Good Governance How we define something as good varies from person to person.

There are a lot of factors that affect our perception of what is good, and what is not. The same goes when it comes to governance. Governance pertains to the act of governing or administering, managing or keeping under control certain matters. The United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP) defined governance as the process of decision-making and the process by which decisions are implemented (or not implemented). To speak of good governance would mean that we would need to define what is understood to be good in terms of controlling or administering. CHARACTERISTICS OF GOOD GOVERNANCE The UNESCAP defined Eight (8) Major Characteristics of Good Governance. If a government or management is able to meet most, if not all, of these characteristics, then we can say that their type of governance is good. 1. Participation. Participation is the ability of the public to express opinion and ideally exert influence regarding political, economic, management or other social decisions. The process of participating can be direct or indirect. Direct in the sense that the people involved themselves help in influencing the decision, or indirect, such as by making use of representatives to make decisions for them. Participation needs to be informed and organized. It means that in order for participation to be considered adequate, those who are participating needs to have sufficient information on the matter, and also a proper mechanism of raising their concerns. Lack of information would mean that their decisions and opinions would be insufficient, and may be subject to manipulation. A disorganized participation method would mean a chaotic process of hearing out their opinions such as how one can imagine a noisy market where everyone speaks as the same time. This means freedom of expression on one hand, and an organized civil society on the other. 2. Rule of Law. Good governance requires fair legal frameworks that are enforced impartially. It also requires full protection of human rights, particularly those of minorities. Impartial enforcement of laws requires an independent judiciary and an impartial and incorruptible police force. 3. Transparency. Transparency means that decisions taken and their enforcement are done in a manner that follows rules and regulations. It also means that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement. It also means that enough information is provided and that it is provided in easily understandable forms and media. When we speak of something being transparent, we have the visualization of being able to see what is inside it. In terms of governance, it refers to being able to know the decisions that were made, and their implementation. It is understood that this process would follow the established rules and regulations of the community or organization involved. 4. Responsiveness. Responsiveness pertains to how fast an individual or organization reacts. Good governance requires that institutions and processes try to serve stakeholders within a reasonable timeframe. There is no fixed time that would determine the adequate speed that is acceptable when we measure responsiveness. It generally depends upon the degree of difficulty and the needed attention a problem calls upon. For example, if a neighbor was robbed, and one called on the police, and they took a year to just arrive on the scene, could we say that they were responsive? Of course not! However, if a very deep-rooted problem, say corruption, was completely eradicated by the ruling president in a year, can we say that his actions were responsive? The degree of responsiveness would depend upon the gravity and degree of the problem that needs attention or action. 5. Consensus Oriented. There are a lot of individuals and groups in a given society, and there are also as many ideas and view points as there are people and groups. Good governance requires mediation of

the different interests in society to reach a broad consensus in society on what is the best interest of the whole community and how this can be achieved. Consensus is defined by Merriam-Webster as a general agreement. When we refer to consensus with regard to decisionmaking, then it refers to seeking the consent, and not necessarily the agreement of participants and the resolution of objections. Being consensus oriented also requires a broad and long-term perspective on what is needed for sustainable human development and how to achieve the goals of such development. This can be achieved by understanding the historical, cultural and social contexts of a given society or community. 6. Equity and Inclusiveness. A societys well being depends on ensuring that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society. This requires all groups, but particularly the most vulnerable, have opportunities to improve or maintain their well being. 7. Effectiveness and Efficiency. Effectiveness refers to the impact of ones actions, while efficiency refers to creating outputs with the least possible inputs. Good governance means that processes and institutions produce results that meet the needs of society while making the best use of resources at their disposal. The concept of efficiency in the context of good governance also covers the sustainable use of natural resources and the protection of the environment. The importance of both efficiency and effectiveness in good governance goes hand in hand especially if one would consider the fact that our resources are scarce and limited, and therefore, for processes and organizations to best utilize these scarce resources, they must choose the most effective course of action, that would use the least amount of resources. Balancing the two elements is difficult. While the most effective course of action can be seen as the best solution, the resource requirement of choosing that solution could be seen as inefficient. Choosing the cheapest solution can also have a low effect, as if there was no solution chosen in the first place. 8. Accountability. Accountability is a concept in ethics and governance often used synonymously with concepts such as responsibility, answerability, blameworthiness, liability and other terms associated with the expectation of account-giving. As a term related to governance, accountability is difficult to define. It is frequently described as an account-giving relationship between individuals. Accountability is a key requirement of good governance. Not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. Who is accountable to who varies depending on whether decisions or actions taken are internal or external to an organization or institution. In general, an organization or institution is accountable to those who will be affected by its decisions or actions. Accountability cannot be enforced without transparency and the rule of law. Conclusion From the above mentioned discussion, we can conclude that good governance is an ideal which is difficult to achieve in its totality. Very few societies and countries have come close to achieving good governance in its totality. However, to ensure sustainable human development, actions must be taken to work towards this ideal with the aim of making it a reality. Review Questions 1. What is governance? 2. What are the 8 Characteristics of Good Governance, explain each.

