1- INTRODUCTION TO CORPORATE GOVERNANCE Flashcards
_____ refers to a process whereby elements in society wield power, authority and influence and enact policies and decisions concerning public life and social upliftment.
governance
It means the process of decision-making and the process by which decisions are implemented (or not implemented) through the exercise of power or authority by leaders of the country and / or organizations.
Governance
CHARACTERISTICS OF GOOD GOVERNANCE
- Participation
- Accountability
- Effectiveness & Efficiency
- Equity & Inclusiveness
- Consensus Oriented
- Responsiveness
- Transparency
- Rule of Law
Participation by both men and women is a key cornerstone of good governance. Participation could be either direct or through legitimate institutions or representatives. It is
important to point out that representative democracy does not necessarily mean that
the concern of the most vulnerable in society would not be taken into consideration in decision making. Participation needs to be informed and organized.
This means freedom of association and
expression on one hand and an organized civil society on the other hand.
Participation
Good governance requires fair legal frameworks that are enforced impartially. It also requires full protection of human rights, particularly those of minorities. Impartial
enforcement of laws requires an independent judiciary and an impartial and incorruptible police force.
Rule of Law
_____ means that decisions and their enforcement are done in a manner that follows rules and regulations. It means that information is freely available and directly accessible to those who will be affected by such decisions and their enforcement. It also means that enough information is provided and that it is provided in easily understandable forms and media.
Transparency
Good governance requires that institutions and processes try to serve the needs all stakeholders within a reasonable
timefram
Responsiveness
Good governance requires mediation of the different interests in society to reach a broad consensus on what is in the best interest of the whole community and how this can be achieved. It also requires a broad and long-term perspective on what is needed for sustainable human development and how to achieve the
development. goals of such This can only result from an understanding of the historical, cultural and social contexts of a given society or community
Consensus Oriented
Ensures that all its members feel that they have a stake in it and do not feel excluded from the mainstream of society. This requires all groups, but particularly the most vulnerable, have opportunities to improve or maintain their well being.
Equity &
Inclusiveness
Good governance means that processes and institutions produce results that meet the needs of society while making the best use of resources at their disposal. The concept of efficiency in the context of good governance also covers the sustainable use of natural resources and the protection of the environment.
Effectiveness & Efficiency
Accountability is a key requirement of good governance. Not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. Who is accountable to whom varies depending on whether
decisions or actions taken are internal or external to an organization or institution. In general, an organization or an institution is accountable to those who will be affected by its decisions or actions. Accountability cannot be enforced without transparency and the rule of law.
Accountability
________ is defined as the system of rules, practices and processes by which business corporations are directed and controlled. It basically involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community.
Corporate governance
PURPOSE OF CORPORATE GOVERNANCE
The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver long-term success of the company. In simple terms, the fundamental aim of corporate governance is to enhance shareholders” value and protect the interests of other stakeholders by improving the corporate performance and accountability. It is also about what the board of directors of a company does, how it sets the values of the business firm.
OBJECTIVES OF CORPORATE GOVERNANCE
- Fair and Equitable Treatment of Shareholders
- Self-Assessment
- Increase Shareholders’ Wealth
- Transparency and Full Disclosure
A corporate governance structure ensures equitable and fair treatment of all shareholders of the company. In some organizations, a group of high-ner-worth individual and institutions who have a substantial proportion of their portfolios invested in the company, remain active through occupation of top-level positions that enable them to guard their interest. However, all shareholders deserve equitable treatment and this equity is safeguarded by a good govenance structure in any organization.
Fair and Equitable Treatment of Shareholders
Corporate governance enables firms to assess their behavior and actions before they scrutinized
regulatory agencies. Business establishments with a strong corporate governance system are better able to limit exposure to regulatory risks and fines. An active and independent board can successfully point out deficiencies or loopholes in the company operations and help solve issues intemally on a timely basis.
Self-Assessment
Another corporate governance’s main objective is to protect the long-term interests of the sharcholders. Firms with strong corporate governance structure are seen to have higher valuation attached to their shares by businessmen. This only reflects the positive perception that good corporate governance induces potential investors to decide to invest in a compan
Increase Shareholders’ Wealth
Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full disclosure of transactions in the company accounts.
Transparency and Full Disclosure
BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE
- Transparency and Full Disclosure
- Accountability
- Corporate Control
Is the board telling us what is going on?
Transparency and Full Disclosure
Is the board taking responsibiity?
Accountability
Is the board doing the night thing?
Corporate Control
• Does the board
meet the information needs of investment
communities?
Transparency and Full Disclosure
• Does the board clarify its role and that of management?
Accountability
• Has the board built long-term sustainable growth in shareholders’ value for the corporation?
