The Steinhoff Saga Management review - University of Stellenbosch Business School

July – December 2019

The importance of strong corporate governance in a complex world

The importance of strong corporate governance in a complex world

By Hendrik Steynberg

  • DEC 2019
14 minutes to read

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It is about leadership and strong corporate governance

The world is becoming increasingly complex and interconnected, with organisations under pressure to deliver value to shareholders while also remaining accountable to society as a whole – all against the backdrop of rising competition. Moreover, many organisations are part of sophisticated supply chains, which are conduits for information, goods, services and payment flows, both locally and internationally. In such a climate, inspired leadership and strong corporate governance are paramount.

Corporate governance refers to the measures introduced and the steps taken to ensure that an organisation’s management acts in the interests of shareholders and other stakeholders, using resources effectively and adhering to the principles of transparency and accountability. Corporate governance has two primary functions: driving the organisation forward (directing performance) and exercising prudent control over the operation (controlling conformance). Together these two functions help to ensure that the organisation remains progressive and forward-looking, but operates within realistic and ethical boundaries.

Many high-profile corporate failures in recent years have put the spotlight on governance issues and raised questions about whether traditional governance rules, structures and mechanisms should be overhauled.

Many high-profile corporate failures in recent years have put the spotlight on governance issues and raised questions about whether traditional governance rules, structures and mechanisms should be overhauled. Corporate governance is typically associated with financial oversight provided by an organisation’s board of directors and the agency relationship it has with management and shareholders. However, there is a growing body of opinion that corporate governance should extend beyond the boardroom – that it should be practised by managers throughout the organisation. For example, the devolution of accountability to successive levels of management would help to improve both financial and non-financial performance, evidenced in enhanced employee morale and customer satisfaction. Having more managers involved in determining the future trajectory of the organisation and continuously monitoring progress could be both empowering and energising for the people concerned.

A more focused and energised operation, in turn, should lead to better organisational performance. By extension, supply chain performance should also improve because more managers (being accountable) will be able and willing to make a positive contribution to those aspects against which supply chain performance is measured, such as cost reduction, on-time delivery, throughput, compliance and achieving a high-performance culture.

Is there a link between corporate governance and organisational performance?

Some say that the quality of corporate governance directly affects an organisation’s performance ‒ that the design of a system of governance and its enforcement are important determinants of whether the organisation will consistently meet its objectives or, alternatively, produce erratic or insipid results. If that is the case, then strong corporate governance and effective leadership go hand in hand.

There are numerous examples of corporate governance lapses in various supply chain performance areas, which contribute to organisations’ poor results or even demise. Not only do these failures deal a blow to shareholders, employees and supply chain partners, but they are also sometimes damaging to the economy as a whole. Sadly, lapses in corporate governance (both within organisations and among supply chain partners) are often the result of unethical behaviour, such as backdating contracts, offering cash inducements to secure business deals and misrepresenting financial results.

Yet, despite the apparent evidence, the link between corporate governance and organisational performance is not clear-cut. A number of studies have failed to detect a direct relationship between corporate governance measures and performance outcomes, possibly because other factors (including an organisation’s size, financial stability and position in the market) help to cloud the issue. It is possible, for example, for an organisation to be doing well financially in the absence of a sound system of governance. In contrast, the failure to implement a proper risk management strategy, which would see an organisation pursuing opportunities in an informed manner, could negatively affect performance – even with financial controls in place.

Other studies have shown that an organisation’s strategy will influence the chosen style of governance. For example, if shareholder value is the board’s chief concern, corporate governance will be geared towards maximising profits without transgressing the law. On the other hand, if a growth strategy is the board’s main focus, less importance might be attached to rigorous corporate governance.

Sadly, lapses in corporate governance … are often the result of unethical behaviour, such as backdating contracts, offering cash inducements to secure business deals and misrepresenting financial results.

It has been suggested that corporate failures are attributable not so much to the absence of corporate governance mechanisms as to the lack of clear governance processes ‒ such as how governance is exercised in an organisation and how the outcomes are acted upon. In other words, it is not only about having the right tools; it is also about using them in the most effective way.

The purpose of the study

In the light of these uncertainties, a study was undertaken to establish the relationship between the internal control aspects of corporate governance (aimed at risk mitigation) and supply chain performance.

