Corporate Governance – Spend Less and Learn More About Your Data

Corporate governance refers to the manner in which an enterprise is directed, and laws and customs affecting that direction. It is very much the topic of today with many conflicting opinions being offered to all who would listen. It is important to see past much of the hype being offered by purveyors of expensive new business solutions. By understanding the subject, it is possible to envisage a business as usual approach to the challenges this new environment brings and comprehend that embracing understandable business process management based around existing systems is logical and effective.

Corporate governance includes the statutes governing the formation of firms, the bylaws established by the firm itself, and the structure of the firm. The corporate governance structure specifies the relations, and the distribution of rights and responsibilities, among primarily three groups of participants. They are the board of directors, managers, and shareholders. This process defines the rules and procedures for making decisions on corporate affairs; it also provides the structure through which the company objectives are defined, as well as the method of attaining and monitoring the performance of those objectives. The fundamental concern of corporate governance is to ensure the conditions whereby an enterprise’s directors and managers act in the interests of the firm and its shareholders, and to ensure the means by which managers are held accountable to capital providers for the use of assets. Issues of fiduciary duty and care and accountability are often discussed within the framework of corporate governance. This clearly points to having better control over and understanding of the information already contained within an enterprises data base. Data and report mining can be used effectively to provide better access to and knowledge of such information. If corporate governance is about anything it is surely a confirmation that to manage an enterprise requires information and that management without such information is not management.

In most countries, a corporation is governed by a board of directors, which has the power to choose an executive officer, usually known as the chief executive officer or managing director. This person has broad powers to manage the corporation on a daily basis, but needs to get board approval for certain major actions, such as hiring his/her immediate subordinates, raising money, acquiring another company, major capital expansions, or other expensive projects. Other duties of the board may include policy setting, decision making, monitoring management's performance, or corporate control.

The board of directors is nominally selected by and responsible to the shareholders – although subsidiaries operate a different system, but perverse incentives have pervaded many corporate boards in the developed world, with board members beholden to the chief executive whose actions they are intended to oversee. Most often members of the boards of directors are CEO's of other corporations, which some commentators see as a conflict of interest.

Corporations are chartered institutions, and have a long history in Europe and the United States. In the nineteenth century, corporate law enhanced the rights of corporate boards to govern without unanimous consent of shareholders in exchange for statutory benefits like appraisal rights, in order to make corporate governance more efficient. Since that time, and because most corporations in America, for example, are incorporated under corporate administration friendly Delaware law, and because America's wealth has been increasingly securitised into corporate entities, the rights of owners and shareholders have become derived and dissipated. The concerns of shareholders over administration pay and stock losses periodically has led to more frequent calls for Corporate Governance reforms. By utilising the skills of data and report mining, an enterprise can respond to such concerns without rolling out a whole new system – with all that may imply for investment, staff and customers.

Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations (institutes) of directors and managers with the support of governments and international organizations. As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. For example, companies quoted on the London and Toronto Stock Exchanges formally need not follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance. Many European entities, which had striven for years to achieve public listings in America, are now seeking to de-list because of the draconian requirements of Sarbanes-Oxley. The U.K.’s largest company B.P. forecast that they will spend around $125 million on compliance in the United States.

In contrast, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary. For example, The GM Board Guidelines reflect the company’s efforts to improve its own governance capacity. Such documents, however, may have a wider multiplying effect prompting other companies to adopt similar documents and standards of best practice.

Corporate governance issues are receiving greater attention in both developed and emerging economies as a result of the increasing recognition that a firm’s corporate governance affects both its economic performance and its ability to access long-term, low-cost investment capital. Anything which allows an enterprise to gain better control over its existing data will be seen as a positive.

Corporate Governance concerns have been widely studied. For the United States, an analysis of these concerns has been published by the New York Society of Securities Analysts in their 2003 Corporate Governance Handbook.

The Sarbanes-Oxley Act of 2002 (HR 3763), signed into law on 30 July 2002, is considered the most significant change to federal securities laws in the United States since the New Deal. It also catches overseas subsidiaries and affects those entities transacting substantial business with same. It came in the wake of a series of corporate financial scandals, including those affecting Enron, Arthur Andersen, and WorldCom. The law is named after Senator Paul Sarbanes and Representative CEOs and CFOs. It is a huge piece of legislation but may be highlighted by:

Ban on personal loans to Executive Officers and Directors

Accelerated reporting of trades by insiders

Prohibition on insider trades during pension fund blackout periods

Publicly disclosure of CEO and CFO compensation and profits

Additional disclosure

Auditor independence, including outright bans on certain types of work and pre-certification by the company's AICPA

Clause 404 compliance

Compliance with Sarbanes-Oxley section 404 has been far more burdensome than anyone expected – so much so that the United States government has extended the deadline twice. The good news is that most companies either were in compliance (even if they do not have a formal auditor sign-off) or would have been when the rule kicked in for calendar year filers at the end of 2004. The bad news is that the ongoing burden of 404 compliance will continue. Some companies (maybe 10-20%) will have either "material weakness" or a "significant deficiency" noted by their auditor. Expert commentators expect at least half of these companies will restructure their control processes within the first two years to make them more efficient. This is where data and report mining can come to the table. Enterprises would be well advised to begin assessing the changes they must make in their IT assets to fully support changes in the financial controls environment.

Organisations should seek to find ways to automate their testing and documentation processes to identify ahead of time how to decide the resources they will devote to achieving ongoing compliance with sections 404 and 302. Finance people generally do not automatically consider how IT can improve efficiency, and ongoing compliance is no exception. Happily, data and report mining tools allow finance and compliance teams access to the additional level of information they require without additional dialogue with IT. According to The Working Council for Chief Financial Officers, three-quarters of public companies they surveyed have no plans to purchase any substantial new software to manage their compliance testing process beyond the applications used for initial testing such as data and report mining skills. When the initial 404 project becomes a process, it is highly probable that companies will have to rethink how they manage this. But at least they will have made a start.
Finance groups should investigate using content management software such as data mining to automate the documentation process, ensure that their reporting systems are adequate for reliably capturing not just financial information but information about processes, and determine if their transactions recording systems (e.g., ERP) should be revamped to improve efficiency (e.g., consolidating instances).

Since the Basel Committee published global regulatory guidelines known as Basel II on 26 June after more than five years of often-controversial work to rewrite the accord, the Bank for International Settlements has looked to emerging markets to display their willingness to adopt these protocols by the end of 2006.

The accord spells out new global guidelines on how banks should set aside capital to cover risk - based on principles similar to the FSA’s realistic reporting measures for life assurers. Banks are required to have even better control of their data so that they are able to report their position to the market, shareholders and regulatory bodies.

Corporate governance and compliance issues generally lend themselves to data and report mining as a way of prolonging the enterprises investment in their existing system. The implications of being able to maintain a business as usual approach while responding to these new imperatives are very attractive when viewed against the possibility of starting again with a whole new system.

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