Corporate Governance

(CG)
Definition
• Corporate Governance – According to the OECD (Organisation for
Economic Co-operation and Development) defines corporate
governance as “the system by which business corporations are
directed and controlled”.
 Components/Pillars of CG
Accountability - Managers, executives and the BODs must always act with the best interests of shareholders in mind
as they are ultimately responsible to them. Directors are accountable to shareholders through voting on
appointments and through annual and other reporting.

Compliance - Managers, executives and the BODs should be reasonably sure that laws and regulations are complied
with (e.g. tax can be avoided but not evaded).

Transparency -Annual reports, financial statements and other reports should be objective and relevant information
supplied to shareholders.

Independence - Non-executive directors, internal auditors and external auditors need to be an effective challenge to
executives and must be free to express their opinions.

Integrity - Managers, executives and the BODs should consider demonstrating high standards of ethics. Their actions
and decisions may need to represent not only what is legal but also what is morally right.
 CG is broadly about two
aspects of an
organization:
Mechanism • The mechanisms by which
corporations are directed and
of CG controlled.
• The mechanisms by which
those who direct and control
the corporation (BODs) are
monitored and supervised
 Companies are controlled by those who have the
majority of shares and they can appoint themselves or
others as directors because of their voting power. Other
(a) shareholders may have influence but lack control.

Mechanisms
by which Directors run companies through the board of directors
corporations as a body and as executives through their management
of activities and processes.

are directed
and
controlled Authority comes from their legal position and power
often comes from their personality and capability to
build power bases.
(a) Mechanisms by which corporations
are directed and controlled

To summarise, some of the mechanisms by which the

company is effectively directed and controlled are:
✓ the company’s strategic plans, its policies and procedures
✓ the personnel manual
✓ the internal audit assurance work
✓ monthly MIS reports
✓ the monthly board meetings
(b) Refer to the methods by which the actions
of the board of directors can be examined
Mechanisms and controlled. These includes;

by which those
who direct and Internal audits.

control the
corporation The inclusion of non-executive directors in
the BODs.
are monitored
and supervised Setting an audit committee for the
company.
 The narrow perspective of corporate governance
requires companies to abide by the laws,
regulations and disclosure rules that will ensure
transparency towards shareholders.

The broad perspective not only necessitates

Perspectives abiding by laws and regulations, but also requires
an awareness of the larger responsibilities of the
of CG company towards stakeholders like employees,
government, environment and local community.

Good governance practices in a broad perspective

will also include responsible behaviour towards
these interest groups, so that no activity carried
out in the economic interests of shareholders may
harm any of them.
 Adequate and appropriate systems of controls in operations -
Supports the development of strategic processes, risk
management processes and controls that give reasonable
assurance that organisational objectives will be met

Features of Prevents any single individual from having too much power
and influence
good
corporate Ensure that the company is managed in the best interests of
the shareholders and considers other stakeholders.
governance
Supports transparency and accountability for investors and
other stakeholders
 To deal ethically with their suppliers and
customers
Examples of the
types of To treat their employees fairly and
responsibilities maintain a healthy working environment

organisations
To be a good “corporate citizen” by paying
may have to all taxes and complying with all
their government legislation
stakeholders
To return some of their profits to society
 To provide mechanisms and processes to
underpin successful businesses

Provide checks and balances to control

Objectives of executive directors of listed companies.

corporate To encourage actions in the best interests

governance of the company, its shareholders and,
where appropriate, other stakeholders.

Remember; Importance of sound CG is to

ensures protection of the value of
shareholders’ investment in a company.
 The OECD principles of Corporate
Governance were developed in
Organisation conjunction with national
governments, other relevant
for economic international organisations and the
cooperation private sector.
and
development
(OECD) Report These principles are a set of
corporate governance standards and
(2004) guidelines.
 The
principles
covered
under OECD
report
 The principles are intended to assist OECD and non-
OECD governments in their efforts to evaluate and
improve the legal, institutional and regulatory
framework for corporate governance in their countries

To provide guidance and suggestions for stock

exchanges, investors, corporations and other parties
Importance that have a role in the process of developing good
corporate governance.
of OECD
Useful tool to improve corporate governance in non-
Principles traded companies, for example, privately-held and
state-owned enterprises.

