Say the word governance, and compliance comes to mind. Performance measurement and knowledge management probably didn't cross your radar screen. They should have. Despite the proliferation of national and international codes, guidelines, and statements of best practices on corporate governance, recent company failures have shown that the primary focus on compliance isn't enough for good governance. To help your company fulfill its responsibility in terms of governance and accountability, we recommend a management tool--the Integrated Governance Scorecard (IGS)--that includes compliance but moves beyond it to address performance and knowledge management. We'll provide some reasons why you should pay attention to these dimensions.
Of course, governance is a complex issue in any organization. But global companies face the steepest challenges because of the many laws, regulations, performance expectations, and cultural values. That's why all companies can learn from the best practices of leading global companies. To explore the accounting and finance practices related to governance at three international companies--General Electric, Whirlpool, and Nestle--we conducted research from 2002 to 2004, discussing the issues with finance executives and others to ultimately create case studies.
Three research teams--from the Manchester Business School in the United Kingdom, the University of Siena in Italy, and DePaul University Kellstadt Graduate School of Business in Chicago--conducted the project. The resulting case studies are part of a research project funded by the Institute of Chartered Accountants of England and Wales (ICAEW).
REPORTS, CODES, AND LAWS
The governance debate has been a hot topic among business executives, financial professionals, and academics. Following recent corporate failures and allegations of management misconduct, the mechanisms through which companies are directed and controlled have been put under scrutiny. In an attempt to regulate key organizational issues, several reports, codes, and laws have appeared worldwide, focusing on the legal and regulatory framework for managing and supervising a company. Let's take a look at the pivotal ones.
The Cadbury Report, published by the Cadbury Committee in 1992 and set up by the Financial Reporting Council of the London Stock Exchange, represented a milestone in setting out measures to enhance corporate integrity based on improved information, continued self-regulation, more independent boards, and greater auditor independence. Although the Cadbury Report broadly defines corporate governance as the system by which companies are directed and controlled, it focuses only on the financial aspects of accountability.
Several recent codes and best practices on corporate governance have attempted to identify the actual mechanisms for ensuring good governance and control. They pay close attention to senior executive compensation systems, internal auditing, and financial reporting. The 1992 report from the Committee of Sponsoring Organizations of the Treadway Commission (COSO), titled Internal Control--Integrated Framework, represented a milestone in providing guidelines and best practices on internal control. The report defined internal control as a process affected by an entity's board of directors, management, and other personnel that's designed to provide reasonable assurance to achieve objectives in the following categories:
* Effectiveness and efficiency of operations;
* Reliability of financial reporting; and
* Compliance with applicable laws and regulations.
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