The juxtaposition of success and failure of corporate governance procedures. The interplay between rules and practice
| Pages | 379-413 |
| Published date | 03 May 2016 |
| Date | 03 May 2016 |
| DOI | https://doi.org/10.1108/JFC-07-2013-0047 |
| Author | Norman Mugarura |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
The juxtaposition of
success and failure of corporate
governance procedures
The interplay between rules and practice
Norman Mugarura
Global Action Research and Development Initiative Limited, Barking, UK
Abstract
Purpose – The paper aims to explore a multiplicity of corporate governance issues in the narrow
purview of different corporate governance systems and procedures across jurisdictional contexts. It
shows a correlation between proper implementation of rules and procedures in a corporation for
determining the success or failure of corporations. The paper also posits that however robust internal
corporate rules and procedures are, the recent experiences have demonstrated that the fate of
corporation could also be dictated beyond the remit of individual corporations by extraneous factors
such as globalisation. This was vividly underscored by the recent global nancial crisis (2008-2010) and
its devastating consequences on well-managed corporation worldwide. The author has structured the
paper into two parts – part one and part two. Part one is designed to explore the dynamics of corporate
governance in fostering the success or failure of corporations. In part two, the paper examines the
interplay between rules and practices in the context of two corporate governance examples –MTN in
Uganda and the defunct BCCI (1991) in the UK in corporate success or failure. The former underscores
a correlation between effective corporate governance mechanisms in fostering corporate success,
whereas the latter underscores how the practice of overlooking corporate rules and procedures could
trigger catastrophic consequences for corporations. The paper also tries to tease out how poor corporate
governance could be exploited for criminal purposes. This was underscored in the case of the BCCI. The
last part underscores how two distinctive corporate governance approaches in MTN (Uganda) and
defunct BCCI could proffer a lesson for change of modern corporate governance systems and
procedures.
Design/methodology/approach – The paper was written by way of a comparative analysis of
different corporate governance approaches in different jurisdictions and their different implications for
the success or failure of corporations. It has examined recent corporate scandals with a view to delineate
how lax governance procedures and lack robust oversight of corporation could have played in
precipitating conditions for criminal exploitation.
Findings – The ndings of the paper clearly demonstrate a close correlation between good corporate
governance and corporate success. It also correlates how lack of robust corporate governance
procedures could provide an environment for exploitation of corporation by executives who may have
criminal inclination. The lax corporate environment can also be exploited by criminals to perpetuate
other forms of criminal activities such as money laundering and fraud.
Research limitations/implications – The paper was largely undertaken by the analysis of
secondary data sources. Because there were no interviews carried to corroborate the foregoing data, it
is possible that some of it could have been biased. Undertaking interviews would have mitigated the
potential for bias and infused the paper with rst-hand experiences from different stakeholders
Practical implications – The paper underscores how two distinctive corporate governance
approaches gleaned in the context of MTN (Uganda) and defunct BCCI (1991) could proffer different
approaches for a change in modern corporate governance systems and procedures.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
Juxtaposition
of success and
failure
379
Journalof Financial Crime
Vol.23 No. 2, 2016
pp.379-413
©Emerald Group Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2013-0047
Social implications – The paper has demonstrated that lack of proper corporate governance
procedures and oversight could provide a recipe for criminal exploitation to perpetuate crimes such as
money laundering in a corporation. This could have far-reaching implications not only for individuals
corporations but also local communities in form of job losses), governments and markets.
Originality/value – The originality of this paper is manifested that there are no comparable studies
undertaken in its purview. It is, therefore, a must-read for both academic and policy purposes.
Keywords Corporate governance, Corporate failure, Money laundering
Paper type Research paper
1. What is corporate governance?
Corporate governance provides a framework for legitimate distribution of powers
across varied stakeholder constituencies in a corporation. The investor, otherwise
known as “the shareholder”, provides capital but does not take part in the day-to-day
management of the company. The executives are responsible for running the
corporation on behalf of the shareholders (investors), and the shareholders are
responsible for providing capital. In both cases, the purpose of this corporate
governance structure is to ensure that the two constituent parties are able to
complement each other in promoting corporate objectives without overlapping each
other’s distinctive roles. The survival of a corporation is dictated, in part, by either the
success or failure of its corporate governance procedures and their effectiveness. A
well-devised corporate governance framework should ensure that the board is not only
accountable to various stakeholder constituencies but also promotes transparency
through a proper disclosure and dissemination of information across various
stakeholder constituencies. For instance, if investors are not satised with internal
corporate governance mechanisms such as the company’s level of disclosure, they will
have misgivings about it and how it is managed. This could subsequently precipitate an
environment for investors to withdraw their capital otherwise known as capital ight.
