Corporate Governance for Dummies

The primary principle of corporate governance is the risk level and free cash flow of a multi-tiered organizational and decision-making structure. The influencers of these factors are the internal elements – inside owners and managers – and external parties – agents, creditors, and shareholders. Similarly, government legal and regulatory statutes can impact corporate governance, and public opinion fueled by media reporting can also influence an organization’s decision-making and management (Bringham & Ehrhardt, 2016).

For example, the purchase negotiations between Elon Musk and Twitter highlighted some challenges in corporate governance. The initial acquisition talks exposed that Twitter leadership might not uphold their fiduciary duties and not have the majority of shareholders’ interests in mind. As the purchase proceeded, shareholders indicated their displeasure with the board and management’s decision-making and aspects of their operating models that Musk wanted to change for the company’s betterment. In preparation for the potential new owner, Twitter released several senior managers and agents they believed were harming the company and its valuation.

In the context of global security, corporate governance also plays a role in various ways. First, corporate social responsibility (CSR) – a form of self-regulation reflecting an organization’s commitments and accountability to society – plays a significant factor. For example, most critical infrastructure elements, such as communications and energy, are privately operated. These services play vital roles in their communities and others they may support by proxy. However, making a profit in their shareholders’ best interest often conflicts with public needs. Similarly, necessary security levels, especially in cyber-security, are a prohibitively expensive operating cost that decision-makers often sacrifice over more tangible and profitable expenditures (Ridley, 2011).

The Covid-19 pandemic also played a significant role in rethinking and restructuring corporate governance for countless businesses globally. But, again, companies had to find a means of continuing to maintain/increase value while operating under conditions in the interest of the public good. Consumption levels dropped significantly. Operations and production had to adapt to the reduced consumption and government public health regulations and mandates. Finally, numerous other human security factors impacted corporate governance, forcing them to adjust to the new environmental, economic, and social conditions (Gelter & Pauschunder, 2021).

Finally, culture, corruption, and security in developing or economically weaker states impact corporate governance in Western liberal democracies and other post-industrialized states in a globalized market. Anti-money laundering (AML) and counterterrorism financing (CTF) protections and mitigation play a role in determining foreign investment. For example, a mining firm might abandon a project in Afghanistan despite a rich mineral reserve because the Taliban now control that state.

Similarly, all U.S. technology, arms, and defense firms have significant government-imposed restrictions on the sale of “dual-use” or sensitive weapon systems or technology, especially to countries with ties to violent extremism (Hemphill & Cullari, 2010). Corruption is also a huge factor because, in many developing countries, the practice is culturally normative and just “the price of doing business.” However, companies can implement legal frameworks within corporate governance to mitigate some of this risk, especially in states that seem to be progressing toward reducing corruption in their institutions (Boateng et al., 2021).

In closing, corporate governance is how a company makes its decisions and the various roles and influence within its leadership structure. Furthermore, corporate governance has global security implications because of CSR’s potential for social engineering and the public good and a company’s investments’ influence on human security elements involving such problems as terrorism financing and corruption. Finally, although this article did not cover it, there are emerging global security threats from state-run/influenced companies, such as TikTok’s ties to the Chinese Communist Party, that corporate governance theories will have to address in the future.

References:

Boateng, A., Wang, Y., Ntim, C., & Glaister, K. W. (2021). National culture, corporate governance, and corruption: A cross‐country analysis. International Journal of Finance & Economics, 26(3), 3852–3874.

Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice (15th Edition). Cengage Learning U.S.

Gelter, M., & Puaschunder, J. M. (2021). COVID-19 and comparative corporate governance. Journal of Corporation Law, 46(3), 557-629.

Hemphill, T. A., & Cullari, F. (2010). Terror-free investment index screens: Corporate governance implications for non-US multinational enterprises. Journal of International Trade Law & Policy, 9(1), 25-45.

Ridley, G. (2011). National security as a corporate social responsibility: Critical infrastructure resilience: JBE. Journal of Business Ethics, 103(1), 111-125

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Ben Varlese is a former U.S. Army Mountain Infantry Platoon Sergeant and served in domestic and overseas roles from 2001-2018, including, from 2003-2005, as a sniper section leader. Besides his military service, Ben worked on the U.S. Ambassador to Iraq’s protective security detail in various roles, and since 2018, he has also provided security consulting services for public and private sectors, including tactical training, physical and information security, executive protection, protective intelligence, risk management, insider threat mitigation, and anti-terrorism. He earned a B.A. and an M.A. in Intelligence Studies from American Military University, a graduate certificate in Cyber Security from Colorado State University, and is currently in his second year of AMU’s Doctorate of Global Security program.

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