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News from Members Corporate governance, the safety belt of companies

Corporate governance, the safety belt of companies

by PKF Finconta July 3, 2019

Author: Florentina Șușnea, Managing Partner, PKF Finconta

As we approach the end of the first half of 2019 and the holiday is approaching, companies have the respite to reflect on the principles and priorities of corporate governance, principles that should be found in their leadership and coordination.

It is an electoral year with European Parliament elections which also prepares Romania for presidential elections. In a country with a stable and fiscally predictable economy, these events should not affect the governance of companies and, in particular, those with state-owned capital. The business environment should not be impacted, corporate governance must remain an instrument of changing corporate leadership and the driving force of a sustainable economy. In this context, the main role remains of the Boards of Directors / Directors and the Supervisory Boards, which are the main players in transforming economies into some resilient and sustainable ones.

Yet, the prospect of slowing economic growth is close, lending on the international market is at a high-interest rate, and the confrontational context of global trade requires careful risk management, even for developed economies. Global macroeconomic developments will have a significant impact on companies, sustainability-driven management, or increased importance of the quality of audit. Topics such as volatility, privacy, social responsibility, cybersecurity will be on the agenda of companies. That is why it is good to know the most important of them.

Volatility

It is expected that decision-makers will face the strategic implications of economic and legislative volatility. Challenges outweigh the effects of sometimes different views of government members, unsustainable growth, the US-China trade conflict, or the steadily rising inflation rate. That is why, for companies, it is important to connect the Board of Directors to corporate management.

Market uncertainty and audit quality

După un an 2018 turbulent în ce privește bunele practici de audit, cu scandaluri globale care au condus la falimentarea unor firme sau la daune reputaționale semnificative pentru altele, în 2019 importanța auditului de calitate crește. Investitorii sunt mult mai sensibili la cele mai mici semnale de slăbiciune a controalelor interne. De aceea companiile cu practici de guvernanță corporativă robustă sunt mai bine poziționate să facă față unei posibile contracții economice, oferind astfel acționarilor și investiorilor un confort cu privire la banii investiți.

After the turbulent year of 2018 on best audit practices, with global scandals that led to company failures or significant reputational damage to others, in 2019, the importance of quality auditing increases. Investors are more sensitive to the smallest weaknesses in internal controls. That's why companies with robust corporate governance practices are better positioned to cope with a possible economic contraction, thus giving shareholders and investors the comfort of investing money.

Security and privacy

As more and more industries rely on technology for confidential information management and customer data, cybersecurity and data confidentiality is an increasingly important issue. In this respect, the weaknesses of corporate governance are discovered post-factum. For this reason, investors are mindful of the prevention, response, and supervision of the Board of Directors and management.

The establishment of a team for IT risk management, the implementation of large cybersecurity programs within companies and the presence of executives with IT expertise in the Boards of Directors give confidence to investors.

Social justice initiatives within companies

The adherence of more and more employees to values such as environmental protection, corporate responsibility, or charity leads many of them to internally promote such initiatives that the company can support. Some of these are consistent with the principle of organizational justice. Others have an ideological component more important than the social one. This makes it increasingly challenging for business leaders to identify and respond appropriately to these initiatives.    

Evolution of the concept of interest conflict

Schimbarea modelului de business redefinește conceptul de competiție într-un mod care scade eficacitatea politicilor privind conflictul de interese din cadrul Consiliului de Administație. În continuare, este posibil că directorii să aibă nevoie să se gândească mai mult la modul în care relațiile și sistemele de stimulare financiară pot genera conflicte de interese potențiale sau reale cu privire la problemele care apar în fața Consiliului de Administrație, consiliu ce are datoria de a folosi guvernanța corporativă ca un instrument de creștere al eticii in activitatea lor și în afaceri. Sifonarea involuntară a unor informații confidențiale socotite necesare pentru creșterea companiei aduce riscul conflictului de interese. Existența unor scheme de stimulare financiară ar putea încuraja luarea unor decizii nefavorabile companiei dar favorabile decidentului.

Changing the business model redefines the concept of competition in a way that lessens the effectiveness of conflicts of interest policies within the Board of Directors. Next, directors may need to think more about how relationships and financial incentive systems can generate real or potential interest conflicts in matters that appear before the Board of Directors, to use corporate governance as a tool for increasing ethics in their work and business. Involuntary tip-off of confidential information deemed necessary for the company's growth brings the risk of conflict of interest. The existence of financial incentive schemes could encourage decision-making that is unfavorable to the company but favorable to the decision-maker.

Commitment to social respinsibility

As social and political divisions grow, the Board of Directors may be called upon to review the appropriate balance between Corporate Social Responsibility initiatives and responsibilities to shareholders and other stakeholders. As evidenced by the Valoria study - Dynamics and Prospects in the Romanian CSR Field – the deserving leaders' tendencies to focus more on serving social goals and meeting the expectations perceived by consumers of new generations may require closer supervision and involvement of corporate governance.

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About PKF Finconta

For more than 24 years, PKF Finconta is one of the 10 leading professional services companies in Romania. Since 2006, we are a member of PKF International Limited. PKF International is a leading international business advisory organization. The company grew consistently over the years, forming a Group of four companies: PKF Finconta, PKF FincontaConsultanta, PKF Finconta HR and Finconta Consulting SPRL, members of national professional organizations CECCAR, CAFR, CCFR, and UNPIR. We provide a wide range of business advisory and related specialist services. We have seven core areas of expertise and within these areas, we tailor our services to your business and your needs: audit, corporate finance, tax, bookkeeping and accounting advisory services, transfer pricing, payroll and personnel administration, and insolvency.

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