The CFO's Role in Corporate Governance

By Wilson, Jim; Ervin, Michael | CMA - the Management Accounting Magazine, April 1996 | Go to article overview

The CFO's Role in Corporate Governance


Wilson, Jim, Ervin, Michael, CMA - the Management Accounting Magazine


Financial executives are well positioned to strengthen the links between corporate governance and management controls - and foster organizational success and survival.

Recent failings of corporate governance have been well documented and indicate a real need for improvement. Unauthorized payments, errors in published information, environmental damage, and other illegal or unethical activities are reported almost weekly along with the fall-out.

These failings may impact the credibility and even the ongoing viability of the institution. In some cases, innocent employees lose their jobs, shareholders forfeit their savings, and pensioners are left without access to a major source of income.

There is a heightened awareness of the failings of corporate governance because of important economic forces including globalization of industry, increased competition, and the more significant role that institutional investors play in many organizations. The business environment has also become more complex and the financial risks have grown exponentially as a result of the access to information and the speed with which the markets react to changed circumstances.

It is difficult to identify one specific cause of the failure of Barings Bank. However, it has been widely reported that there were a number of fundamental weaknesses in the authority and accountability structures, management reporting, and the ongoing evaluation of corporate risks. These weaknesses combined with a lack of awareness of the potential risks at the most senior levels allowed one individual to pursue his own personal interests at the expense of the institution.

Over the last while, many organizations have downsized, re-engineered processes, empowered staff, delayered management or introduced other new management practices or programs. All of these undertakings introduced both opportunities and new risks to these organizations. At the same time, the responsibilities of many boards of directors have increased beyond traditional financial responsibilities to now include related employee health and safety as well as environmental matters. These potential exposures have discouraged risk taking.

Initiatives to improve governance

In response to the opportunities to enhance governance, a great deal of discussion has recently taken place throughout the world. Various studies indicate that the responsibilities, accountabilities, and checks and balances have been the subject of review in Japan, Germany, France, United Kingdom, the United States, and Canada.

There have also been suggestions of how the board's role can be re- invented by focusing on a number of processes and structures as well as a more active role in the development of the vision, mission and objectives for the organization. This involvement will reinforce the importance of the ethical tone which is demonstrated at the top.

In Canada, the Toronto Stock Exchange (TSE) through the Dey Report has issued guidelines to support improved corporate governance in Canada.

It defined "corporate governance" as "the process and structures used to direct and manage the business and affairs of the corporation with the objective of enhancing shareholder values, which includes ensuring the financial viability of the business."

Explicitly, the board is required to assume responsibility for strategic planning, risk management, succession planning, communications policies, the integrity of internal control and management information systems in addition to specific requirements for board governance processes and structure.

Although not mandatory, TSE registrants are required to describe their system of stewardship or corporate governance with reference to the guidelines in their 1995 annual report or information circular and explain differences from the guidelines. The Montreal Stock Exchange. has adopted similar disclosure requirements.

The CICA Guidance for Directors - Governance Processes for Control highlights key activities for directors including: establishing values and key elements of the strategic plan, overseeing external communications, evaluating senior management, monitoring management control systems, and assessing board effectiveness. …

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