Regulators, courts and investors frequently extol the virtues of 'good corporate governance' in organisations but often fail to define exactly what that means. It's often a case of "we'll know it when we see it" or, in the case of the regulators, courts and investors, "we know what it isn't when we see it".

It is important to understand that what would be considered 'good corporate governance' differs for each individual organisation according to its circumstances. What is inadequate for one organisation may be onerous for another. It is also important to realise that good corporate governance isn't just about compliance. Whilst compliance will keep you out of trouble, it won't help your organisation be successful.

To understand what would constitute good corporate governance for your organisation, it helps to understand what corporate governance is from a fundamental level.

The most fundamental definition for corporate governance is based on the idea that an organisation is essentially a nexus of contractual agreements between many parties for the purpose of achieving the organisation's objectives. These parties include shareholders, directors, managers, suppliers, employees, customers, financiers, government authorities, other stakeholders and the society in which the company operates. Whilst some of these contractual agreements are formal written ones, many are implicit. Likewise, some of these contractual agreements are financially based but many are not.

Although the company enjoys the status of a person through legal fiction, in reality a company is constituted entirely by the actions and interactions of people with other people, products of technology, systems, and the natural world. Corporate governance involves managing the framework within which these complex relationships operate.

The quality and nature of these relationships has a strong influence on the long term financial interests of the organisation. It can be expected that the negotiation and administration of these contractual agreements to the benefit of each of the parties involved will maximise the long term results of the organisation.

So good corporate governance is all about ensuring that the needs and interests of all of an organisation's stakeholders are taken into account in a balanced and transparent manner.

However, good corporate governance is not just a matter of having the right policies and procedures in place. It has to be embedded into the culture of the organisation from the very top down. As Justice Owen, the Royal Commissioner into the collapse of HIH Insurance, warned:

"Systems and structures can provide an environment conducive to good corporate governance practices, but at the end of the day it is the acts or omissions of the people charged with relevant responsibilities that will determine whether governance objectives are in fact achieved." (The failure of HIH Insurance. HIH Royal Commission. 2003)

Good corporate governance is also no guarantee of success. It is a necessary but not sufficient foundation for success as strategic factors play a more important role in determining the eventual success or failure of an organisation. In the majority of large business failures, it is essentially the failure of the underlying business strategy that causes each business to fail. Corporate governance issues allow the flawed businesses to continue and amplify the magnitude of their eventual collapse.

Justice Owen expressed the view:

“Good governance processes are likely in my view to create an environment that is conducive to success. It does not follow that those who have good governance processes will perform well or be immune from failure. Risk exists to some extent at the heart of any business. Risks are taken in the search for rewards. No system of corporate governance can prevent mistakes or shield companies and their stakeholders from the consequences of error. Corporate failures will occur.” (The failure of HIH Insurance. HIH Royal Commission., 2003)