Some Fundamental Factors of Corporate Governance System Sustainability

Abstract

Multilevel governance systems have a number of properties that at first glance may look paradoxical. For example, additional feedback mechanism does not necessarily increase stability of the system and can even destabilize it.  Developing and applying mathematical model of corporate governance allows us to identify ways to ensure company sustainability and manageability, analyze the most frequently proposed and discussed approaches to the organization of corporate governance and internal control system. Our analysis shows drawbacks of overly strong “shareholders control”: an overly active revision commission, even working professionally, increases instability of a company. One of the most important conditions for the sustainability and manageability of a company is the availability of a mechanism that ensures the delegation of decision-making to all levels of the company’s management. Any strategy that implies constant improvement of performance discipline without such mechanism will sooner or later lead to a loss of the company’s manageability as predicted by our dynamic model.An essential stability for a multi-level management system could be ensured by participation of all personnel in the company’s internal control system and the formation of the company’s internal audit unit that could help to evaluate and improve the effectiveness of governance, risk management and control processes (the existence of an ordinary control unit providing feedback is not a fundamental factor of sustainability) as well as independence of internal audit and its functional reporting to the Board.Typical factors that could lead to “near the border of sustainability trap” for a small state owned company are analyzed. Possible steps and their prioritization to bring the company out of this situation are discussed in this article. Approaches to the organization of the internal audit function proposed by international standards are analyzed from the standpoint of ensuring the company sustainability.