Corporate Governance Corporate governance is a set of processes, customs, policies, laws and institutions affecting the way a corporation or company is directed, administered or controlled. It also includes the relationships among the many stakeholders involved and the goals for which Stakeholders in a corporation: External stakeholders: 1. Shareholders 2. Debtors and trade creditors

3. Suppliers 4. Customers 5. The community affected by the corporations operations. Internal Stakeholders: 1. Board of Directors 2. Executives 3. Employees of the corporation An important aspect of corporate governance is accountability. Who is accountable to whom? This theme of corporate governance is establishing accountability of certain individuals in a corporation through mechanisms that try to reduce the principal-agent problem. Corporations are judicial entities, given by law rights that are similar to living individuals. However, without proper corporate governance put in place, should problems involving the corporation arise, who will the people go after who will they complain to? To the corporate building itself? When we try to visualize corporations, we would either think of the corporate headquarters building, or the company logo, or even just the products associated with that corporation. We seldom think of the people who run the corporation behind the scenes. Corporate governance tries to reduce this problem of who will be responsible for the action of the corporation as a judicial entity by establishing accountable persons. These persons will be held responsible for the actions and results of the actions that were a product of these peoples decisions, rather than hiding it in the veil of the corporate identity. PRINCIPLES OF GOOD CORPORATE GOVERNANCE There have been various discussions regarding the principles of corporate governance. The SarbanesOxley Act of 2002 in the US is an attempt by their Federal Government to legislate several of these principles. 1. Rights and Equitable Treatment of Shareholders. Organizations should respect the rights of shareholders and help shareholders exercise those rights. They can help shareholders exercise those rights openly and effectively communicating information and by encouraging shareholders to participate in general meetings. 2. Interest of other Stakeholders. Organizations should recognize that they have legal, contractual, social and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers and policy makers. 3. Role and Responsibilities of the Board. The board needs sufficient and relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment to fulfill its responsibilities and duties. 4. Integrity and Ethical Behavior. Integrity should be a fundamental requirement in choosing corporate officers and board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. 5. Disclosure and Transparency. Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the companys financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. MECHANISMS AND CONTROLS Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from the moral hazards and poor decision choices. INTERNAL CORPORATE GOVERNANCE CONTROLS These monitor activities and take corrective action to accomplish organizational goals. Examples include:

management, safeguards invested capital. Regular board meetings allow potential problems to be identified, discussed and avoided. While non-executive directors are thought to be more independent, they may not always result in more effective corporate governance and may not increase performance. Different board structures are optimal for different firms. Moreover, the ability of the board to monitor the firms executives is a function of its access to information. Executive directors possess superior knowledge of the decisionmaking process and therefore evaluate top management on the basis of the quality of its decisions that lead to financial performance outcomes. It could be argued, therefore, that executive directors look beyond the financial criteria.

Internal Control Procedures and Internal Auditors. Internal control procedures are policies implemented by an entitys board of directors, audit committee, management, and other personnel to provide reasonable assurance of the entity achieving its objectives related to reliable financial reporting, operating efficiency and compliance with laws and regulations. Internal Auditors are personnel within an organization who test the design and implementation of the entitys internal control procedures and the reliability of its financial reporting. Balance of Power. The simplest balance of power is very common; require that the President be a different person from the Treasurer. This application of separation of power is further developed in companies where separate divisions check and balance each others actions. One group may propose company-wide administrative changes, another group review and can veto the changes, and a third group can check the interests of people outside the three groups (customers, shareholders, employees) are being met.

Remuneration. Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior, and can elicit myopic behavior.

EXTERNAL CORPORATE GOVERNANCE CONTROLS External corporate governance controls encompass the controls external stakeholders exercise over the organization, such as:

Competition Debt Covenants Demand for and assessment of performance information (such as financial statements) Government regulations Managerial labor market Media pressure Takeovers

Review Questions 1. What is corporate governance? 2. Who are the stakeholders in a corporation? 3. What are the principles of good corporate governance? Be able to explain each. 4. Give examples of internal corporate governance controls. 5. Give examples of external corporate governance controls.

Monitoring by the Board of Directors. The Board of Directors, with its legal authority to hire, fire and compensate top