Corporate Governance

Introduction to Corporate Governance

In the current business context, the top management of organizations were made responsible to many financial scandals in relation to accounting and fraudulent activities (e.g. Enron, Worldcom, and Adelphia). This has also brought into light the question of whether organizations strive towards meeting the best interests of shareholders and other company stakeholders including employees, general community etc. Many identify that this is because most top managers consist of high power within organizations and therefore lack of accountability and control of business operations is common.  Therefore research has been conducted to generate effective and solutions that lead to good company governance. Corporate governance is identified as the combination of trust, ethics, moral values and confidence of all the stakeholders, including government; the general public etc.; professional/service providers – and the corporate sector. Corporate governance is considered as an increasingly important concern in current context (Herman, 2005). Corporate governance gained fame due to two main reasons including economic liberalization and deregulation of industry as well as the requirement new corporate ethos (Joyner and Payne, 2002). In addition, the new shift from the traditional models towards a new paradigm of corporate governance is the demand for greater accountability of companies to their shareholders and customers (Bushman and Smith, 2001).

 

Theoretical framework of Corporate Governance

Let me take you through the theories that encompass corporate governance. There are many theories identified under Corporate Governance. Stiles and Taylor (2001) developed six theories of corporate governance, however only three theories are useful in applying to contemporary context.  The first theory suggests how certain directors view their role as completing their obligations to the organization law, in which the level of guidance is low. In contrast, the next two theories known as class hegemony and managerial hegemony which describes implicitly statutory advice.  The organizational economic approach utilizes an ethical perspective through agency theory which implies that the board of Directors have a responsibility to control manipulations in managerial power, and transaction-cost theory is utilized to lead decision-making. On the contrary, Agency theory is originated by Adolf Berle and Gardiner Means (1932/1991) which investigates the issue of individual greed. As Jensen and Meckling (1976) points out that managers who are in charge of managing the wealth of others is a cost, known as the agency cost. However, this cost does not exist in the business owned by the manager which creates the problems of governance in a private company which are different from public companies. These issues cannot be avoided but only controlled. Therefore, public companies have developed a mechanism of incentives which helps align the interests of managers with shareholders. In contrast, the Stewardship approach focuses on the psychological standing: managers and directors, are motivated towards things more than self-interest such as to perform well, and become good stewards. Drawing on organizational psychology, it suggests that self-esteem and fulfillment loom large in their decision-making. The resource-dependence approach focuses on observing non-executive with the responsibility of providing access to funds, people and other resources. 

Corporate governance consist of three elements. Let me take you through each of these. Ethics is the first element which is an important concept that contributes towards the business success (Arjoon, 2005), especially if the organization is vulnerable to financial scandals. Currently many organizations in Europe, Australia, and the United States, embraces business ethics in the form of an ethical code of conduct (Adam and Rachman-Moore, 2004). CSR on the other hand has world-wide attention and acquired a new resonance in the global economy (Jamali, 2006). Due to the increases in the complexity of the business environment and requirements for transparency and corporate citizenship the demand for CSR will increase. CSR has been theoretically investigated by Carroll (1979) and Lantos (2001). Carroll (1979) identified four types of CSR, which includes economic, legal, ethical and discretionary while Lantos (2001) identified CSR elements ethical, altruistic, and strategic. Lantos (2001), ethical CSR suggests that beyond economic and legal obligations, the responsibility to ensure reduction of harm of society even if these actions do not benefit the organization. Altruistic CSR, focuses on the philanthropic CSR in which the firm focuses on ensuring benefits for the community and related stakeholders even if there is no financial benefit.

The next element is working capital which is directly linked to the firm performance, capital structure and shareholder value. Efficient working capital management must focus on planning and controlling of current liabilities and assets which will eliminate excessive investments in current assets (Mehmet and Eda, 2009).  Karani (2013) stated that corporate governance is a critical factor in controlling working capital management. This can be brought about by devising policies that control efficient working capital management. Therefore, CEO and the Board of Directors as per Gill and Shah (2012), is required to devise policies connected to cash management efficiency in working capital management. Further, Gill, Biger, and Obradovich (2014), suggest that poor working capital management is resulted due to weak corporate governance which will result in affecting negatively on shareholders’ wealth.

 

Application at Dialog

The Board of Directors of Dialog Axiata is committed in managing good corporate governance and achieving the corporate objectives that ensure the long term shareholder value and sustainable growth. The organization focuses on complying with Dialog’s Code of Corporate Governance, which is developed using international corporate governance principles and best practices. Dialog therefore complies with the requirements mentioned in the Code, the Rules on Corporate Governance contained in the Listing Rules of the CSE and the requirements stipulated in the Companies Act, No. 7 of 2007 (Annual Report Dialog Axiata, 2019). The Board at Dialog consist of 09 Directors in which 08 are Non-Executive Directors and 01 is an Executive Director, who is the Group Chief Executive Officer (“GCEO”). The Board states that it is required to verify independently the financial reporting in order to maintain integrity. Therefore, the Board maintains accounting and financial reporting and internal control systems, which will be evaluated continuously to maintain effectiveness. Dialog is part of the UN Global Compact on Human Rights and has zero tolerance on employing child labour, or forced/ compulsory labour and suppliers must commit to these ethics (Annual Report Dialog Axiata, 2019). The Dialog Employee Code of Conduct, requires employees to commit to and for third parties must also agree to Vendor Code of Conduct. Dialog’s Whistle-Blower Policy is also available to report alleged improper activity, such as bribery or corruption. Also the Speak Up hotline is another option to report actual or suspected misconduct, and illegal or unethical behaviour. Employee wellbeing is a key area that is been monitored at Dialog in which employees are ensured a safe and comfortable working area with grievances handled through open door policies. However, the degree to which employees are engaged in initiating sustainability concepts are very low. Labor management at Dialog is exceptional but the engagement from employees towards sustainability is low. Also the transactional Net-Promoter Score (NPS) study quarterly measures the employee satisfaction level. Environmental sustainability is maintained by aligning to five the sustainable development goals of the UN Global Compact that includes a reduction in poverty, an increase in the provision of quality education, the integration of innovation and sustainable thinking across business priorities, and development of sustainable infrastructure for the betterment of society, and towards combating climate change to secure a safer future by implementing strategies such as Vaayu, Govi Mithrua, Sayuru etc. Further social sustainability is achieved through Dialog’s social stewardship strategy which focuses on innovations for social needs, driven by a social innovation strategy that focuses on education, hearing sight and speech and disaster risk reduction (Annual Report Dialog Axiata, 2019).

