Purpose and Benefits of Good Governance

 INCREASES TRUST - Businesses do not exist in a vacuum. Organizations that are cognizant of the
role they play in wider society will typically seek to behave in a transparent manner by providing
clear and accurate information to their stakeholders on a regular basis. When all stakeholders feel
able to rely upon the data provided by companies this leads to increased levels of trust and
organizations are able to develop stronger, longstanding relationships with their stakeholders. The
benefits that can be reaped are numerous and varied - from favorable credit terms to repeat
business.
 ENHANCES SUSTAINABILITY - A company committed to good governance is able to quickly identify
and resolve any systemic issues thus reducing the likelihood of costly corporate crises and scandals.
Of course, matters may arise which an organization is unable to anticipate but with a governance
system in place that is geared to manage such eventualities, an organization can respond quickly in
order to safeguard its reputation and future.
 ENCOURAGES POSITIVE BEHAVIORS - Significant focus has been placed on the role that culture
plays in the success of an organization. Having clearly delineated policies and processes and a board
of directors and executive managers who take an interest and responsibility for such matters can
help to prevent future failures whilst setting the organizations cultural expectations. It is said that
‘the tone of an organization is set at the top’ meaning that the chairman and CEO are protagonists
of the organizational culture. It is therefore imperative that all board members take an active
interest in the activities of the company and ensure clear lines of communication and
responsiveness to dealing with any move away from the positive culture that they seek to imbue
throughout the organization.
 LOWERS THE COST OF CAPITAL - In today’s volatile environment, the implementation of good
governance practices may lead to a reduction in a company’s cost of capital. An organization that is
seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a
lower rate than those with no, or weak governance systems. Companies with debt or equity
investors may find that their investors pay a premium for the comfort they obtain in knowing that
the company has a sound governance framework.
 MINIMIZES WASTE, RISKS, CORRUPTION AND MISMANAGEMENT - Companies committed to
implementing and maintaining good governance practices will likely find that certain risks are
drastically minimized. This is because strong governance practices typically increase levels of
transparency, trust and integrity, all of which create an environment conducive to reducing risks,
opportunities for corruption and any source of mismanagement.

NON-EXECUTIVE DIRECTOR
A non-executive director (abbreviated to non-exec, NED or NXD), independent director or external
director is a member of the board of directors of a company or organization, but not a member of the
executive management team. They are not employees of the company or affiliated with it in any other way
and are differentiated from executive directors, who are members of the board who also serve, or
previously served, as executive managers of the company (most often as corporate officers). However they
do have the same legal duties, responsibilities and potential liabilities as their executive counterparts.
Non-executive directors provide independent oversight and serve on committees concerned with sensitive
issues such as the pay of the executive directors and other senior managers; they are usually paid a fee for
their services but are not regarded as employees.
All directors should be capable of seeing company and business issues in a broad perspective. Nonetheless,
non-executive directors are usually chosen because of their independence and initiative, are of an
appropriate caliber and have particular personal qualities.
Fundamentally, the non-executive director role is to provide a creative contribution and improvement to
the board by providing dispassionate and objective criticism. Their role may change depending on the
organization, though they are usually not involved in the day-to-day management of the company but
monitor the executive activity and contribute to the development strategy.
Non-executive directors can also be referred to as external directors; they are usually people of stature and
experience who can act as both a source of wise independent advice and a check on any wilder elements
on a board.
According to the UK Institute of Directors, non-executive directors are expected to focus on board matters
and not stray into ‘executive direction,’ thus providing an independent view of the company that is
removed from day-to-day running. Non-executive directors, then, are appointed to bring to the board:

 Independence;
 Impartiality;
 Wide experience;
 Special knowledge;
 Personal qualities.
In addition to the above five key qualities an effective non-executive director would influence the
achievement of balance of the board of directors as a whole as well as commitment, perception and a
broad perspective of the area or industry. More key responsibilities may include:

 Contributing to the strategic direction of the company;

 Efficiently solving problems that arise;
 Communicating with third parties;
 Ensuring all the audit requirements are satisfied;
 Remuneration of the executive directors;
 Appointing the board of directors.

