GOVBUSMAN MODULE 2:

Chapter 2: CORPORATE GOVERNANCE RESPONSIBILITIES AND ACCOUNTABILITIES

Expected Learning Outcomes

After studying the chapter, you should be able to …

1. Explain the relevance of good governance to both large publicly-listed companied and SMEs.
2. Know the relationship between shareholders or owners and other stakeholders.
3. Identify the parties involved in Corporate Governance.
4. Describe the respective broad rate and specific responsibilities of the different parties in a
corporate setting.

INTRODUCTION

Many of the characteristics of good governance described in Chapter 1 are relevant to both SME’s and
large listed public companies. As an organization grows in size and influence, these issues become
increasingly important.

However, it is also important to recognize that good governance is based on principles underpinned by
consensus and continually developing notions of good practice. There are no absolute rules which must
be adopted by all organizations. “There is no simple universal formula for good governance.” Instead,
emphasis in many localities has been to encourage organizations to give appropriate attention to the
principles and adopt approaches which are tailored to the specific needs of an organization at a given
point in time.

The essence of any system of good governance is to allow the board and management the freedom to
drive their organization forward and to exercise that freedom within a framework of effective
accountability.
RELATIONSHIP BETWEEN SHAREHOLDERS / OWNER(S) AND OTHER STAKEHOLDERS

The relationship between the shareholders / owners, management and other stakeholders in a
corporation is shown below.

Public Corporation Stakeholders

Shareholders /
Board of Directors Owners

Delegate Have
Executive External
Management Auditors
Shareholder
s
Accountabilities

Responsibilities Operational Regulators

Management

Internal Auditors
Society and Others

Governance starts with the shareholders/owner delegating responsibilities through an elected board of
directors to management and, in turn, to operating units with oversight and assistance from internal
auditors. The board of directors and its audit committee oversee management and, in that role, are
expected to protect the shareholders’ rights. However, it is important to recognize that management is
part of the governance framework; management can influence who sits on the board and the audit
committee as well as other governance controls that might be put into place.

In return for the responsibilities (and power) given to management and the board, governance demands
accountability back through the system to the shareholders. However, the accountabilities do not
extend only to the shareholders. Companies also have responsibilities to other stakeholders.
Stakeholders can be anyone who is influenced, whether directly or indirectly, by the actions of the
company. Management and the board have responsibilities to act within the laws of society and to
meet various requirements of creditors, employees, and the stakeholders.

While shareholders/owners delegate responsibilities to various parties within the corporation, they also
require accountability as to how well the resources that have been entrusted to management and the
board have been used. For example, the owners want accountability on such things as:

 Financial performance
 Financial transparency – financial statements that are clear with full disclosure and that reflect
the underlying economics of the company.
  Stewardship, including how well the company protects and manages the resources entrusted
to it.
 Quality of internal control
 Composition of the board of directors and the nature of its activities, including information on
how well management incentive systems are aligned with the shareholders’ best interests.

The owners want disclosures from management that are accurate and objectively verifiable.
Management has always had the primary responsibility for the accuracy and completeness of an
organization’s financial statements. From a financial reporting perspective, it is management’s
responsibility to:

 Choose which accounting principles best portray the economic substance of company
transactions.
 Implement a system of internal control that assures completeness and accuracy in financial
reporting.
 Ensure that the financial statements contain accurate and complete.

PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR RESPECTIVE BROAD ROLE AND SPECIFIC
RESPONSIBILITIES

PARTY OVERVIEW OF RESPONSIBILITIES

1. Shareholders Broad Role:

Provide effective oversight through election of board members, approval

of major initiatives such as buying or selling stock, annual reports on
management compensation from the board.

2. Board of Broad Role:

Directors
The major representatives of stockholders to ensure that the organization
is run according to the organization’s charter and that there is proper
accountability.

Specific activities include among others:

