According to The Three Pillars of Good Corporate Governance theory, corporate governance, due diligence and compliance programs are related and are key focus areas (Adams, 2004).
Abramov (2011) states the corporate governance generally serves to encourage long-term planning, establish an effective management structure, promote integrity within the company, provide a framework for establishing and carrying out corporate objectives, and ensure that the interests of all relevant constituencies, including investors, employees and the general public, are not overlooked. A well-designed corporate governance regime delineates board of directors and officers roles and responsibilities to implement a control and audit process that maximizes risk management capabilities. “It is imperative that the company establish a governance structure that provides its management with the proper tools and knowledge to satisfy its duties to the company and its shareholders.” (Abramov, 2011).
From a business perspective, the profits generated from a company’s multiple revenue streams generally hinges heavily on the results of the preliminary conducted due diligences. Decisions about entering to a new market, acquiring another company, favourable financing, and implementing global supply chain require corporate governance standards to withstand scrutiny and lead to optimal terms and conditions. Thus, corporate governance systems should be customized to the specific conditions of jurisdiction and must respond to a set of financial, legal, cultural, environmental and human rights standards. The policies that a company sets are particularly required in places where corporate, legal, cultural, and political interests often try to influence or control one another (Abramov, 2011). It appears corporate governance, monitoring and enforcement rules are a preventive mechanism for a corporation. In places where corporate governance is weak, it makes due diligence even more essential to identify applicable risks.
The risk management to identify applicable risks that a corporation is exposed to is due diligence process. Such risks could be legal, environmental, human rights, reputational or financials in nature. Depending to risk tolerance, a company may have different approaches in conducting due diligence. If the company has an appetite for risk, it proceeds with decisions. Then, it conducts due diligence as a defensive strategy.
There is a direct relationship between corporate governance and due diligence. The corporations conduct due diligence as requirement of their corporate governance. Board of directors and executives manage the process based on the set standards and procedures. The due diligence process may be conducted on internal processes or external organizations depending to the framework board of directors or executives outline.
Corporations have compliance programs for their major risks zones, which are usually identified by due diligence. The primary benefit of a compliance program is avoiding contraventions of the law (Ferron & Tremblay, 2018). The compliance program existence is an indication that the directors were not passive, and that the organization had rules of sound corporate practice in place. Creating a compliance program on paper is not sufficient and cannot be an effective shield against legal actions. It must be adequately conceived and properly applied (Ferron & Tremblay, 2018).
Abramov, I. (2011, September 06). Corporate Governance Due Diligence . Retrieved from mondaq Connecting Knowledge & People: https://www.mondaq.com/canada/corporate-governance/144486/corporate-governance-due-diligence
Adams, M. A. (2004). The three pillars of good corporate governance. Risk management, 1(1), 8-10.
Ferron, D., & Tremblay, T. (2018, October 17). Compliance Programs: A Guardrail To Keep You On The Path Of Good Governance. Retrieved from mondaq Connecting Knowledge & People: https://www.mondaq.com/canada/securities/746414/compliance-programs-a-guardrail-to-keep-you-on-the-path-of-good-governance