GOOD CORPORATE GOVERNANCE

1.0 Introduction

Corporate governance has recently become a central issue for the success of
corporations in the business environment. In particular, in the wake of a number of scandals,
such as Enron, Parmalat, WorldCom or Lehman Brothers, its importance has been understood
by both developed and developing countries. But, what exactly is corporate governance? A
large volume of studies has been published describing the main definition of corporate
governance in the literature. For example, Clarke and Roma stress that corporate governance
is a system, which coordinates all participants in the company; regulates the objectives, rights
and responsibilities; protects and develops welfare of the company; and finally serves the
wider communities in corporations (Clarke and Roma, 2008). In general, corporate
governance consists of shareholders, stakeholders, employees, boards of director, chief
executive officers (CEO) and owners (Clarke and Roma, 2008).

2.0 Definition of Corporate Governance

Corporate governance is defined as the process and structure used to direct and manage
the business and affairs of the company towards promoting business prosperity and corporate
accountability with the ultimate objective of realising long-term shareholder value while taking
into account the interest of other stakeholders. Corporate governance provides a framework
of control mechanisms that support the company in achieving its goals, while preventing
unwanted conflicts. The pillars of corporate governance such as ethical behaviour,
accountability, transparency and sustainability are important to the governance of companies
and stewardship of investor’s capital. Companies that embrace these principles are more likely
to produce long term value than those that are lacking in one or all.

NR Narayana Murthy has observed that Corporate Governance is the acceptance by

management, of the inalienable rights of shareholders as the true owners of the corporation
and of their own role as trustees on behalf of the shareholders. It is about commitment to
values, about ethical business conduct and about making a distinction between personal and
corporate funds in the management of a company. While the Institution of Company
Secretaries of India also defined as corporate governance is the application of best
management practices, compliance or jaw in true letter and spirit and adherence to ethical
standards for effective management and distribution of wealth and discharge of social
responsibility for sustainable development of all stakeholders.
3.0 What is Good Corporate Governance look like?
Good corporate governance is a means by which organizations may achieve their own
purpose in the long term. The key aspects of good corporate governance include transparency
of corporate structures and operations; the accountability of managers and the boards to
shareholders; and corporate responsibility towards stakeholders. Good corporate governance
practices instil in companies the required vision, processes and structures that ensure long-
term sustainability. It is also critical to support good corporate citizenship, which is a
commitment to ethical behaviour in business strategy, operations and culture.

According to Sarbah & Xiao (2015) on their research of Good Corporate Governance
Structures: A Must for Family Businesses, Corporate Governance refers to the structure and
processes for the direction and control of businesses and the relationship among the
management, board of director, controlling shareholders, minority shareholders and the other
stakeholders. Since good corporate governance contributes to sustainable economic
development by enhancing the performance of companies, it is imperative that companies
adopts good corporate governance structures to enable them grow.

Good corporate governance allows company to look well in the future, anticipate
challenges and opportunities, build capacities to create value on an ongoing basis, embrace
creating real value for customers and building wealth for shareholders as mutually reinforcing
objectives, and recognize societal and environmental sustainability as essential conditions for
delivering on these objectives in long run. Good corporate governance must embrace all these
objectives and implement them in business strategy through valuation, monitoring and
incentive mechanisms. Companies that are run in this way are more likely to act ethically even
in the absence of a clear business case.

4.0 Principles of Good Corporate Governance

Good corporate governance is a key factor in underpinning the integrity and efficiency of
a company. Poor corporate governance can weaken a company’s potential, can lead to
financial difficulties and in some cases can cause long-term damage to a company’s
reputation. A company which applies the core principles of good corporate governance;
fairness, accountability, responsibility and transparency, will usually outperform other
companies and will be able to attract investors, whose support can help to finance further
growth.
4.1 Fairness

Fairness refers to equal treatment, for example, all shareholders should receive equal
consideration for whatever shareholdings they hold. In addition to shareholders, there
should also be fairness in the treatment of all stakeholders including employees,
communities and public officials. The fairer the entity appears to stakeholders, the more
likely it is that it can survive the pressure of interested parties.

4.2 Accountability

Corporate accountability refers to the obligation and responsibility to give an explanation

or reason for the company’s actions and conduct. In brief: the board should present a
balanced and understandable assessment of the company’s position and prospects, the
board is responsible for determining the nature and extent of the significant risks it is
willing to take, the board should maintain sound risk management and internal control
systems, the board should establish formal and transparent arrangements for corporate
reporting and risk management and for maintaining an appropriate relationship with the
company’s auditor, and the board should communicate with stakeholders at regular
intervals, a fair, balanced and understandable assessment of how the company is
achieving its business purpose.

