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June 18, 2014

Good governance needn’t mean reinventing the wheel

Has the time come for a governance framework and principles of good governance, which would apply across sectors and geographical locations?

The world over, governments are expected to minimise red-tape while ensuring appropriate regulatory frameworks accompanied by effective enforcement regimes. The issue of regulatory convergence and its importance has been identified by many for a long time now.

It is an issue we know well in the accounting world. Around the globe, accounting regulators and standard setting bodies are trying to align laws and ensure that the frameworks and standards are common. We know – on this issue at least – that no country is an island, unaffected and unaffecting. But the same can be said for many entities and corporations.

Yet while a lot of attention and energy is placed on sharing accounting, auditing and increasingly sustainability standards, the same is not evident in the case of governance.

Governance frameworks and standards for listed companies, for government entities, for not-for-profits, for small and medium and large entities differ almost everywhere you look with supranational institutions, national and local governments, regulators and entities developing governance frameworks and principles. While there are inevitably similarities, little effort has been made to date in forging real alignment.

With the increasing interconnectedness and globalisation of business, it is a concept for which the time has definitely come and the accounting profession is more than equipped to light the path.

Indeed, given the relative maturity of accounting standards we can probably learn something from them and the way we adopt them in Australia.

There we have adopted the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board for all entities. The Australian Accounting Standards Board has a transaction neutrality policy: similar transactions and events should be accounted for in a similar manner by all types of entities, whether in the for-profit sector, not-for-profit, private, or public sector – unless there is a sound reason to be different in particular circumstances. We believe that same phenomena should be treated in the same manner, regardless of sector.

To achieve a reduction in unnecessary regulatory burden and improve convergence, efficiency and effectiveness, the same approach should be considered for governance. The foundations for good governance and its fundamental principles do not change between sectors or countries. We expect any entity, be it public, private, or not-for-profit to have good governance. But I do not think good governance depends on the sector or the country.

Of course there may be intricacies that need to be taken into consideration at the national and local levels and between sectors, but they would not necessarily conflict with the fundamental principles regarding behavioural integrity, the creation of stakeholder value, the importance of establishing appropriate management and oversight, and the need to report fairly and in a timely manner and be accountable.

That said, I am a strong believer that each country should not blindly import others’ regulations. We need to be careful to diagnose the specific symptoms and prescribe the right medicine. But when it comes to governance principles we are talking about the fundamentals of human interaction: how we are going to ensure entities create value that enables us to flourish in the interconnected societies we have created in this globalised world.

Good governance has to do with maximising long term value creation with integrity and accountability.

As with accounting standards, to advance good governance we don’t need to reinvent the wheel.

Alex’s previous blog postIs prudence still a virtue?

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