Corporate governance ? so who needs it?

GOVERNANCE of organisations, whether they be a quoted plc, a health trust or the cabinet office is a hot topic. As democratically-controlled member organisations, co-operatives should be at...

GOVERNANCE of organisations, whether they be a quoted plc, a health trust or the cabinet office is a hot topic.
As democratically-controlled member organisations, co-operatives should be at the forefront of best governance practice, with transparency to members an essential watchword.
At Congress 2005, the Corporate Governance Review Group is due to launch the new Code of Best Practice for co-operative societies. The new Code seeks to build on the existing Code; augment it where necessary and introduce some new areas which reflect the changed corporate governance environment which has evolved in the ten years since the existing Code was drafted.
What is corporate governance? Who needs it? Why is it important for co-operative societies?
Corporate governance is the system and process used to ensure proper accountability, probity and openness in the conduct of business.
The basic principles in good corporate governance systems include transparency, accountability, fairness and responsibility, which are put into practice by a combination of statutory rules and self-regulation in ?codes of best practice&#039.
The foundation of corporate governance is disclosure: this encourages the confidence and trust of stakeholders. These principles provide a sound basis for good corporate governance within co-operative societies.
During the 1990s governance in our corporate cousins was in the spotlight following the publication of various reports such as Cadbury (1992), Greenbury (1995) and Hampel (1998).
Despite these codes the corporate world has seen major failures in corporate governance which have triggered high profile collapses.
In the US there were the so-called ?pinstripe-plunderers&#039. The Worldcom and Enron scandals were brought on by the failure of boards of directors not acting as an effective check on "rogue senior management" and by investors not acting as a check on boards which were supine in the face of the senior management.
Such scandals prompted legislation in the US in the form of the Sarbanes-Oxley Act. Fortunately, there haven&#039t been any failures on such a scale in the UK, although there was a failure of good governance at Equitable Life where the board appeared to have been ill equipped to address a very complex business.
The Co-operative Movement has not been without its failures in corporate governance. Some may recall the well-publicised scandals in the 80s and 90s, hence the 1995 introduction of the Co-ops UK Code of Best Practice for co-operative societies.
In recognising that evolution and continuous review of the governance framework is inevitable, the revised Combined Code for listed companies was published in July, 2003.
The Combined Code, which applies to reporting years beginning or after November, 2003, replaced the Combined Code issued by the Hampel Committee in 1998.
Although introduced mainly for implementation by listed companies, this introduces a wide range of changes to the previous version (raising the bar of acceptable standards) and provides governance principles of separation of function, independence and transparency, which are universally applicable.
Some key features of the Combined Code include more emphasis on the "professionalism" and "effectiveness" of directors; the establishment of a board performance and evaluation process; and the continuous development of directors.
Co-operatives, of course, have a unique structure, with their focus clearly being on delivering benefits to their members.
The very nature of their ownership means that co-operatives will face a number of specific corporate governance and accountability issues. The fundamental principle of corporate governance is, however, clearly as relevant in co-operative societies as it is in listed companies.
The primary beneficiaries of good corporate governance are the organisation and its members or owners.
Societies whose standards of governance are high are surely more likely to gain the support and confidence of their members and customers but I would suggest, equally, that a lack of transparency (unless for a good commercial or legal reason) is indefensible in a member-owned and controlled organisation.
Governance provides the checks and balances to ensure organisations are run efficiently, effectively and meet the objectives of their stakeholders. This concerns the delegation of responsibility to management and the means by which members can hold management to account.
A society cannot be well governed if it has no one to account to. It is not simply about what goes on in the boardroom; societies need corporate governance policies which place the interests of members at the heart of their business.
In today&#039s world of regulation and best practice codes it would be easy to think that simple compliance was sufficient.
It is a distinctive feature of the UK&#039s corporate governance regime that ? as enshrined in the Combined Code ? it operates on the basis of ?comply or explain&#039 and recognises that its provisions may not be appropriate in all circumstances.
This approach has been in operation for more than ten years and the flexibility it offers has been widely welcomed in the corporate world by both shareholders and directors.
The ?comply or explain&#039 approach is one of the requirements of the new Co-operative UK Code of Best Practice ? societies will be asked to include in their statement of corporate governance an explanation concerning the areas where they don&#039t comply, leaving it up to members to evaluate the society&#039s statement.
The Co-operative UK Code of Best Practice is, of course, voluntary ? in the short term the acid test will be the extent to which societies ?buy in&#039 to the Code by adopting and complying with its recommendations.
As a member of the committee recommending the Code, I would seek societies&#039 endorsement of the recommendations which will inevitably, in part, at least initially, impose some new challenges for co-operative boards around the UK.

? Nick Eyre is Secretary of the Co-operative Group but is writing in a personal capacity and as a member of Co-operatives UK&#039s Corporate Governance Review Group.

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