4.3 Responsibility

The Board of Directors are given authority to act on behalf of the company. They should
therefore accept full responsibility for the powers that it is given and the authority that it
exercises. The Board of Directors are responsible for overseeing the management of the
business, affairs of the company, appointing the chief executive and monitoring the
performance of the company. In doing so, it is required to act in the best interests of the
company. Accountability goes hand in hand with responsibility. The Board of Directors
should be made accountable to the shareholders for the way in which the company has
carried out its responsibilities.

4.4 Transparency

A principle of good governance is that stakeholders should be informed about the

company’s activities, what it plans to do in the future and any risks involved in its business
strategies. Transparency means openness, a willingness by the company to provide clear
information to shareholders and other stakeholders. For example, transparency refers to
the openness and willingness to disclose financial performance figures which are truthful
and accurate. Disclosure of material matters concerning the organisation’s performance
 and activities should be timely and accurate to ensure that all investors have access to
clear, factual information which accurately reflects the financial, social and environmental
position of the organisation. Organisations should clarify and make publicly known the
roles and responsibilities of the board and management to provide shareholders with a
level of accountability. Transparency ensures that stakeholders can have confidence in
the decision-making and management processes of a company.

5.0 Benefits of Corporate Governance

Strong corporate governance maintains investors’ confidence, whose support can help to
finance further growth. Companies who implement the principles of good corporate
governance into working environment life will ensure corporate success and economic growth.
They are the basis on which companies can grow. Best-practice.com (2016) indicated that
companies have increasingly practiced corporate governance across the globe due to the
number of benefits it offers. It is beneficial not only for a company as its stakeholder, but also
for the economy as a whole. The following are some of the benefits that corporate governance
offers:

i) Encouraging positive behaviour

Clear policies and processes, boards and executive managers maintain a culture of
compliance that continues to support better decisions. It is important that all members
participate in the culture, maintain clear lines of communication with management and the
entire organization, and respond promptly to any evidence that some organizations are not
participating.

ii) Reducing the cost of capital

The implementation of good governance practices can lead to a reduction in a company’s
cost of capital. An organisation 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 weak corporate
governance. Companies with debt or equity investors may find that their investors pay a
premium to work with a company that has a sound governance framework.

iii) Improving top-level decision-making.

There is a strong and demonstrable link between an organisation’s governance and rapid
decision-making associated with improved performance. Moreover, a number of
performance failures have been directly linked to poor governance. There is no doubt that
good governance assures rapid access to information and the good communication among
stakeholders that leads to better results. Good governance also enables rapid and accurate
 prioritising of actions. This can prove invaluable in enabling the organisation to weather
tough economic storms and supports the organisation’s sustainability.

iv) Assuring internal controls

By implementing corporate governance correctly across the organisation, the board may
be certain that an adequate and effective control environment is in effect, with the level of
assurance associated with each important component of governance. What’s more, the
board or the board committee is better positioned to take action when the controls signal
non-compliance.

v) Enabling better strategic planning

With more rapid access to information and good communication with management, boards
are able to formulate more successful strategies. This includes more efficient allocation of
resources and capital. The strong governance framework will further assist the board in
some of the following ways – understanding the regulatory environment governing the
business; leveraging technology from a production, distribution and communications point
of view; and identifying and managing the reasonable interests of all stakeholders in the
business. All these components are essential elements of a robust strategic plan.

vi) Attracting talented directors.

Bring in the talented non-executive directors with complementary skillsets helps to make
an overall and comprehensive assessment of the overall sustainability of the organisation,
including its level of compliance with relevant legislation. This kind of new talent is vital to
the sustainability of the organisation which has to adapt to the ever-evolving conditions of
the market. For the candidate to the non-executive post, providing this kind of environment
is equally important.

6.0 Conclusion

Corporate governance is a function of governing a corporation. Good Corporate governance

promotes fairness, openness, and transparency in its responsibilities to stakeholders. Good
corporate governance practices facilitates economic efficiency by focusing on value-
enhancing activities and aids efficient allocation of scarce resources. This is achieved when
firms efficiently employ their assets, attract low cost capital, meet societal expectations and
improve overall performance. This paper discusses the essential issues in corporate
governance that helps to achieve these desired objectives.
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