Conversations with AI: Governance in Listed Companies Compared to Government Entities

This article about governance is a chat between me and the new Llama-3.1-70B. I worked for more than 20 years in a position reporting to the board in SMEs, and I studied “management control systems” course in my Masters degree. So, I gathered a lot of knowledge regarding the topic. Also, I am a big fan of the work of CMA and SAMA and their effort to regulate the industries under their supervision (that will be in another article).

Below is the conversation where I ask and Llama 3.1 answers.

Walid:

Governance in listed companies and government entities share some similarities but also have distinct differences. Here are a few key points of comparison: Similarities:

1. Both aim to establish rules, processes, and structures for decision-making and oversight.
2. Both seek to ensure accountability and transparency to stakeholders (shareholders for companies, citizens for governments).
3. Both involve setting strategic direction and monitoring performance.

Differences:

1. Listed companies are profit-driven and accountable to shareholders, while government entities serve public interests and are accountable to citizens/voters.
2. Corporate governance focuses more on financial performance and shareholder value, while government governance emphasizes policy outcomes and social welfare.
3. Government entities have a broader scope including law-making, whereas listed companies operate within the legal framework set by governments.
4. Listed company boards are usually appointed by shareholders, while government leaders are elected or appointed through political processes.

In summary, while both involve oversight and accountability mechanisms, corporate governance is more financially oriented under private ownership, while government governance is oriented towards public goods and services under a political mandate. The principles have some overlap but the contexts and ultimate objectives differ significantly between the two domains.

Walid:

Please elaborate on the differences in direction side and control side of governance in both types of entities.

Assistant
Llama-3.1-70B

Certainly! Let's delve deeper into the differences between the "direction" (strategy-setting) and "control" (oversight) sides of governance in listed companies versus government entities.

Direction Side:

1. Listed Companies:
   • The board of directors, representing shareholder interests, sets the strategic direction to maximize profitability and shareholder value.
   • Strategies often focus on market positioning, product/service offerings, investments, and financial returns.
   • The CEO and executive team are responsible for implementing the chosen strategies.
2. Government Entities:
   • Elected officials (e.g., president, prime minister, legislators) set the policy direction based on their political mandates and public interests.
   • Strategies revolve around socio-economic development goals, welfare programs, infrastructure plans, etc.
   • The bureaucracy (civil service) is tasked with executing these strategies.

Control Side:

1. Listed Companies:
   • The board of directors oversees management's execution of the chosen strategies.
   • Financial audits, risk management, and compliance monitoring are key control mechanisms.
   • Shareholders can hold the board accountable through voting rights and other corporate actions.
2. Government Entities:
   • Various checks and balances (e.g., legislative oversight, judicial review) help control government actions.
   • Audits by supreme audit institutions ensure proper use of public funds.
   • Citizens can hold governments accountable through elections, protests, media scrutiny, etc.

In summary, while both involve setting direction and exercising control, listed companies focus on maximizing shareholder value through market strategies, with the board overseeing management. In contrast, government entities set policy directions aimed at public welfare, with various institutional checks balancing power and citizens holding leaders accountable through democratic processes. The control mechanisms also differ, with financial/compliance audits for companies versus political/judicial oversight for governments.

Walid:

What form of incentives do boards of both types of entities use to make sure governance direction and control are efficient and that no conflict of interest is created?

Assistant
Llama-3.1-70B

Boards in both listed companies and government entities employ various incentives to align the interests of directors/managers with those of stakeholders, promote effective governance, and mitigate conflicts of interest. Here are some common approaches:

Listed Companies:

1. Equity-based compensation: Stock options or restricted shares tie a director's personal wealth to the company's stock performance, incentivizing them to make decisions that boost shareholder value.
2. Performance-based cash bonuses: Directors may receive bonuses based on achieving specific financial targets or strategic milestones, aligning their incentives with corporate objectives.
3. Reputation and network benefits: Serving on prestigious boards can enhance a director's professional standing and access to valuable networks, providing non-financial incentives for effective governance.
4. Claw back provisions: If misconduct or misstatements are discovered later, directors may have to forfeit previously earned bonuses or equity, deterring reckless behavior.

Government Entities:

1. Political capital and re-election prospects: Elected officials who deliver on their mandates and govern effectively can build political support for re-election bids.
2. Prestige and career advancement: Excelling in government roles can lead to higher positions or private sector opportunities post-public service.
3. Legal consequences: Directors found guilty of corruption, self-dealing, or other conflicts face fines, imprisonment, or disqualification from office.
4. Public scrutiny and media attention: Poor governance can attract negative publicity, damaging an official's reputation and electability.

Both types also employ mechanisms like disclosure requirements (e.g., financial statements for companies, asset declarations for officials) to identify potential conflicts of interest. Codes of conduct and ethics training further reinforce the expected standards.

Ultimately, a mix of financial rewards, career advancement opportunities, legal deterrents, and reputational considerations aim to motivate directors in both realms to prioritize stakeholder interests and maintain effective governance with minimal conflicts. The specific incentives vary based on the unique objectives and constraints of each type of entity.

Walid:

Please elaborate on "government governance emphasizes policy outcomes and social welfare" with examples from KSA

Assistant
Llama-3.1-70B

Certainly! In the context of Saudi Arabia (KSA), government governance indeed places a strong emphasis on achieving positive policy outcomes and enhancing social welfare for its citizens. Here are some illustrative examples:

1. Vision 2030: This ambitious national transformation program aims to reduce dependence on oil, diversify the economy, and improve living standards. It sets clear goals like increasing non-oil government revenue, boosting foreign direct investment, and raising the private sector's contribution to GDP.
2. Social Welfare Programs:
   • The Citizen Account Program provides monthly cash transfers to eligible low-income families, helping them cope with the removal of some subsidies.
   • The Sakani (Residence) program offers subsidized loans for first-time homebuyers, promoting homeownership among Saudi citizens.
   • The Hafiz social security program supports orphans, widows, and people with disabilities through monthly financial aid.
3. Education and Skills Development:
   • KSA has made significant investments in education infrastructure and scholarships to improve access and quality.
   • The National Transformation Program focuses on developing human capital by aligning education outcomes with labor market needs.
4. Healthcare Access:
   • The Ministry of Health oversees a network of public hospitals and primary healthcare centers, providing subsidized care to citizens.
   • Initiatives like the Saudi Vision for Health Services aim to improve service quality, accessibility, and patient satisfaction in the health sector.
5. Cultural Preservation:
   • KSA has invested heavily in preserving its cultural heritage sites (e.g., Mada'in Saleh) and promoting cultural tourism.
   • The Kingdom also supports arts, literature, and traditional crafts through institutions like the Saudi Art Council.

These examples illustrate how government governance in KSA is oriented towards achieving tangible policy outcomes that enhance social welfare across various dimensions - economic diversification, poverty alleviation, housing, education, healthcare, culture, etc. The ultimate aim is to improve quality of life for citizens while driving national development in line with Vision 2030's aspirations.