Theory on Good Governance

What is good governance? Before proceeding to the definition of good

governance, let us first define what governance means. The Merriam Webster
Dictionary defines governance as the way that a city, company, and etc. is
controlled by the people who run it. According to the United Nations Economic
and Social Commission for Asia and the Pacific, the concept of governance is not
that new and it as old as human civilization. The same source also defined
governance as the process of decision-making and the process by which
decisions are implemented (or not implemented) and can be used in different
circumstances such as corporate governance, international governance, national
governance and local governance. Now, let us proceed to the meaning of good
governance.Good governance means differently from one organization to
another organization because each have different actors and each focuses on
different types of governances (Gisselquist, 2012). But to lead us to a much
broader definition of good governance, www.goodgovernance.org.au defines it as
the processes for making and implementing decisions. Its not about making
correct decisions, but about the best possible process for making those
decisions. Good governance plays a vital role in the constant drive for
companies to improve the quality of services provided (Ernst & Young Global
Limited). Being responsive to the current and potential needs of the organization,
exercising cautiousness in policy-setting and decision-making, and prioritizing the
best interest of stakeholders is what good governance is all about.
There are several characteristics of good governance that must be noted,
starting with the rule of law. One requirement on good governance is that it
requires fair legal frameworks that an objective regulatory body compulsorily
imposes for the full protection of stakeholders. Second thing that must be noted
is transparency. Important information should be provided in a manner that is
easy and understandable. It should be freely available and accessible by those
who may be directly affected by the imposition of these practices and policies of
governance. Responsiveness, the next characteristic, emphasizes that the

interest of stakeholders should be served in a timely, appropriate and

responsive manner. Being consensus oriented means understanding the different
interest of stakeholders through a consensus. This is conducted in order to gain
an understanding of what is the best interest of the entire stakeholder group. It
also gives focus on how to achieve it. The fifth characteristic is Equity and
Inclusiveness. It is about giving an opportunity for maintaining, enhancing and
generally improving the well-being of the stakeholders. Good governance should
have effectiveness and efficiency, which means that organizations should
implement decisions and processes using the best of their resources, including
time and people, to ensure the best possible results. Another key characteristic of
good governance is accountability. It should be included in the documented
policies a general understanding of who is responsible for what. The last
characteristic is participation. This is the strong foundation of good governance.
Everyone, especially those affected by it, should be given an equal opportunity to
participate in the process of making decisions. This can be done by asking for
opinions, making recommendations or being part of the actual actual decisionmaking process (Governance Pro, 2010).
Aiming for good governance in a company or organization needs something to
drive them to reach it. And that something is the theory about corporate behavior
and behind that is a set of beliefs about human behavior (Roberts, 2004). Our
group chose todays prevailing theory that is called the Agency Theory.
According to Business Dictionary,agency theory is a way of studying the way
that a broker and a clientwork together.InvestorWords further explains that it is
A theory explaining the relationship between principals, such as a
shareholders, and agents, such as a company's executives. In this
relationship the principal delegates or hires an agent to perform work. The
theory attempts to deal with two specific problems: first, that the goals of
the principal and agent are not in conflict (agency problem), and second,
that the principal and agent reconcile different tolerances for risk.

The history of the agency theory goes back to time during the 1960s and
1970s, where the economists tried to know about risk sharing among individuals
or groups. This literature described the risk sharing problem as one that arises
when working together with other parties that have different risk tolerance
(Sagarphul, n.d.).
Agency theory broadened this risk sharing literature to include the so
called agency problem that happens when working together with other parties
that have different goals and division of labor (Sagarphul, n.d.).
This theory is directed and focused at the ubiquitous agency relationship,
in which one party assigns work to another party which is called the agent, who
will be the one who performs that specific work. Agency theory attempts to
describe this relationship with a contract. Agency theory also suggests that the
firm can be viewed as a nexus of contacts between resource holders (Sagarphul,
n.d.).
There are two (2) problems that the agency theory addresses.
The first one is the problems that may arise when there is a conflict of
interest between the gents and the principals. These problems arise when the
desires or goals of the principal and the agents are in conflict. The agency theory
attempts to deal with this problem by aligning goals of the principal so that they
are not in conflict.
The second problem that the agency theory addresses are problems
arising when the principals and the agents have different risk tolerance. These
problems arise when the principals and their agents have different attitudes
towards risk. Because of their different risk tolerance each party may be inclined
to take different actions. The agency theory attempts to reconcile that the
principals and the agents reconcile their different tolerances for risk.
Agency Practice and Coca-Cola Company
Found in the official website of Coca-Cola Company, it stated that: "At The
Coca-Cola Company, we aim to lead by example and to learn from experience.
We set high standards for our people at all levels and strive to consistently meet

