Principles of Good Corporate Governance - Essay Example

?Principles of good corporate governance Ms Novita Ikasari Executive of the Australian Local Network PO Box 123 Bentley WA 6004 Dear Ms. Ikasari, This letter contains our recommendations to the Local Network to encourage compliance with the Global Compact principles: three "Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining" and ten "Businesses should work against corruption in all its forms, including extortion and bribery". Corporate governance is a term which refers to a set of principles, regulations, policies or laws established by a company to determine the manner in which it operates in the industry, has today, become one of the hottest topics in the contemporary corporate world. It is a complex amalgamation of legal, moral and economic / financial issues closely associated with financial scandals, concerns of stakeholders, and social / environmental activism, all rolled up in one. It raises several critical concerns regarding the manner in which the organizations must operate; the moral / ethical responsibilities of companies towards the stakeholders; the financial responsibilities towards their directors and shareholders; and ways to uphold the interests in the larger benefit of the society / community. However, one of the most crucial aspects of corporate governance is to ascertain that the individuals in the organization are held morally accountable for their business practices or their actions and repercussions of the same, towards the society (Colley, 2003, Pp. 13 - 18). The Body Shop – a company with activism as a part of its DNA is a prime example of companies, with ethics as one of its core business practices. The company gave prime importance to a range of social issues through its campaigns - such as the one against human rights abuses; policies in favour of animal and environmental protection; its commitment to society through charity etc., to name a few. It was one of the few commercial organizations which revolutionized the corporate world, through incorporation of ethical principles as a part of its core business practices (Witcher, Chau, 2010, Pp. 43 - 45). The company was taken over by a leading cosmetics brand, L’Oreal, with drastically different business practices, in the year 2006. As opposed to The Body Shop, L’Oreal on the other hand, involved in animal testing, which caused a furore among animal rights activist, in the process giving bad repute to the trusted brand. Positive and negative lessons learnt from these business practices and approaches One of the key lessons learnt, from the case of The Body Shop is the fact that contrary to popular opinion, hard-core commercial organizations, as opposed to not-for-profit organizations, can also implement socially relevant business practices, which have the greater interests of the community at large. The company successfully implemented such principles during the 1990s thus, revolutionizing the profit oriented and highly commercial competitive corporate world. Furthermore, it is also reaffirmed that the contemporary corporate world, must seek to pursue social and environmental issues, and be more stakeholder oriented in their approach, rather than profit seeking, stockholder oriented one. 21st century has given rise to a phenomenon called ethical consumerism. The consumers today are far more aware of social and environmental issues and are highly active in defending their rights. Companies which tend to ignore their interests might have to face mass boycott of their products, as is observed in several instances in the past such as the case of Nestle and Nike in the 1990s and The Body Shop in the recent times (Crane, Matten, 2007, Pp. 421 - 423). Thus over and above the legal consequences, the companies are at a risk of losing their brand image and garnering a bad reputation among the public, thus having a serious negative impact on their competitive positioning the industry translating into huge financial losses. Business practice recommendations which will improve compliance to the two Global Compact principles The two key corporate governance principles discussed in this paper include: Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining Benefits and Implication: a. Better employment practices which entails the right to form trade unions; permit the employees and rest of the staff to join and associate with it; establish channels for a healthy communication and a meaningful exchange of dialogues between the management and the employees / workers etc., would encourage employees to apply and work for such companies; lead to increase in employee morale; rise in productivity; and ensure greater harmony between the employees and the management. An amicable relationship between the two would further ensure, untoward incidents such as strikes and lock outs, as well as legal action against the company for the violation of internationally governed laws. b. The increasing costs of production have driven several reputed international companies in search of cheap labour, which is readily available in third world or developing countries. There are several international corporations which operate sweat shops with extremely unhealthy environment, employ forced labour, encourage child labour and have absolutely no regard about employees’ rights and development. This would not only lead to strict legal action but also heavy fines; negative publicity and a fear and apprehensions among the public, which would restrict them to seek employment in such companies. Loss of faith among the public, would render the company devoid of human resources, which is a critical tool for the company’s financial health. Principle #10: Businesses should work against corruption in all its forms, including extortion and bribery Benefits and Implication: a. Businesses benefit greatly by ensuring compliance with internationally proclaimed rules and regulations. It helps in endorsing a good brand image in the industry; helps in developing greater confidence and faith among the investors in the company, ultimately leading to increased investment; influence consumers’ purchasing preferences; etc among others. This ultimately translates into increased revenues for the companies. b. Companies which fail to adhere to such international conventions are at a high risk of attracting strong legal action; garner negative media attention leading to large scale public protests and ultimately boycott of the company's products / services; incurring huge financial losses in the process (Joseph, 2004, 119 - 125). Restoring consumer faith after the image has already been tarnished is a herculean task, as consumer might switch to substitute products. Losing market share in this highly competitive industry would be the greatest setback of all. References: ASX Corporate Governance Council (March, 2003). Principles of good corporate governance and best practice recommendations Crane, C., Matten, D., (2007). Business ethics: managing corporate citizenship and sustainability in the age of globalization, Oxford University Press, Pp. 421 - 423 Colley, J. L., (2003). What is corporate governance? McGraw Hill Publication Joseph, S. (2004). Corporations and transnational human rights litigation. Hart Publishing, Pp. 119 - 125 Witcher, B. J., Chau, V. S., (2010). Strategic Management: Principles and practices, CENGAGE Learning, Pp. 43 - 45 Read More