Reflection and responsibility

Dale Williams gives an intriguing insight into why he believes that many are to blame for the recent spate of corporate scandals, not just those executives directly involved

The origins of corporations can be traced back to Europe, where they emerged during the Middle Ages, particularly from about the 5th century to about the 15th century. Corporations have made significant contributions to our civilisation, which are highlighted by the fact that, initially, they were created to achieve wonderful objectives such as the creation of universities, monasteries, and guilds. The early corporations should also be credited for organising voyages of exploration and great discovery. It may well hold true that the Industrial Revolution might not have occurred but for the existence of corporations.

The sterling contribution made by the early manifestations of corporations is almost forgotten history. The great achievements and contributions have been replaced in the corridors of public opinion by the memories of recent corporate scandals at particular high profile publicly listed companies.

Corporations have quickly built a worldwide reputation for profit maximisation at the expense of the environment and the welfare of their employees and wider society. The governance of the public corporation has also left much to be desired.

The well-publicised corporate scandals have been characterised by much finger pointing at the person or persons deemed by the public to be responsible for the present state of affairs. Whilst it is the executives of these public listed companies that have come in for the most criticism for their poor governance, other groups, including the companies' statutory auditors, have borne their fair share of the blame. One thing is most apparent from all the finger pointing; that multiple groups may be responsible for the present state of affairs.

Corporations were created to further the best interest of their stakeholders - the general public. The present state of lost public confidence and credibility is an indictment of all the parties that are remotely connected to publicly listed companies. The executives, including the chairman, the auditors, the shareholders, the employees, and customers of these corporations, have all somehow contributed to the corporate decline.

The role of the executives of publicly listed companies is well documented; they have done little to enhance their reputation as good stewards who are accountable to their ultimate employers - the shareholders. These executives have done little to assist their companies in enhancing the view that corporations are good citizens with concerns for the society and the environment. However, they are not the only parties at fault and I believe that the failure of corporations and their loss of credibility and public confidence mirrors the wider failures of society.

It is easy to point fingers. However, when we look at the failures of publicly listed companies we should see our own failures being reflected.

As shareholders we have failed to question how return on investment was achieved; we have failed to question our corporations' environmental policies. We have given a free reign to executives by neglecting to use the forum of the annual general meeting as a platform to question their performance.

How many of us as shareholders have liquidated our investments in companies with questionable environmental and social practices, but with a great bottom line?

It is no secret that corporations exist to maximise the return on the investment made by the shareholders; a view accepted by wider society. The achievement of this objective was measured primarily by the amount of profits generated by companies, with little regard to how these profits were generated. Shareholders and other stakeholders in the past appeared to be concerned only about their financial returns and little else, a mirror of the views of society.

As executives, we have failed to lead our organisations along a path that considers the views of all stakeholders. We have done little to contribute to the long-term sustainability of our present civilisation. Evidently our main concern has been short-term profitability in order to maximise remuneration.

As employees, we have not made our voices heard. We have willingly accepted faulty guidance, leadership and practices, as long as at the end of the day a premium rate is received in our pockets.

As customers, we have failed to boycott companies with good products but questionable practices and objectives, a failure also of many investors.

The failure of corporations mirrors the failure of auditors to achieve perceived independence from the corporations whose shareholders appoint them to offer an independent opinion.

The failure of corporations mirrors the failure of the legislature to introduce fair and equitable statutes which compel corporations to be good citizens and follow acceptable practices.

It is evident that corporations will continue to exist as the dominant business unit but society will soon eliminate those that fail to gain public confidence and build credibility. Corporations are now firmly under the microscope, particularly in the context of their governance and conduct as corporate citizens.

If corporations are to survive in this emerging environment then a number of critical areas should be addressed, namely the corporate objective and the wider corporate governance structure, including the accountability of executives, and the role of statutory auditors, the chairman and the audit committees of publicly listed companies.

Thankfully, the world view on performance measurement of publicly listed companies has undoubtedly changed. The performance of corporations can no longer be measured only in terms of monetary profits because other areas of performance are now of paramount importance. Whilst shareholders still expect favourable returns on investment, they now also expect their organisations to achieve financial success while caring for the environment, thus contributing to sustainable development and other areas of social concern. The customers and employees of publicly listed companies are interest groups who are integral to the success of any organisation, and, as such, any measurement of performance must indicate the corporation's success in satisfying their objectives.

Pursuit of profits

It is clear that, in order to prepare adequately for performance measurement utilising a balanced score, corporations should change their objectives. The shortsighted pursuit of profits at the expense of employees, the environment, sustainable development, and wider society will no longer be tolerated.

Most corporations are owned largely by working class people, through pension funds. There is also an emerging trend of employee share ownership and, coupled with trade unions, the employees are a group whose interest must be considered. Consumers also cannot be taken lightly as they are becoming ever more powerful. Thanks to consumer lobby groups, no corporation can risk a possible consumer boycott.

The structure of corporate governance must change if publicly listed companies are to improve their public image and reputation. The executives of corporations must be held accountable for the actions of their organisations. The audit committees must become more effective in monitoring the finance function of the organisation. The role of the chairman must evolve into that of the ultimate steward, a person who has the best interest of wider society and the shareholders at heart. Perhaps additional legislative changes are needed to propel these developments in corporate governance, but companies cannot sit and wait for these laws to come into effect.

There is currently a visible drive towards introducing legislation to ensure that the perceived independence of the statutory auditor is maintained. The Sarbanes-Oxley Act, introduced in the US, and other similar legislation will serve to increase the credibility of auditors and publicly listed companies.

In light of the proposed and introduced legislative changes affecting public listed companies and the restructuring of corporate governance, the outlook for the future of corporations is encouraging. There is, however, no room for complacency, as all the stakeholders and other parties with even a remote interest in companies must examine and modify their roles in order to restore credibility and confidence. It is now time for us to realise that corporations reflect our own failures and success in the roles we play in their existence.

Mr Williams' article has won the a&b business writing awards. Members and affiliates were invited to submit essays on the ACCA centenary theme of 'responsibility', spelling out how corporations should conduct business to restore public confidence and credibility. We thank Mr Williams for his entry and congratulate him on winning the competition.