them." They have established their own code of business conduct with 49 pages
containing the established standards of corporate governance and ethics to be
followed by the employees to meet consistency with the company. All of their
associates and directors and required to read and understand the Code and
practice it in the workplace. Coca-Cola is a worldwide company with different
branches all over the world and therefore they have to deal with various people
with different values. In order for the Coca-Colas employees to cope up with the
differences, the company has an office called ethics and compliance office which
is given the operational responsibility for education, consultation, monitoring and
assessment related to the Code of Business Conduct and compliance issues. It
determines code violations and administers training sessions on the Code of
business for the employees. The training sessions may be online and is given to
all associates with Company-provided computers discussing topics related to the
ethics and compliance of the code, including the Anti-bribery policy of Coca-Cola.
The company's associates are requested to participate in ethics training on an
average of 60 minutes per associate per year. The company also revise their
Code to further improve its effectiveness if they find it useful. Continuous training
and consistency in the code is the key to the Coca-Cola Companys good
governance.
The Agency practice and Enron
Enron has been well-known for being an energy, commodities, and
service company even before the Enron Scandal in 2001. One of the many
factors of the sudden bankruptcy of Enron was because of the strong agency
culture. Enrons executives were well educated in business and economics to be
sufficiently familiar with the agency theory. Even if the agency theory was not that
familiar with other executives or employees, one of Enrons central assumptions
was that of self-interested parties. This is a fairly common theory and it is this
assumption that is essential to thinking within an agency theory framework. The
executives and employees were given incentives with a combination of
perquisites and high pay, which then was an active control mechanism for the

employees to perform. Receiving excessive amounts, the employees were more

determined on the bonuses they could make rather than the good they couldve
contribute to the company as a whole. Because of the high risk/high reward
mentality, the company suffered the consequences of the choices made by the
employees who sought for self-interest. Since Enron had executives inclined to
agency-reasoning the personnel under them were influenced as well as the
pressure was passed down the ladder. This made the agency culture in Enron so
strong that it became almost cult-like. This example, suggest the need to
recognize that an irresponsible use of power may be prevalent in an empowered,
innovative culture when incentives are established on the assumption of a pure
agency relationship between a firms ownership and its employees.
References:
Brian W. Kulik (2005), Agency Theory, Reasoning and Culture at Enron: In
Search of a Solution, Springer, Journal of Business Ethics (2005) 59: 347
360,
Business dictionary online. (2015). Retrieved from
http://www.businessdictionary.com/definition/agencytheory.html#ixzz3Tg5jeuft
Gisselquist, R. (2012). What does good governance mean? Retrieved from
http://www.wider.unu.edu/publications/newsletter/articles-2012/en_GB/012012-Gisselquist/
Governance Pro. (2010). Retrieved from
http://www.governancepro.com/about.html
InvestorWords. (2015). Retrieved from
http://www.investorwords.com/6398/agency_theory.html#ixzz3Tg7Yi7lS

Merriam-Webster, Inc. (2015). Retrieved from http://www.merriamwebster.com/dictionary/

Roberts, J. (2004). Retrieved from http://www.parcentre.com
Sagarphul.

(n.d.).

Agency

theory.

Retrieved

from

http://www.slideshare.net/sagarphul/agency-theory-24234940
United Nations Economic and Social Commission for Asia and the Pacific. (n.d.).
What is good governance? Retrieved from
http://www.unescap.org/sites/default/files/good-governance.pdf
What is good governance? (n.d.). Retrieved from
http://www.goodgovernance.org.au/about-good-governance/what-is-goodgovernance/