Corporate Control
Principles of Good Corporate
Governance
- A company should lay solid foundation for management and oversight. It should recognize and publish the respective roles and responsibilities of board and management.
Formalize and disclose the functions reserved to the board and those delegated to management.
Principles of Good Corporate
Governance
- Structure the board to add value. Have a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties.
2-a. A board should have independent directors.
2-b. The roles of chairperson and chief executive officer should not be exercised by the same individual.
2-b. The board should establish a nomination committee
Principles of Good Corporate
Governance
- Promote ethical and responsible decision. making. Actively promote ethical and responsible decision-making.
3-a. Establish a code of conduct to guide the directors, the chief executive officer (or equivalent), the chief financial officer (or
• equivalent) and any other key executives as to:
• The practices necessary to maintain confidence in the company’s integrity, and
• The responsibility and accountability of individuals for reporting and investigating reports of unethical practices
3-b. Disclose the policy concerning trading
in company securities by directors,
officers and employees.
Principles of Good Corporate
Governance
- Safeguard integrity in financial reporting.
Have a structure to independently verify and safeguard. the integrity of the company’s financial reporting.
4-a. Require the chief executive of (or equivalent) and the chief financial officer (or equivalent) to state in writing to the board that the
company’s financial reports presenta true and fair view, in all material respects, of the company’s financial condition and operational results and are in accordance with relevant
4-b. The board should establish an audit
4-c. Structure the audit committee so that it Only non-executive or independent directors;
An independent chairperson, who is not chairperson of the
• At least three (3) members,
Principles of Good Corporate
Governance
- Make timely and balanced disclosure.
Promote timely and balanced disclosure of all material matters concerning the company.
5-a. Establish written policies and
compliance with IFS.
procedures designed to ensure
5-b. Listing Rule disclosure requirements and to ensure accountability at a senior management level for compliance.
Principles of Good Corporate
Governance
- Respect the rights of shareholders and facilitate the effective exercise of those rights.
6-a. Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings.
6-b. Request the external auditor to attend the annual general meeting and be available to answer shareholder questions about the audit.
Principles of Good Corporate
Governance
- Recognize and manage risk. Establish a sound system of risk oversight and management and internal control.
7-a. The board or appropriate board committee should establish policies on risk oversight and management.
2-a. The chief executive officer (or equivalent) and the chief financial officer (or equivalent) should state to the board in writing that:
• The statement given in accordance with best practice recommendation 4-a (the integrity of financial statements) is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the board; and The company’s risk management and internal compliance and control system is operating efficiently in all material respects.
Principles of Good Corporate
Governance
- Encourage enhanced performance. Fairly review and actively encourage enhanced board and management effectiveness.
8-a. Disclose the process for performance evaluation of the board, its committees and individual directors, and key executives.
Principles of Good Corporate
Governance
- Remunerate fairly and responsibly. Ensure that the level and composition of remuneration is sufficient and reasonable and that its relationship to corporate and individual performance is defined.
9-a. Provide disclosure in relation to the company’s remuneration policies to enable investors to understand:
The costs and benefits of those policies; and
• The link between remuneration paid to directors and key executives and corporate performance.
9b. The board should establish a
remuneration committee.
9-c. Clearly distinguish the structure of non-executive director’s remuneration from that of executives.
9-d. Ensure that payment of equity-based executive remuneration is made in accordance with thresholds set in plans approved by shareholders.
Principles of Good Corporate
Governance
- Recognize the legitimate interests of stakeholders. Recognize legal and other obligations to all legitimate stakeholders.
10-a. Establish and disclose a code of conduct to guide compliance with legat and other obligations to legitimate stakeholders.
• Does it safeguard integrity in financial reporting?
Transparency and Full Disclosure
• Does the board have sound disclosure policies and practices?
Transparency and Full Disclosure
• Does it make timely and balanced disclosure?
Transparency and Full Disclosure
Can an outsider meaningfully analyze the organization’s actions and performance?
Transparency and Full Disclosure
• Does it promote objective, ethical and responsible decision making?
Accountability
• Does it lay solid foundations for management oversight?
Accountability
- Does the composition mix of board membership ensure appropriate range and mix of expertise, diversity, knowledge and added value?
Accountability
• Is the organization’s senior
ofTicial committed to widely
accepted standards of correct and proper behavior?
Accountability
• Does it create an environment to take risk?
Corporate Control
> Does it encourage enhanced performance?
Corporate Control
> Does it recognize and manage risk?
Corporate Control
> Does it remunerate fairly and responsibly?
Corporate Control
• Does it recognize the legitimate interests of stakeholders?
Corporate Control
Are conflicts of interest avoided such that the organization’s best interests prevail at all times?
Corporate Control