The study comprised a literature review and a quantitative survey conducted among a sample of 196 employees in a multinational organisation whose supply chain operation was located in South Africa. The latter was responsible for procuring and supplying materials and services to the organisation’s manufacturing plants as well as organising the logistics to transport final products to customers. The questionnaire-based survey was aimed at soliciting employees’ views about the importance and impact (either positive or negative) of the internal controls that had been implemented, below board level, on supply chain performance in the organisation.

One way of ensuring an effective governance process is to implement a governance framework which sets out the rules and parameters for exercising financial and operational oversight. To this end, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) published an internal control integrated framework guide in 1992, which has been regularly updated over the years. The COSO internal control framework was introduced at the multinational organisation participating in the survey with a view to ensuring that risks threatening the achievement of organisational objectives remained at acceptable levels. The COSO framework has five dimensions, each of which comprises various elements:

(1)   The control environment (e.g. promotion of integrity, ethical values and moral behaviour);

(2)   Risk assessment (e.g. identification and mitigation of risks);

(3)   Control activities (e.g. implementation of appropriate controls to minimise supply chain risks);

(4)   Information and communication (e.g. development of an effective information system and promotion of open communication among employees and stakeholders);

(5)   Monitoring activities (e.g. regular review and strengthening of controls, and acting on results of monitoring activities).

While financial controls are vital, on their own they are unlikely to deliver the well-founded and sustainable value to which a high-performance organisation aspires.

Findings from the survey

Perceived importance of internal controls

All respondents saw great value in the organisation’s internal control framework (ICF), with control activities viewed as the most important dimension and monitoring activities as the least important dimension for strong supply chain performance, although the differences in the perceived importance of the five dimensions were in most cases marginal. When comparing the responses of those working in the supply chain function and those working in the operations business units, the only significant difference was in their views about monitoring activities: the supply chain staff attached much more importance to this dimension than the operations business unit staff.

Those elements considered to be the most important for supply chain performance were: integrity, ethical values and moral behaviour; the identification and mitigation of risks; and the implementation of appropriate controls to minimise supply chain risks.

It has been suggested that corporate failures are attributable not so much to the absence of corporate governance mechanisms as to the lack of clear governance processes ‒ such as how governance is exercised in an organisation and how the outcomes are acted upon.

Perceived impact of the implementation of internal controls

About two-thirds of respondents said that the implementation of the internal control framework (ICF) had enabled supply chain performance, while one-third of respondents said that it had not. Of the five dimensions, the implementation of control activities had, according to the respondents, had the greatest enabling effect, while the implementation of information and communication had had the least enabling effect. There was little difference in the views of the supply chain staff and the operations business unit staff regarding the implementation impact of the ICF.

In terms of supply chain performance variables, the ICF was perceived to have the greatest impact on the variable of achieving a high-performance culture and the least impact on the variables of on-time delivery and cost reduction.

Key insights

Notwithstanding the mixed views found in the literature on the link between corporate governance and organisational performance, the survey confirmed that those working in different functional units and at different occupational levels in the organisation considered corporate governance to be very important for effective supply chain performance. The fact that an internal control framework (ICF) had been implemented at the organisation appears to have given structure and clarity to the governance process, although more could be done to ensure the effective implementation of controls below board level, which would positively impact supply chain performance.

It was interesting that control activities received the highest ratings both in terms of perceived importance and impact, since a high level of control can lead to bureaucracy and a loss of efficiency. However, as certain studies have revealed, it is often poor implementation of controls at different levels of the organisation and across the various stakeholder groups, rather than the inherent nature of the control mechanisms themselves, that compromises effective supply chain performance.

Clearly, collaboration and strong communication should be the cornerstones of a corporate governance strategy, with ethical leadership providing the reinforcing structure.

Clearly, collaboration and strong communication should be the cornerstones of a corporate governance strategy, with ethical leadership providing the reinforcing structure. While financial controls are vital, on their own they are unlikely to deliver the well-founded and sustainable value to which a high-performance organisation aspires.

  • This article is based on the research assignment of Hendrik Steynberg – an MBA alumnus of USB. The title of his research assignment is: An evaluation of a governance framework implemented as an enabler of supply chain performance: Evidence from a South African multinational organisation.
  • His study leader was Prof Mias de Klerk, Professor of Leadership and Organisational Behaviour, Director: Centre for Responsible Leadership Studies (Africa) and Head of Research at USB.

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