What is Governance?
Compiled and Edited by
Muhammad Abubakar Siddique,
Lecturer, Int’l Institute of Islamic Economics (IIIE),
Int’l Islamic University, Islamabad.
Website: http://islamicfina.com/
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Governance
We live in a heterogeneous society. Not all individuals are alike, nor do they think alike. Had all of us thought or behaved in a similar fashion, there would be no criminals in the society nor would there be any need for law-keepers. Growth in any sphere of life can be achieved only when there are different perspectives amongst the actors involved. Every individual is motivated by his/her own unique need. If every individual had his/her own way, society could witness lawlessness. To control and govern human behavior, certain rules are made mandatory in the society. While it would be convenient to surmise that rules would take care of any potential lawlessness, individuals belie such a hypothesis. To achieve personal gains, individuals can infringe on the general good of the society. Given the heterogeneity in individual perceptions, the available resources could be wasted with each individual trying to assert his/her supremacy over the other by channelizing the resources to his/her personal gain. It is to subordinate such individual interests to the general interest that governance is needed
Corporations, if left uncontrolled, can hold the society to ransom. Remember, corporations have to exhibit their unquestioned loyalty to the shareholders first. Only then are the other stakeholders’ interests considered. Assume that a manufacturing unit in order to save costs has decided not to invest in an effluent treatment plant. Instead it releases its effluents into the local sewage drains or the nearby river. What would happen to the communities living nearby? What would happen to the environment? While the shareholders’ interests are served, the community at large is exploited. It is to control such value expropriation from stakeholders that governance is needed. Even in a case where the corporation is excessively concerned about the stakeholders and not concerned about its investors’ interests, governance is required. The reason being, the value of one entity is being appropriated for the benefit of the others. Governance ensures an optimal and efficient mechanism by which each stakeholder gains optimally in value in such a way that no other stakeholder feels or experiences his/her value expropriation. Governance helps in exercising authority, giving direction and controlling a corporation so that its objective is achieved. Of late there is a growing conviction that governance should not be left to the corporate boards alone. A certain amount of government and public involvement is necessary to drive the governance of corporations. Today, the financial institutions and other market participants along with the regulatory bodies and global legal requirements are exercising enormous influence on the governance systems of corporations.
What is Governance?
Governance has been defined to refer to structures and processes that are designed to ensure accountability, transparency, responsiveness, rule of law, stability, equity and inclusiveness, empowerment, and broad-based participation.
Governance also represents the norms, values and rules of the game through which public affairs are managed in a manner that is transparent, participatory, inclusive and responsive.
Governance therefore can be subtle and may not be easily observable. In a broad sense, governance is about the culture and institutional environment in which citizens and stakeholders interact among themselves and participate in public affairs.
History of governance
The medieval poet Geoffrey Chaucer (c.1343–1400) wrote of ‘the gouernance of hous and lond’ [the governance of house and land]. He was the first to record the word ‘governance’[1] although he was not sure how it should be spelled.[2] At that time, of course, it was a city or state that needed governing. Nevertheless, although the use of the phrase ‘corporate governance’ is recent, the need for governance of trade ventures is ancient. Shakespeare (1564–1616) understood the challenge. Antonio, his Merchant of Venice,[3] agonized as he watched his ships sail out of sight, knowing that his fortune was now in the hands of others.
Whenever a principal relies on agents to look after his interests, governance issues arise. This agency dilemma has long been recognized. Shareholders in a company elect their board directors to look after their interests. Members of professional bodies elect their council. Members of a club appoint their committee. All corporate entities need a governing body nominated and elected in line with that organization’s constitution. These governing bodies have a variety of names. For companies it is usually the board of directors. For other organisations it may be the ‘council’ or the ‘committee’. The Bank of England has a ‘Court’, reflecting its ancient origins. Oxford colleges, with classical simplicity, often call their governing body ‘the governing body’: surprisingly not‘ corpus governate’
Governance focuses on ownership because ownership, and therefore financing, results in businesses being formed and expanded. Different systems of governance are seen as best practice in different countries, as we shall see later in this text. However, much of the governance debate has been seen in the context of the so-called Anglo-Saxon model where ownership and management are separate, and companies can obtain a listing on a stock exchange where their shares are bought and sold.
Governance in companies and non-governmental organizations
Although mostly discussed in relation to large quoted companies, governance is an issue for all corporate bodies, commercial and not for profit, including public sector and non-governmental organizations. There are certain ways in which companies might differ from other types of organization, such as their ownership (principals), their mission, and the legal/regulatory environment within which they operate.
- Public sector organizations are organizations that are controlled by one or more parts of the state. Their functions are often to implement government policy in secretarial or administration areas.
- Some are supervised by government departments (for example hospitals or schools). Others are devolved bodies, such as local authorities, nationalized companies (majority or all of the shares owned by the Government).
These organisations are in the public sector because the control over a particular public service, utility or public good is seen as so important that it cannot be left to the profit-motivated sector, which may for example seek to close socially vital loss-making services, such as bus routes.
Objectives will be determined by the political leaders in line with government policy. They are likely to focus on value for money and service delivery objectives, possibly underpinned by legislation. The level of control may be high, leading to accusations of excess bureaucracy and cost.
In many countries there are thousands of charities and voluntary organisations that exist to fulfil a particular purpose, maybe social, environmental, religious or humanitarian. Funds are raised to support that purpose. Charities are not owned as such, but will be primarily responsible to the donors of funds and the beneficiaries (those who receive money or other aid) out of the charities’ resources. Charities will be subject to their own legal regime that grants privileges (for example tax concessions) but imposes requirements on how funds can be spent and the charities’ assets managed.
[1] Troilus and Criseyde (Troilus and Criseyde is an epic poem by Geoffrey Chaucer)
[2] ‘gouernance’or‘governaunce’
[3] Shakespeare, William (1598)The Merchant of Venice, Act 1 Scene 1‘In sooth, I know not why I am so sad