They are intended to be brief, understandable and

accessible to the international community.
The International Corporate
Governance Network (ICGN)
The International Corporate Governance Network (ICGN) was
founded in 1995 at the instance of major institutional investors,
who included investors, companies, financial intermediaries and
other parties interested in the development of global corporate
governance practices. One of its objectives is to facilitate
international dialogue on issues of concern to investors.

Through this process, companies can compete more effectively and

economies can prosper. The ICGN also believes that it is in the
public interest to encourage and enable the owners of corporations
to participate in their governance.
 Corporate objective
Communication and reporting
Voting rights

Contents of Corporate boards

ICGN Report Strategy determination/focus
Corporate citizenship
Corporate implementation
Corporate remuneration policy
Board of Directors • BODs is a group of people who collectively
or jointly oversee the activities of an
organization which may be either a profit
(BODs) nmaking business or non profit business.
 Setting company’s strategic
aims.

The Policy formulation

responsibilities
of an effective
Board Supervising management

Accountability
 Positioning the company in dynamic markets e.g. deciding on
Positioning products to sell and where in a market they will compete.

Setting Setting corporate direction e.g. this might include objectives

company’s
Setting for growth and whether this will be organic or through
acquisition and how international expansion might take place.

strategic
Reviewing
aims. and
deciding
Reviewing and deciding on key resources e.g. deciding on the
major suppliers, the major types of raw materials used and
their specifications, hiring the right people for the right jobs.

Deciding on implementation processes e.g. deciding how plans

Deciding will be put into place by managers and staff.
 • Stating purpose: the purpose of the company should be stated
clearly as this will help formulate the policy to be followed.
• Creating vision: the board should consider potential areas for
expansion
• Creating value: the board should create value by growing the
Policy business, improving its capability and processes and translating
this into customer value and shareholder margin.

formulation • Developing corporate climate and culture: culture is driven

from the top and represents the way people work and crucially
their moral and ethical values
• Monitoring the external environment for opportunities,
threats and risks: the global economy, local economy and
society and the markets in which firms operate are dynamic
and unpredictable
Supervising
management
• Overseeing management performance: E.g. performance
management systems may be put in place at an individual level
linked to business unit objectives and results.
• Monitoring budgetary control: E.g. the board needs to
establish whether strategic objectives will be achieved by
examining the evidence.
• Reviewing key business results: The board does not need to
monitor all results but should monitor the results of key
business processes and projects that are important from a
financial perspective.
• Assessing organisational capability in resources and
processes: This needs to be done across human resources,
products and operational locations
 Accountability
The board owes its duties:
• To the company: the board should act in the best interests of the
company.
• To the shareholders (both institutional, private and as a whole): the
board should work in the interests and benefit of institutional
shareholders and shareholders holding majority shares as well as small,
individual shareholders.
• To regulators: the board should work within the parameters set by the
regulatory authorities of the area in which they operate.
• To stakeholders in a broader sense: the board has responsibilities
towards all stakeholders including suppliers, customers, employees and
society.
 The directors should possess the
following characteristics to be
effective business managers:
• Proactive
Characteristics • Motivating
of the directors • Experienced
• Good listening and questioning skills
• Good negotiating skills
• Leadership.
• General knowledge of business
• Expertise in relevant areas:
 Taking full responsibility of accountability towards the board for
company operations and performance.

Developing and implementing the policy decisions and executing

strategy.

Implementing proper risk management, financial, operational,

planning and internal control systems.

The Planning and managing the financial and physical resources.

responsibilities Closely monitoring financial operations and monitoring the results

of the CEO in accordance with budgets.

Building and maintaining a strong management team and acting

as a link between the board and the employees.

Acting as a representative of the company towards major

suppliers, customers, professional bodies.

Assisting in the selection of the board members.