The alignment between IT and corporate governance adds value to the decision making process at various levels in an organisation. Various internal and external key factors influence the governance mechanism. Overall, the corporate governance framework can only work well when there are strong relational mechanisms in place between the various layers of the organisation. Introduction Corporate governance has received a greater level of attention after the rise in corporate fraud and present global economic conditions. This paper is going to look at the fundamentals of corporate governance, linkages to IT governance and how internal and external factors may affect governance decision making.
The key objective of this paper is to highlight the importance of relational mechanisms within the corporate governance framework which can lead to organisational efficiencies, profitability and competitive advantages. Corporate governance Lamoreaux (2009) describes for shareholders in today's environment, there are two basic issues affecting corporate governance – the expropriation by controlling shareholders or managers and the expropriation by the state.
In recent times we have seen the expropriation by controlling managers with the collapse of Enron by executives who deliberately shifted company liabilities to shell companies and made substantial financial gains in the process. Shareholders are also faced with state expropriation with continual legislative changes aimed to take maximum tax revenue from company coffers. Hence, today's environment places a greater deal of emphasis on a good corporate governance framework for corporations to work within.
(Weill & Ross, 2004) established an expanded corporate governance framework highlighting the corporate and IT governance linkages interacting between internal and external mechanisms (refer to appendix A). The principle theme here is to note how different levels of the organisation (board, senior managers and implementers) have different sets of functionalities to manage their areas respectively and how it becomes essential for these structures to interact at various levels for effective governance.
Need for IT governance (Lee , Lee & Jeong, 2008) outline that the term 'IT Governance (ITG)' indicates businesses growing need to find a balance between the conformance ( or conformity to regulatory standards) and performance goals mandated by their boards. Furthermore, as companies come better to appreciate the value of their IT assets, IT has been designated a strategic tool in increasing the value of a firm and helping it attain its business goals.
(Rau, 2004) outlines IT governance has three pivotal roles – policy setting, management control and monitoring of results which are expected to mature in differentiation and effectiveness over time. In addition, achieving effective IT governance requires careful consideration of IT and non-IT organisational design components prior to strong change management practices to support and implement the design. A natural benefit a firm may create from an effective IT governance programme is increasing the realisable value generated from IT assets which may help create competitive advantages.
Internal factors affecting governance (Weir, Laing & J.McKnight, 2002) discusses how internal mechanisms include board structure variables such as duality and the proportion of non- executive directors, debt financing and executive director shareholding. The purpose is to align shareholder and manager interests. (Weill & Aral, 2006) establishes that obtaining bottom line results from IT requires more than investment in IT. It requires regular realignment of IT spending with strategic objectives termed,'IT savvy'. More successful organisations invest a lot of time and effort to ensure any IT investments are aligned to their overall strategic initiatives.
(Lasfer, 2006) points out that the split of the roles of the CEO and the Chairman, the proportion of non-executive directors, and the appointment of a non-executive director as a Chairman. Overall, his findings cast doubt on the effectiveness of the board as an internal corporate governance mechanism when managerial ownership is high. In order to accomplish their monitoring function, boards should be small and should include mainly non-executive/independent directors with a split of the roles of the Chief Executive Officer (CEO) and the Chairman.
The key to managing effective internal governance mechanism lies in the relationship dynamics between the board of directors and the senior executive team. This relationship can add more value to governance when independent directors reside on the board as they possess more varied industry experience and are not entrenched in organisational culture. External factors affecting governance (Cater-Steel, 2008) highlights the following external factors that affect governance: In today's environment auditors provide the ultimate sets of assurance for all stakeholders attached to an organization. (Cadbury, 1992) argues that audit committees are an additional control mechanism that ensures shareholder interests were being safeguarded. This was achieved by promoting the effective financial management of the company and increasing accountability.
A reality of globalisation is takeover market pressures imposing a greater level of responsibility on the board of directors and senior executive team to ensure the organisation is efficient and profitable. (Weir, 1997) comments that acquired firms exhibit certain undesirable governance characteristics which make them more susceptible to takeovers. It is in the best interest of the organisation to ensure strong governance framework and relational mechanism work efficiently and deliver value to avoid potential acquisitions.
IT governance fit with corporate governance (Lee, Lee & Jeong, 2008) mentions that despite the fact that effective IT investment and its strategic use is based on systematic linkages between legitimate decision-making processes and strategy, while many companies recognize the importance of information assets and IT infrastructure, they remain unaware of the importance of decision-making processes connected to ITG. It is subtly understood in the corporate world that IT governance has to fit near perfectly with the firm's corporate governance in order to help create positive organisational synergies which may lead to greater efficiencies and profitability.
The key to securing a good fit between the two governance frameworks is in two parts: Part A is the construction of IT governance where "structural (formal) devices and mechanisms for connecting and establishing horizontal, or liaison, contacts between business and IT management (decision making) functions" are in place (Peterson, 2003). Part B is to establish positive relational mechanisms which ensure "the active participation of, and collaborative relationships among corporate executives, IT management and business management" (Peterson, 2003). Once the Part A is in place, (Haes & Grembergen, 2009) note relational mechanisms require less attention as the governance culture is well embedded into the structures and processes. However, without good relational mechanism the alignment between IT and corporate governance will not add any value to organizational efficiencies, profitability and competitive advantages.
Good corporate governance needs to be managed by a balanced team of directors who are external to the organisation. This will add a greater depth of value to the strategic decision making process. The alignment of IT and corporate governance can only add value to an organisation if the relational mechanisms are effective across the various organisational layers. The board of directors have to ensure that the procurement of any IT asset is aligned to the overall strategic initiatives. Sound audit and management practices will ensure the expectations of the organisation's stakeholders are met and the risk of acquisitions is reasonably mitigated.
Cadbury, A. (1992), Report of the Committee on the Financial Aspects of Corporate Governance. Gee Publishing: London.
Cater-Steel, A. (2008) (Editor). Information Technology Governance and Service Management. IGI Global: London.
Lamoreaux, N.R. (2009) Scylla or charybdis? Historical reflections on two basic problems of corporate governance. Business History Review, 83(1), 9-34.
Lasfer, M.A. (2006). The Interrelationship between managerial ownership and board structure. Journal of Business Finance & Accounting, 33(7) & (8), 1006-1033.