1.

Definition of corporate governance (further readings)

Corporate governance is the system of rules, practices, and processes by
which a firm is directed and controlled. Corporate governance essentially
involves balancing the interests of a company's many stakeholders, such
as shareholders, senior management executives, customers, suppliers,
financiers, the government, and the community. Since corporate
governance also provides the framework for attaining a company's
objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement and
corporate disclosure.

2. Mechanisms of corporate governance (Why is corp gov important)

a. Internal Mechanism
The foremost sets of controls for a corporation come
from its internal mechanisms. These controls monitor the
progress and activities of the organization and take corrective
actions when the business goes off track. Maintaining the
corporation's larger internal control fabric, they serve the
internal objectives of the corporation and its internal
stakeholders, including employees, managers and owners.
These objectives include smooth operations, clearly defined
reporting lines and performance measurement systems. Internal
mechanisms include oversight of management, independent
internal audits, structure of the board of directors into levels of
responsibility, segregation of control and policy development.

b. External Mechanism
External control mechanisms are controlled by those
outside an organization and serve the objectives of entities such
as regulators, governments, trade unions and financial
institutions. These objectives include adequate debt
management and legal compliance. External mechanisms are
often imposed on organizations by external stakeholders in the
forms of union contracts or regulatory guidelines. External
organizations, such as industry associations, may suggest
guidelines for best practices, and businesses can choose to
follow these guidelines or ignore them. Typically, companies
report the status and compliance of external corporate
governance mechanisms to external stakeholders.

c. Independent Audit

Independent external audit of a corporation’s financial

statements is part of the overall corporate governance structure. An
audit of the company's financial statements serves internal and
external stakeholders at the same time. An audited financial
statement and the accompanying auditor’s report helps investors,
employees, shareholders and regulators determine the financial
 performance of the corporation. This exercise gives a broad, but
limited, view of the organization’s internal working mechanisms
and future outlook.

3. The principles of corporate governance

a. Fairness
Fairness refers to equal treatment, for example, all shareholders
should receive equal consideration for whatever shareholdings they
hold. In the UK this is protected by the Companies Act 2006 (CA
06). However, some companies prefer to have a shareholder
agreement, which can include more extensive and effective minority
protection.

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.

b. 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.

c. 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.

d. 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.
_____
a. Rights and equitable treatment of shareholders

Organizations should respect the rights of

shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by openly and
effectively communicating information and by encouraging
shareholders to participate in general meetings.

b. Interests of other stakeholders:

Organizations should recognize that they have legal,

contractual, social, and market driven obligations to non-
shareholder stakeholders, including employees, investors,
creditors, suppliers, local communities, customers, and policy
makers.

c. Role and responsibilities of the board

The board needs sufficient relevant skills and

understanding to review and challenge management
performance. It also needs adequate size and appropriate levels
of independence and commitment.

d. Integrity and ethical behavior

Integrity should be a fundamental requirement in
choosing corporate officers and board members. Organizations
should develop a code of conduct for their directors and
executives that promotes ethical and responsible decision
making.
 e. Disclosure and transparency
Organizations should clarify and make publicly
known the roles and responsibilities of board and management
to provide stakeholders with a level of accountability. They
should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting.
Disclosure of material matters concerning the organization
should be timely and balanced to ensure that all investors have
access to clear, factual information.

4. Risk management (overview)