved?
• Is remuneration linked with board and individual performance?
• Is the board accountable for achieving the organisation's objectives?
• Does the board accept its responsibilities for assessing and managing enterprise risks?
• Has the board the expertise to implement enterprise-wide risk management?
• Do board members act as responsible corporate citizens?
• Does the board distinguish between its risk conformance and performance responsibilities?