With the volatility of the
cotton market and the remaining struggle to gain economic recovery in mind, I
reviewed OECD's June 2009 Corporate
Governance and the Financial Crisis: Key Findings and Main Messages report.
I found it interesting, insightful and timely.
The study analyzed
governance of several major corporations against OECD governance principles (www.oecd.org/daf/corporateaffairs/principles/text).
The study found overarching issues centered on improved risk management,
remuneration, transparency, stakeholder engagement and board responsibility.
The report pointed out challenges and weaknesses with corporate governance
programs, including a more in depth discussion on risk and risk management and
controls - subjects I feel are relevant to many types of organizations within
the cotton industry. Some of those challenges are highlighted below.
Board practices: Ensuring independence and competence of board of
director members can be challenging. It should be board policy to identify the
best skill set of the board and its members. The roles and responsibilities of
various board members should be clearly stated and understood and each member's
remuneration should be linked to specific performance objectives.
Remuneration and incentive systems: The link between compensation and performance is
often very weak. This is in part due to managers having too much influence over
the terms of performance-based remuneration without adequate transparency and
independent judgment by the board or others.
Shareholder rights: Stakeholders could do more to ensure corporate
governance is optimized in the company they have invested. Shareholder
resolutions tend to be reactive rather than proactive, the latter of which
could encourage a more collaborative response. The rate of shareholder voting
is very low in most corporations. There may be ways a corporation can inspire
more voting or provide other options on how shareholders can engage with the
corporation on governance and other important matters.
Risk management: The study cites failure of risk management
systems was one of the greatest shocks from the financial crisis. In many cases
boards were ignorant of the risks their company faced. It notes that effective
implementation of risk management requires an enterprise-wide (and, I suspect,
possibly industry-wide) approach. Risks should not be assessed on the basis of
individual raw materials or business units and a risk management system should
consist of the following five components:
environment: this is needed as a foundation for effective internal controls
identification: one must have a system to identify risks
activities: controls can be preventive or detective
and communication: these elements connect all internal controls together
ensure that risk management tools and controls are understood and used properly
by all necessary levels of the company
Routine risk assessments
should be conducted and disclosed in a transparent and understandable fashion.
Identified risks should be assessed in terms of the enterprise's appetite for
risk as well as its risk management systems - no enterprise should be taking on
risks beyond their means or that they don't have a manner in which to respond.
Other aspects of a risk
management program should include:
- Aligning business strategies with risks to
ensure proper risk management
in the business context.
- Clearly articulated definitions of risks.
- Responses to risks should incorporate input
from key departments and stakeholders (e.g. regulators, guardians,
Risk management, in
particular, will be increasingly important to all members of the cotton
industry as climate change, trade sanctions and other factors threaten the
consistent supply of cotton needed to meet increasing demands. All industry
members -from brands to spinners - should be aware of their risks and then
develop systems to manage them.
Is there value in having
industry associations help individual actors understand the need to identify
and manage their risks in an effort to reduce overall risk to the industry?