Arguably, corporate governance mechanisms (depending on how effective they are)
have the potential to inuence the health and future survival of a corporation. The
effectiveness of corporate governance mechanisms is also of signicant importance in
enhancing the stability of nancial markets. For example, the East Asian nancial crisis
saw the economies of Thailand, Indonesia, South Korea, Malaysia and Philippines being
severely affected by the withdrawal of capital by investors after property assets
collapsed (Stigliz, 2002). Lack of proper corporate governance mechanisms was
responsible for the nancial institutions’ failure to withstand sudden changes in asset
portfolios in the above economies. It was evident that corporate governance systems of
the developing countries were weak largely due to corruption, in particular cronyism
and nepotism. In Uganda, for instance, top positions in the majority of corporations tend
to be given to people who have strong political connections in the ruling government.
This situation has also been prominent in Kenya and presumably replicated in other
countries across Africa as well[1]. This begs the question whether “these people” are the
best qualied to ll the higher corporate positions they occupy or whether corruption
could have a hand in inuencing corporate failure in some countries?
To appraise the effect of corporate governance mechanisms in either facilitating the
success or failure of corporations, one needs to examine the process in which a
corporation is constituted. A corporation is constituted, by virtue of its Articles and
Memorandum of Association, to allow different constituent parties to complement each
JFC
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other with regard to contribution of capital, expertise and labour for the mutual benet
of both parties. The separation of ownership and control which is provided for by the
constitution of the company explains why shareholders often take a passive or no part
in the management of the company. This separation-of-powers issue helps to minimise
the possibility of conict of interests and enables different constituent parties to co-exist
in fostering the objectives of the company. Issues of conict of interests can be pertinent
in relation to the disclosure of nancial reports and ethics required of senior executives.
Section 33 of the Company Act (2006) in the UK vests the Articles of Association with
a contractual force that binds a company and its individual members in their consensual
contractual undertakings[2]. Therefore, corporate governance procedures are used to
evaluate the relationship between different stakeholder constituencies in a corporation.
Corporate governance provides a mechanism for evaluating corporate performance –
based on a proper distribution of legitimate powers to safeguard shareholders’ equity.
The contemporary trend in corporate governance has shifted its focus from the
traditional agency orientation based on managers and dispersed shareholders,
ascribing an enhanced role to minority and majority shareholders in an organisation[3].
By dispersed shareholders, we mean a situation where no single investor (shareholder)
owns enough shares to control the company. The effectiveness of corporate governance
systems can also be inuenced by external factors such as globalisation and its
overlapping effect on economies. Therefore, this paper articulates the effect of corporate
governance mechanisms on either fostering the success or failure of corporations in a
cross-jurisdictional context.
2. Corporate governance theory
Corporate governance theory is explained often depending on jurisdictions where
corporate governance issues are being examined. But generally speaking, corporate
governance underscores a set of relationships between the company management, its
board, shareholders and other stakeholders. It provides the structures through which
the objectives of the company are set and measures for attaining those objectives and
monitoring performance are determined (OECD, 2004, p. 11). Organisation for Economic
Co-operation and Development (OECD) also denes corporate governance as a system
by which companies are directed and controlled. It is a set of rules, policies, laws,
measures and instruments that have an effect on the manner in which a company is
ruled (Wankel, 2009). It is also used to measure and monitor whether the company is
governed in accordance with the law, policies and procedures.
A well-devised corporate governance framework should provide incentives for the
board and management to ensure they achieve objectives and the interest of the
company. Shareholders should inuence the creation of mechanisms for effective
monitoring and evaluation of executives in their duties to the company. The presence of
effective corporate governance system within an individual company and across an
economy as a whole helps to provide a degree of condence necessary to attract more
investment and enhance the proper functioning of the market economy (OECD, 2004).
Equally, corporate governance creates mechanisms with which outside investors
protect themselves from excesses of insiders (La Porta et al.). It provides a mechanism
for transmitting signals from products and input markets into corporate behaviour
(Berglof and Thaden, 1999). Corporate governance entails a system of checks and
balances designed to ensure that management of a corporation is for the benet of its
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Juxtaposition
of success and
failure
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