Rivista Corporate Governance ISSN 2724-1068 / EISSN 2784-8647
G. Giappichelli Editore


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Effective corporate governance as pillar for effective and efficient compliance: policy implementation and monitoring (di Francesca Valenti)


1. Introduction: The Ratio Behind the Introduction of Corporate Governance Standards and Their Impact on Firms Conduct of Business - 2. A Corporate Governance Handbook: Key Features - 3. The Importance of Effective Monitoring and Reporting: The Role of the Board and the Independent Director - 4. Conclusions - NOTE

1. Introduction: The Ratio Behind the Introduction of Corporate Governance Standards and Their Impact on Firms Conduct of Business

This chapter investigates the impact of corporate governance and its intersection with a more effective compliance and attempts to outline with a practical approach the factors which can lead to a real cultural shift within firms when dealing with the aforesaid matters. As discussed in the previous chapters, corporate governance generally implies responsible and proper business management in compliance with soft-law and best-practices approach and, where existing, hard-law legislation framework, with the ultimate goal of ensuring a well-functioning market and the establishment of long-term value within the companies. The trust and confidence of investors and the business competitiveness and efficiency [1] within a firm may be accomplished through an adequate corporate governance regulation, which mitigates agency conflicts between shareholders and managers, reassuring investors after the financial and economic crisis [2]. In this respect, the global financial crisis and the collapses of prominent firms (i.e. Enron [3], Parmalat [4]) have led to state intervention on corporate governance aspects with the aim to foster a cultural shift within companies, increasing awareness on the significance of white collar crimes [5] and corporate crime [6]. As a matter of fact, the fight against financial crimes is about regulating market failures [7] and the role of the corporate go­vernance is crucial in preventing crimes and contain misbehaviours [8] by means of building and spreading a strong corporate culture [9] which in turn will also affect, in terms of performance [10], the firms involved. For this reason, arising awareness and getting to the bottom of the corporate subculture [11] in which physical individuals operate, minimize the definition of corporate conduct in favourable terms [12]. This leads to a dismission of deviant effect and misperception of the damage produced by the corporate conduct due to (i) space-time distance between misbehaviour and the surfacing of the damage, (ii) invisibility of the victims [13], (iii) non-transparency and deficiency in the decision-making process [14] and (iv) group dynamics [15], which increase the risks shift [16] and the neutralization mechanisms [17]. However, from a [continua ..]

2. A Corporate Governance Handbook: Key Features

As mentioned in the previous section, Italy offers an interesting case study where firms are incentivised to introduce adequate, efficient and tailormade models [21] so to obtain a key advantage: a reduction in their risk to be subject to criminal trial for corporate crime [22] or the obtainment of discounts on the applicable sanctions [23]. In this respect, good corporate governance [24] and effective compliance require firms to introduce tailor-made policies and procedures which suit and reflect the peculiarity of their business and assess multiple internal and external factors [25]. Basing on such grounds, European Commission promotes an harmonization of corporate governance regulatory framework mostly through a soft-law approach – based on self‐regulatory model and comply‐or‐explain model – which sa­feguard the diversity of the national corporate environments rather than a one-size-fit-all approach. The following paragraphs will focus on four key elements which ought to offer a strong mix of solutions suitable to represent the infrastructure of a firm’s corporate governance architecture, and namely (i) transparency, (ii) tailored policies and procedures, (iii) effective risk management and (iv) corporate culture. Transparency [26] is a paramount element and implies a complete, accurate and accessible communication that (i) minimizes the risk of potential crime or breach, (ii) enhances well-informed decision-making process, (iii) boosts the reporting system, i.e. internal whistle-blowing system [27], and (iv) reassures the shareholders. In addition to the aforesaid transparency requirement, effective corporate governance further requires a participating, consensus oriented model of conduct that is achievable through a set of tailor made policies and procedure that (i) are proportionate to the nature and size of the business, (ii) outline and take into consideration the employees’ behaviour [28] and (iii) enhance a fair corporate culture [29]. Eventually, technology could be utilized to cost-cut administrative expenses and make corporate governance and compliance more efficient [30] by increasing transparency and information availability, speeding communication, time-cutting activities and enhancing a more effective decision-making process. Looking at the third element, as a matter of [continua ..]

3. The Importance of Effective Monitoring and Reporting: The Role of the Board and the Independent Director

In order to ensure effectiveness to “compliance on paper”, compliance in practice implies monitoring and guiding individual action, combined with strengthening the spot-and-report system for breaches [37]. A pragmatic approach in the compliance functions is vital: as such, a combination of (1) frequent compliance metrics reports, (2) proper information handling and (3) an ongoing assessment of (a) competence, (b) relationship, (c) motivation of the human resources, may contribute to effective compliance and adequate policies implementation. Under a subjective standpoint, compliance and the internal control system must be independent in order to be effective. In this regard, looking at the Italian landscape, an independent and autonomous (also financially) control body (the so-called “Organismo di Vigilanza”) with a sufficient power of initiative is a condition sine qua non [38]. The deputy body in charge of ensuring that the above factors are taken in due consideration is the Board of Directors [39] (“BoD”). The BoD has a key role in this dynamic process and as such is responsible for the regular assessment, update and review of the firm’s policies and procedures. As a matter of fact, ongoing monitoring and reporting of misbehaviour imply a strong ability of not only spotting and gaps and misconducts, but also readdressing them whilst ensuring the implementation of policies and procedures to prevent them in the future or reducing their likelihood. Furthermore, given its executive and steering role, the BoD should supplement both their planning and concrete actions with the establishment of an adequate communication channel in order to educate, update and train the employees who represent the first and second line of defence within the firm. In this respect, the BoD should reduce the gap of information between shareholders and managers [40], and focus its attention on both conformance and performance. As a matter of fact, an efficient BoD means effective corporate governance and, on the other hand, effective corporate governance, increase the BoD awareness of the risks facing the business and the internal control. However, in order to better address agency problems and oversee the executive directors actions themselves – being the latter involved in the day-to-day management (such as [continua ..]

4. Conclusions

After having provided a brief overview on the intersection between effective corporate governance and efficient compliance and their impact on firms’ set-up and on the performance of their business activities, it seems suitable outline a takeaway from the principles highlighted in the previous paragraphs identifying some of the elements leading to effective corporate governance and compliance within firms. Firms ought to embed (i) a clear, transparent and strong decision-making process, (ii) efficient reporting system and (iii) ongoing monitoring program within governing bodies: the combination of the above factors would align the interests of the firm with the interests of its stakeholders, being these its shareholders, regulators and local community. In fact, corporate governance implies strong link between business and ethics that the Board of Directors may foster thanks to its power to affect firms’ best practices and strategy and to steer the firm so to pursue long-term value through an actual commitment to good corporate governance. This may also strengthen the reputation and image of a company, which is a key element in the market. Whilst the principle of societas delinquere non potest [46] is nowadays overcome and considering that firms’ goal is adding economic value to their business, it seems to be essential to rethink compliance and good corporate governance’ incentives in order to foster and embed a cultural shift within companies.