In recent years, the terms “governance” and “compliance” have become more common, and many of you may be familiar with them. While these two terms have different meanings, they are deeply linked to the sound management of a company. Here, we will explain the difference between the two, the importance of governance, and the benefits of strengthening governance.
Concept Of Governance
Governance means “governance”, “management” and “operation” in English, and is a word that refers to “ruling a nation”. Governance in the business scene is an abbreviation for “corporate governance” and is generally translated as “corporate governance.
Since the 1990s, when the bubble economy burst, the concept of governance has attracted attention due to a series of corporate scandals such as window dressing and embezzlement. Behind these problems, “managers put strong pressure on employees to pursue profits” and “an increase in short-term profit-oriented shareholders”.
Corporate scandals not only harm the interests of stakeholders but also adversely affect the overall economic development. As a result, demands from investors and the general public for proper management increased, and government efforts to strengthen governance were promoted.
Companies are expected to take responsibility for their stakeholders (people who have an interest in the company) such as shareholders, customers, and local communities. The purpose of strengthening governance is to manage and supervise whether the company is properly fulfilling its role, and to prevent the management from taking the company’s ownership.
Difference Between Governance And Compliance
There is the word “compliance” that also has the same sense as governance, but the meaning is different.
Compliance refers to “observing” requirements, orders, rules, laws, etc., and is often translated as “legal compliance” in business terms. However, it is not just the law that must be complied with. Today’s compliance is not a usual way of thinking that simply does not need to violate the law, but is interpreted in a broad sense, such as observing company rules and regulations, acting in accordance with social norms, and paying attention to morals.
While compliance is to “obey” laws and regulations and internal and external norms, governance is to “control” the company itself. Although the meaning of the word is completely opposite, the reason why companies control themselves in the first place is to comply with internal and external norms. In this way, both terms are linked by a strong causal relationship.
Strengthening Governance
“Strengthening governance” means strengthening the oversight of corporate management systems. Specific measures include “separation of directors and executive officers,” “establishment of outside directors and internal audit departments,” and “establishment of compliance committees and risk management committees.” These are not only important in preventing runaway management such as one-man management and ensuring corporate transparency, but also lead to gaining the trust of stakeholders and sustainable growth of the company.
In addition, it is also effective to visualize operations and standardize business processes company-wide, disclose information in a transparent manner, and clarify company creeds and management principles to improve internal control and strengthen governance.
Why Governance And Compliance Are Focused
The advent of the information society is behind the frequent use of these two terms in business. Two points are explained below.
Increased Value Of Information
With the rapid development of the Internet environment and the spread of smartphones, we are now in the midst of the latest information society. In addition, with the expansion of the use of the latest technologies such as AI and machine learning as well as cloud storage, companies are now able to collect and analyze data groups containing huge amounts of files and content that could not be handled by conventional database management systems.
As a result, the value of information owned by companies has increased dramatically, and it is now possible to use it for planning marketing strategies, forecasting demand, discovering new business opportunities, and data-driven management.
However, on the other hand, the risk of information leakage is also increasing. Regardless of whether an employee intentionally or negligently leaks customer information, for example, it is a “serious violation of compliance” and is nothing less than an act that significantly damages the social credibility of a company.
Thorough management is necessary to protect the value of corporate information, which is why governance is becoming more important.
Anyone Can Send Information
The development of IT is not limited to the leakage of customer information. The spread of SNS such as Facebook, Twitter, and Instagram has made it possible for anyone to freely and easily transmit information to the world. While SNS has the advantage that anyone can express their own opinions and express themselves, there is a danger that a careless remark by a single employee can significantly reduce the company’s social credibility and reputation.
In order to prevent such disclosure of internal information, it is important to establish policies and penalties regarding the use of SNS and how to handle internal information, and to ensure that these are thoroughly understood by employees through training and education.
What is the Corporate Governance Code?