KEY RESPONSIBILITIES
Non-executive directors have responsibilities in the following areas, according to the Review of the role
and effectiveness of non-executive directors (the Higgs report), published by the British government in
2003:

 Strategy: Non-executive directors should constructively challenge and contribute to the development
of strategy. As an external member of an organization, the NED may have a clearer or wider view of
possible factors affecting the company and its business environment, more-so than executive directors.
 Performance: Non-executive directors should scrutinize the performance of management in meeting-
agreed goals and objectives and monitoring and, where necessary, removing senior management, and
in succession planning.
 Risk: Non-executive directors should satisfy themselves that financial information is accurate and that
financial controls and systems of risk management are robust and defensible.
 People: Non-executive directors can benefit the company's and board's effectiveness through outside
contacts and opinions. Helping the business and board connect with networks of useful people and
organizations become an important function for the NED to fulfill.
NEDs should also provide independent views on:
 Resources
 Appointments
 Standards of conduct
Boards (and the non-executive directors on them) also have a responsibility to evaluate their own
performance. Reasons for undertaking a board evaluation might include:

 to address specific issues;

 to benchmark performance against other companies;
 the need to ensure that the board is doing the best it can; and
 the need to be seen to be doing something.
Much has been written about how best to go about evaluating board performance and it remains a key
topic of discussion.

SOCIAL RESPONSIBILTY

• The adoption by a business of a strategic focus for fulfilling the economic, legal, ethical, and
philanthropic responsibilities expected of its by its stakeholders.

A. Economic responsibility - It includes providing high returns for investors, providing workers with jobs and fair wages
and promoting new technology.

B. Legal Responsibility - which provides the laws needed to determine acceptable or unacceptable behavior.

C. Ethical responsibility - which goes beyond the law and presents the idea of morality and acting in a fair, just and right
manner.

D. Philanthropic responsibility - promotes human welfare and goodwill; by making voluntary donations of money, time,
and other resources, companies can contribute to their communities and society and improve quality of life.

• Social responsibility is a never ending process of continuous improvement that requires leadership
from top management, employees and good relationships across the community, industry, market,
and government.

• It involves action and measurement.

• Communicating the company's social responsibility philosophy and commitment.

• Social responsibility must be given planning time, priority, and management attention that is given
to any other company initiative such as continuous improvement, cost management, investor
relations, research and development, human resources, or marketing research
Social Responsibility applies to all types of businesses

• small and large

• sole proprietorships and partnerships
• large corporation

Benefits of Social Responsibility

• TRUST - employee can expect to be treated with respect and consideration by both their peers and
their superiors, contribute greater decision-making efficiencies, maintain positive long-term
relationships
• CUSTOMER SATISFACTION - company should strive to market products that satisfy customers'
needs through a coordinated effort that also allows the company to achieve its own objectives.
• EMPLOYEE COMMITMENT-willing to make personal sacrifices for the organization, loyalty.
• INVESTOR LOYALTY-investor are concerned with the reputation of companies in which they invest
• PROFITS
• NATIONAL ECONOMY

Factors that influence on business decisions and actions

• Corporate Governance - companies must maintain a governance structure to ensure proper control
of their actions and assign responsibility for those actions.
• Legal, Regulatory, and Political Issues - every business must be aware and abide by laws and
regulations that dictate acceptable business conduct.
• Employee Relations - organizations must build strong relationships with employees. Employees
want fair treatment, excellent compensation and benefits, and assistance in balancing work and
family obligations.
• Consumer Relations - companies have toward their customers, including health and safety issues,
honesty in marketing, consumer rights, and related responsibilities.
• Community and Philanthropy - strategic philanthropy involves both financial and non financial
contributions ( employee time, goods and services, technology and equipment, and facilities) to
stakeholders.
• Technological Issues - with the help of internet and other technological advances, we can
communicate and find information fast, while negative effect online credit -card fraud.
• Sustainability Issues - how company manage their economic, social development, and
environmental impact. Companies must develop goals, implement programs, and contribute to
sustainability concerns.
• Global Social Responsibility - businesses must continually evolve to reach global markets and
anticipate emerging world trends.
• The Social Audit - auditing and assurance procedure that can be used to measure and improve the
social responsibility effort.

Strategic Management of Stakeholder Relationships

STAKEHOLDERS

• Those people and groups to whom an organization is responsible - including customers, investors
and shareholders, employees, suppliers, governments, communities, and many others.
• They have a "stake" or claim in some aspect of a company's products, operations, markets,
industry, or outcomes.
• Shareholders and other investors provide the financial foundation for business and expect
something in return-profits
 • Employees - commitment, trust and loyalty-benefits and fair treatment.
• Suppliers - provide materials according to customer specification.
• Customers - patronize, buy product.
• Government - provide various laws, and infrastructure projects.

A business exist because of relationships among employees, customers, shareholders or investors,

suppliers, and managers that develop strategies to attain success

Building effective relationships is considered one of the more important practices of business today.

Relationships are associated not only with organizational success but also with organizational failure to
assume responsibility.

Milton Friedman quoted that " the basic mission of business thus produce goods and services at profit, and
in doing this, business making its maximum contribution to society and, in fact being socially responsible"