Introduction to Corporate Governance

Governance
- Refers to a process whereby elements in society wield power,
authority and influence and enact policies and decisions
concerning public life and social upliftment.
- 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.
Characteristics of Governance
1. Participation
- Could be either direct or through legitimate institutions or
representatives.
- It is important to point out that the representative democracy
does not necessarily mean that the concern of the most
vulnerable in society would not be taken into considerations in
decision making.
- It 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
2. Rule of Law
- Good governance requires fair legal framework 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.
3. Transparency
- It means that decision taken and their enforcements are done in
a manner that follows rules and available 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.
4. Responsiveness

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 - Good governance requires that institutions and processes try to
serve the needs all stakeholders within a reasonable timeframe.
5. Consensus Oriented
- 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 goals of such development.
- This can only result from an understanding of the historical,
cultural and social contexts of a given society or community.

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6. Equity and Exclusiveness
- 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.
7. Effectiveness and Efficiency
- 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.
8. Accountability
- 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.
Types of Governance
1. Corporate Governance
2. International Governance
3. National Governance
4. Local Governance
Corporate Governance
- The corporate governance structure specifies the distribution of
rights and responsibilities among different participants in the
corporation, such as the board, managers, shareholders, and
other stakeholders, and spells out the rules and procedures for
making decisions on corporate affairs. By doing this, it also
provides the structure through which the objectives are set and
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 the means of attaining those objectives and monitoring
performance.
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.

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Objectives of Corporate Governance
1. Fair and Equitable Treatment of Shareholders
2. Self-Assessment
3. Increase in Shareholder’s Wealth
4. Transparency and Full Disclosure

Objectives of Corporate Governance

1. Fair and Equitable Treatment of Shareholders
- A corporate governance structure ensures equitable and fair
treatment of all shareholders of the company.
- In some organizations, a group of high net-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 governance structure in
any organization.
2. Self-Assessment
- Corporate governance enables firms to assess their behavior
and actions before they are scrutinized by 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 internally on a timely basis.
3. Increase Shareholders Wealth
- Another corporate governance's main objective is to protect
the long-term interests of the shareholders.
- Firms with strong corporate governance structure are seen to
have higher valuation attached to their shares by
businessmen.

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 - This only reflects the positive perception that good corporate
governance induces potential investors to decide to invest in a
company
4. Transparency and Full Disclosure
- Good corporate governance aims at ensuring a higher degree
of transparency in an organization by encouraging full
disclosure of transactions in the company accounts.

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Basic Principles of Effective Corporate Governance
- Effective corporate governance
is transparent, protects the
rights of shareholders and
includes both strategic and
operational risk management.
- It is concerned in both the
long-term earning potential as
well as actual short-term
earnings and holds directors accountable for their stewardship of
the business.
- Positive answers to the following questions indicate a firm's
conformance an compliance with the basic principles of good
corporate governance
1. Transparency and Full Disclosure
- Does the board meet the information needs of investment
communities?
- Does it safeguard integrity in financial reporting?
- Does the board have sound disclosure policies and
practices?
- Does it make timely and balanced disclosure?
- Can an outsider meaningfully analyze the
organization's actions and performance?
2. Accountability
- Does the board clarify its role and that of management?
- Does it promote objective, ethical and responsible decision
making?
- Does it lay solid foundations for management oversight?
- Does the composition mix of board membership ensure an
appropriate range and mix of expertise, diversity, knowledge
and added value?
- Is the organization's senior official committed to widely
accepted standards of correct and proper behavior?

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Illustrative Application of the basic principles of corporate governance
and best practice recommendations
Principles of Good Corporate
Governance
1. A company should lay
solid foundation for
management and oversight. It
should recognize and publish
the respective roles and
responsibilities of board and
management.
2. Structure the board to add
value. Have a board of an
effective composition, size and
commitment to adequately
discharge its responsibilities
and duties.
3. Promote ethical and
responsible decision making.
Actively promote ethical and
responsible decision making.
Governance Business Ethics Risk Management and Internal Control
Best Practice
Recommendations
a. Formalize and disclose the
functions reserved to the
board and those delegated
to management.
a. A board should have
independent directors.
b. The roles of chairperson and
chief executive officer
should not be exercised by
the same individual.
c. The board should establish
a nomination committee
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;
- The responsibility and
accountability of
individuals for reporting
and investigating reports
of unethical practices
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 Disclose the policy concerning
trading in company securities by
directors, officers and employees.

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4. Safeguard integrity in
financial reporting. Have a
structure to independently
verify and safeguard the
integrity of the company's
financial reporting.
b. The board should establish an
5. Make timely and balanced
disclosure. Promote timely
and balanced disclosure of all
material matters concerning
the company.
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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 present a true and fair
view, in all material respects,
of the company's financial
condition and operational
results and are in accordance
with relevant accounting
standards.
audit committee.
- Structure the audit
committee so that it
consists of:
- Only non-executive or
independent directors;
- An independent
chairperson, who is not
chairperson of the board;
and
- At least three 3 members.
a. Establish written policies and
procedures designed to
ensure compliance with
IFRS.
b. Listing Rule disclosure
requirements and to ensure
accountability at a senior
management level for
compliance.
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6. Respect the rights of
shareholders and facilitate the
effective exercise of those
rights.
b. Request the external auditor
a. Design and disclose a
communications strategy to
promote effective
communication with
shareholders and encourage
effective participation at
general meetings.
to attend the annual general
meeting and be available to
answer shareholder questions
about the audit.

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7. Recognize and manage
risk. Establish a sound system
of risk oversight and
management and internal
control.
8. Encourage enhanced
performance. Fairly review
and actively encourage
enhanced board and
management effectiveness
9. Remunerate fairly and
responsibly. Ensure mat the
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a. The board or appropriate
board committee should
establish policies on risk
oversight and management.
b. 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
a. Disclose the process for
performance evaluation of
the board, its committees
and individual directors, and
key executives.
a. Provide disclosure in
relation to the company's
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level and composition of remuneration policies to
remuneration is sufficient and enable investors to
reasonable and mat its understand:
relationship to corporate and - The costs and benefits of
individual performance is those policies; and
defined - The link between
remuneration paid to
directors and key
executives and corporate
performance.
b. The board should establish
a remuneration committee.
c. Clearly distinguish the
structure of nonexecutive
director's remuneration from
that of executives.
d. Ensure that payment of
equity-based executive
remuneration is made in
accordance with thresholds
set in plans approved by
shareholders.

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10. Recognize the legitimate
interests of stakeholders.
Recognize legal and other
obligations to all legitimate
stakeholders
a. Establish and disclose a
code conduct to guide
compliance with legal and
other obligations to
legitimate stakeholders.

Recitation Questions:
1. What does Governance mean?
2. Explain whether the following statement is true or false.
"Governance is exercised only by the government of a country.
3. Explain how governance can be used in the following contexts
and give appropriate examples: a. national governance, b. local
governance, c. corporate governance, d. international
governance
4. Explain briefly the eight (8) basic characteristics of good
governance.
5. Transparency and accountability are synonymous. Explain
whether the statement is correct or not.
6. Explain whether the following statement is true or false.
"Responsiveness usually results to effectiveness and efficiency
"
7. Define corporate governance
8. What does corporate governance structure involve?
9. State the purpose of corporate governance.
10. Explain the basic objectives of corporate governance.
11. Explain the three basic principles of effective corporate
governance

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