There is no clear definition of governance efforts. However, for listed companies, there is a guideline called the “Corporate Governance Code” established in 2015 mainly by the Financial Services Agency and the Tokyo Stock Exchange. These are principles and guidelines that should be referred to as indicators of governance conducted by listed companies and are intended to make it possible for shareholders, employees, business partners, etc., to understand whether the company is properly addressing governance.
The Code consists of 5 “fundamental principles”, 30 principles, and 38 supplementary principles. The five “fundamental principles” are:
- Ensuring shareholder rights and equality
- Appropriate cooperation with stakeholders other than shareholders
- Ensuring Appropriate Information Disclosure and Transparency
- Responsibilities of the Board of Directors, etc.
- Dialogue with shareholders
These principles do not apply to SMEs, are not legally binding, and are only held accountable to companies that have not adopted the Code. The establishment of guidelines is also an opportunity for companies to appeal to investors that they are actively working on governance and compliance. For this reason, in recent years, an increasing number of companies have formulated and published their own guidelines and are updating them as appropriate.
Benefits Of Good Governance
What are the specific benefits of strengthening corporate governance and thoroughly implementing corporate management systems and internal controls? I will explain this in detail below.
Improve Corporate Value
Strengthening governance and complying with compliance not only protect the interests of stakeholders by preventing fraud and information leaks, but also increase corporate value. Companies that are working to strengthen governance are considered to be highly transparent, so they are socially trusted and recognized externally as excellent companies.
If we become a company chosen by consumers and customers, sales will increase as a result, and corporate management will also be stable. If corporate value increases further, it becomes easier to receive loans from financial institutions, creating a virtuous cycle in which corporate value increases further.
Can Prevent Internal Fraud
A strong governance eliminate business processes that allow inappropriate processing and also help prevent internal improprieties such as window dressing and fraudulent accounting. Since the company is constantly monitored by outside directors and auditors, even if the management seems to run out of control and become excessively profitable, it can be checked. As a result, it is less likely that management will privatize the company.
Bring Peace Of Mind To Shareholders
Companies that work on corporate governance are more likely to be judged as excellent companies with sound management. Shareholders have the advantage of being able to invest with peace of mind, as there is less concern about management taking ownership of the company or fraud. In addition, brand power is a major strength for companies. By making consumers feel “peace of mind”, even in an industry with many competitors, it is likely that they will choose your company’s products and services more.
Measures To Strengthen Governance And Compliance
What kind of measures should be taken to strengthen governance? I will explain two points that governance promoters should be especially aware of.
Awareness And Sharing Of Governance
Strengthening governance cannot be achieved simply by setting up outside directors and an internal audit committee, but the understanding and cooperation of employees are essential. After sharing why governance is important, it is necessary to formulate rules such as standards for judging what can and cannot be done in business, a code of conduct, etc., and ensure that all employees understand and comply with them. Furthermore, it is also important to publicize guidelines for management systems and governance on the company’s website, etc., and appeal to external stakeholders.
Visualization And Digitalization Of Business Processes
In the case of companies that have offices in multiple locations, it is not uncommon for each location to have different business processes. The same is true for companies with subsidiaries. In such a situation, it is difficult to instill governance, the controls are inevitably inadequate, and there is a risk that fraud will be overlooked.
In order to strengthen governance, it is important to control business processes company-wide through business visualization and appropriate management. Specifically, in addition to creating a manual that summarizes workflows and unifies work processes between offices, it is also useful to digitize work and centrally manage internal information as data. Of course, it is also necessary to manage who can access what information and the actual access log.
Digitizing all business processes at once is a high hurdle in terms of cost and time, and places a heavy burden on employees. Therefore, we recommend that you gradually systematize tasks that are frequently used and highly important, such as attendance management, budget management, and business trip management.
Summary
Governance initiatives are essential to improving corporate value over the long term. In addition to fulfilling accountability to shareholders and other stakeholders, creating a comfortable working environment for the company’s employees can be said to be one of the important activities for strengthening governance.