1. Overall Operations
 Establishing the organizations vision, mission, values and
ethical standards.
 Delegating an appropriate level of authority to
management
 Demonstrating leadership
 Assuming responsibility for the business relationship with
CEO including his or her appointment, succession,
performance remuneration and dismissal.
 Overseeing aspects of the employment of the
management team including management remuneration,
 performance and succession planning.
 Recommending auditors and new directors to
shareholders.
 Ensuring effective communicating with shareholders
other stakeholders
 Crisis management
 Appointment of the CFO and corporate secretary.
2. Performance
 Ensuring the organization’s long-term viability and
enhancing the financial position.
 Formulating and overseeing implementation of corporate
strategy.
 Approving the plan, budget and corporate policies.
 Agreeing key performance indicators (KPIs)
 Monitoring/assessing assessment, performance of the
organization, the board itself, management and major
projects.
 Overseeing the risk management framework and
monitoring business risks.
 Monitoring developments in the industry and the
operating environment.
 Oversight of the organization, including its control and
accountability systems.
 Approving and monitoring the progress of major capital
expenditure, capital management and acquisitions and
divestitures.
3. Compliance / Legal Conformance
 Understanding and protecting the organization’s
financial position.
 Requiring and monitoring legal and regulatory
compliance including compliance with accounting
standards, unfair trading legislations, occupational
health and safety and environmental standards.
 Approving annual financial reports, annual reports and
other public documents / sensitive reports.
 Ensuring an effective system of internal controls exists
and is operating as expected.

3. Non-Executive or Broad Role:

Independent
Directors The same as the broad role of the entire board of directors

Specific activities include among others:

 To understand the organization, its business, its operating
environment and its financial position.
 To apply expertise and skills in the organization’s best interests.
 To assist management to keep performance objectives at the top
 of its agenda.
 To understand that his/her role is not to act as auditor, nor to act
as a member of the management team.
 To respect the collective, cabinet nature of the board’s decisions
 To prepare for and attend board meetings
 To seek information on a timely basis to ensure that he/she is in a
position to contribute to the discussion when a matter comes
before the board, or alert the chairman in advance to the need for
further information in relation to a particular matter, and
 To ask appropriate questions relative to operations

4. Management Broad Role:

Operations and accountability. Manage the organization effectively;

provide accurate and timely reports to shareholders and other
stakeholders.

Specific activities include among others:

 Recommend the strategic direction and translate the strategic
plan into the operations of the business
 Manage the company’s human, physical and financial resources to
achieve the organization’s objectives – run the business.
 Assume day to day responsibility for the organization’s
conformance with relevant laws and regulations and its
compliance framework.
 Develop, implement and manage the organization’s risk
management and internal control frameworks.
 Develop, implement and update policies and procedures
 Be alert to relevant trends in the industry and the organization’s
operating environment
 Provide information to the board.
 Act as conduit between the board and the organization
 Developing financial and other reports that meet public,
stakeholder and regulatory requirements

5. Audit Broad Role:

Committees of
the Board of Provide oversight of the internal and external audit function and the
Directors process of preparing the annual financial statements as well as public
reports on internal control

Specific activities include among others:

 Selecting the external audit firm.
 Approving any non-audit work performed by the audit firm
 Selecting and / or approving appointment of the Chief Audit
Executive (Internal Auditor)
 Reviewing and approving the scope and budget of the internal
 audit function
 Discussing audit findings with internal auditor and external
auditor and advising the board (and management) on specific
actions that should be taken.

6. Regulators Broad Role:

a. Board of
Accountancy Set accounting and auditing standards dictating underlying financial
reporting and auditing concepts; set the expectations of audit quality and
accounting quality.

Specific activities include among others:

 Conducting CPA Licensure Board Examinations
 Approving accounting principles
 Approving auditing standards
 Interpreting previously issued standards implementing quality
control processes to ensure audit quality
 Educating members on audit and accounting requirements

b. Securities Broad Role:

and
Exchange Ensure the accuracy, timeliness and fairness of public reporting of
Commission financial and other information for public companies.

Specific activities include among others:

 Reviewing filings with the SEC
 Interacting with the Financial Reporting Standards Council in
setting accounting standards
 Specifying independence standards required of auditors that
report on public financial statements
 Identify corporate frauds, investigate causes, and suggest
remedial actions

7. External Broad Roles:

Auditors Perform audits of company financial statements to ensure that the
statements are free of material misstatements including misstatements
that may be due to fraud.

Specific activities include among others:

 Audit of public company financial statements
 Audits of non-public company financial statements
 Other services such as tax or consulting

8. Internal Auditors Broad Role:

Perform audits of company for compliance with company policies and

laws, audits to evaluate the efficiency of operations and periodic
 evaluation and tests of controls.

Specific activities include among others:

 Reporting results and analyses to management (including
operational management) and audit committees
 Evaluating internal controls

DISCUSSION QUESTIONS:

1. What is the essence of any system of corporate governance?

2. To whom is the board of directors accountable?

3. What are the specific activities of the board of directors?

4. What is management’s responsibility as far as financial reporting is concerned?

5. “Small business enterprises do not need good governance.” Do you agree? Explain.