Recommendations

 

Based on the analysis, Dialog is currently consisting of good governance in terms of the specified requirements. However, they can enhance their position in terms of good governance by incorporating new systematic procedures that will include benchmark practices from other companies. Especially incorporating lean principles that will govern how operational policies takes place is important to be considered. New creative methods adhering to the new normal in managing CSR and Ethics is highly important. It is also critical to revise their code of ethics as per the dynamic changes in the business environment. It is important to secure their position in terms of working capital and develop mechanisms to achieve financial independence. It is highly important to maintain investor relations in order to maintain good governance. Special focus on working capital financing and working capital management initiatives will further enhance the position of Dialog. Further, Dialog must examine ways in which they can engage their employees in driving sustainability initiatives. By doing so the organizational culture will transform to become sustainable in nature.

Conclusion

Dialog can be considered as an organization which practices good governance in terms of ethics, CSR and working capital. Dialog consist of a strong framework and initiatives that ensure ethics are maintained according to international standards. Most organizations utilize Dialog’s ethical framework as a best practice to apply to their business models. In addition to this Corporate Social Responsibility is the next immense field of corporate governance ensured at Dialog. They have conducted many projects to meet the social, economic and environmental needs. Finally working capital is effectively managed through control mechanisms, good investor relations and effective financial management practices.  However, there is much room to be improved as highlighted in the recommendations. What do you think? Currently Dialog or any other organization for that matter exists in the new normal age created by the pandemic Covid-19. Therefore, the behavior patterns of stakeholders have changed and therefore organizations must be able to effectively adhere to this which includes corporate governance as well. Therefore, considering the current environment changes on the policies at Dialog must be made to further enhance their position as a good governance organization. 

 

References

 

Adam, M. A. and Rachman-Moore D.: (2004). ‘The Methods Used to Implement and Ethical Code of Conduct and Employee Attitudes’, Journal of Business Ethics 54, 225–244

Arjoon, S.: 2005, ‘Corporate Governance: An Ethical Perspective’, Journal of Business Ethics 61(4), 343–352

Berle, A.A. and G.C. Means (1991). The Modern Corporation and Private Property. New Brunswick, NJ, Transaction Publishers

Bushman, R.M. and Smith, A.J. (2001). “Financial accounting information and corporate governance”, Journal of Accounting and Economics, Vol. 32, pp. 237-333.

Carroll, A. B.: (1991). The Pyramid of Corporate Social Responsibility: Towards the Moral Management of Organizational Stakeholders’’, Business and Society 34 (4), 39–48

Carroll, A. (1979). A three-dimensional conceptual model of corporate performance, Academy of Management Review, 4: 497–505

Dialog Axiata (2019). Annual Report. [online] Available at: https://www.dialog.lk/dialogdocroot/content/pdf/annual_reports/2019-annual-report.pdf (Accessed 21 June 2021)

Gill, A. S., & Biger, N. (2013). The impact of corporate governance on working capital management efficiency of American manufacturing firms.  Managerial Finance, 39(2), 116-132.

Gill, A., & Shah, C.  (2012). Determinants of corporate cash holdings: Evidence from Canada.  International Journal of Economics and Finance, 4(1), 70-79

Jamali, D. (2006). Insights into triple bottom line integration from a learning organization perspective, Business Process Management Journal, 12: 809–21

Jensen, M.C. and W.H. Meckling (1976). "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure." The Journal of Financial Economics 3(4): 305-60.

Joyner, B.E. and Payne, D. (2002), “Evolution and implementation: a study of values, business ethics and corporate social responsibility”, Journal of Business Ethics, Vol. 41, pp. 297-311

Karani, H. (2013). The Effect of Corporate Governance on Working Capital of Manufacturing Firms Listed at the Nairobi Securities Exchange.  Unpublished Master of Business Administration Thesis: University of Nairobi.

Lantos, G. (2001). The boundaries of strategic corporate social responsibility, Journal of Consumer Marketing, 18: 595–630.

Mehmet, S, & Eda, O. (2009). Relationship between Efficiency Level of Working Capital Management and Return on Total Assets in Ise. International Journal of Business and Management, 4(10):109-114

Stiles, P. and B. Taylor (2001). Boards at Work – How Directors View Their Roles and Responsibilities. Oxford, Oxford University Press.