INTRODUCTION TO CORPORATE GOVERNANCE

WHAT IS GOVERNANCE?
Generally, 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.
It comprises all the processes of governing — whether undertaken by the government of a country, by
a market or by a network — over a social system and whether through the laws, norms, power or
language of an organized society.
Governance therefore means the 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.
Governance can be used in several contexts such, as corporate governance, international governance,
national governance, and local governance.
The focus of this book is on Corporate Governance.

CHARACTERISTICS OF GOOD GOVERNANCE

Whatever context good governance is used, the following major characteristics should be present:

These characteristics are briefly described as follows:

Participation
Participation by both men and women is a key cornerstone of good governance. Participation could
be either direct or through legitimate institutions or representatives. It is important to point out that
representative democracy does not necessarily mean that the concern of the most vulnerable in society
would not be taken into consideration in decision making. Participation 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.
Rule of Law
Good governance requires fair legal frameworks 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.
Transparency
Transparency means that decisions taken, and their enforcement are done in a manner that follows
rules and 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.
Responsiveness
Good governance requires that institutions and processes try to serve the needs all stakeholders within
a reasonable timeframe.
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.
Equity and Inclusiveness
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 wellbeing.
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.
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.

CORPORATE GOVERNANCE: AN OVERVIEW

Corporate governance is defined as the system of rules, practices and processes by which business
corporations are directed and controlled. It basically involves balancing the interests of a company's
many stakeholders, such as shareholders, management, customers, suppliers, financiers, government,
and the community.
Corporate governance is a topic that has received growing attention in the public in recent years as
policy makers and others become more aware of the contribution good, corporate governance makes
to financial market stability and economic growth. Good corporate governance is all about controlling
one's business and so is relevant, and indeed vital, for all organizations, whatever size or structure.
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 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.

OBJECTIVES OF CORPORATE GOVERNANCE

The following are the basic 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 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. 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.

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.
The basic principles of effective corporate governance are threefold as presented below:

Positive answers to the following questions indicate a fires' conformance and compliance with the
basic principles of good corporate governance:

A. 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?

B. 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?
 C. Corporate Control
• Has the board built long-term sustainable growth in shareholders' value for the
corporation?
• Does it create an environment to take risk?
• Does it encourage enhanced performance?
• Does it recognize and manage risk?
• Does it remunerate fairly and responsibly?
• Does it recognize the legitimate interests of stakeholders?
• Are conflicts of interest avoiding such that the organization's best interests prevail at all
times?

ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPLES OF CORPORATE

GOVERNANCE AND BEST PRACTICE RECOMMENDATIONS

Principles of Good Corporate Best Practice Recommendations

Governance
1. A company should lay solid
foundation for management and 1-a, Formalize and disclose the functions reserved to the
oversight. It should recognize and board and those delegated to management.
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.
2-a. A board should have independent directors.
2-b. The roles of chairperson and chief executive officer
should not be exercised by the same individual.
2-b. The board should establish a
nomination committee

3-a. Establish a code of conduct to guide the directors,

3. Promote ethical and responsible
decision- making. Actively promote
ethical and responsible decision-
making.
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; and
• The responsibility and accountability of individuals
for reporting and investigating reports of unethical
practices

3-b. Disclose the policy concerning trading in

company securities by directors, officers and
employees.

4. Safeguard integrity in financial
reporting. Have a structure to
independently verify and safeguard
the integrity of the company's
financial reporting.
5. Make timely and balanced
disclosure. Promote timely and
balanced disclosure of all material
matters concerning the company.
6. Respect the rights of the
shareholders and facilitate the
effective exercise of those rights
7. Recognize and manage risk.
Establish a sound system of risk
oversight and management and internal the board in writing that:
control.
4-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.
4-b. The board should establish an audit committee.
4-c. 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
5-a. Establish written policies and procedures designed
to ensure compliance with IFRS.
5-b. Listing Rule disclosure requirements and to
ensure accountability at a senior management level for
compliance.
6-a. Design and disclose a communication strategy to
promote effective communication with shareholders
and encourage effective participation at general
meetings.
6-b. Request the external auditor to attend the annual
general meeting and be available to answer shareholder
questions about the audit.
7-a. The board or appropriate board committee should
establish policies on risk oversight and management.
7.b The chief executive officer (or equivalent) and the
chief financial officer (or equivalent) should state to
• 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

8. Encourage enhanced performance.
Fairly review and actively encourage
enhanced board and management.
effectiveness.
9. Remunerate fairly and responsibly.
Ensure that the level and composition
of remuneration is sufficient and
reasonable and that its relationship to
corporate and individual performance
is defined.
10. Recognize legitimate interest of
stakeholders. Recognize legal and
other obligations to all legitimate
stakeholders.
policies adopted by the board; and
• The company's risk management and internal
compliance and control system is operating
8-a. Disclose the process for performance evaluation
of the board, its committees and individual directors,
and key executives.
9-a. Provide disclosure in relation to the company's
remuneration policies to enable investors to
understand:
• The costs and benefits of those policies; and
• The link between remuneration paid to
directors and key executives and corporate
performance.
9-b. The board should establish a remuneration
committee.
9-c. Clearly distinguish the structure of non-executive
director's remuneration from that of executives.
9-d. Ensure that payment of equity- based executive
remuneration is made in accordance with thresholds
set
in plans approved by shareholders.
10-a. Establish and disclose a code of conduct guide
accomplish with legal and other obligation to
legitimate stakeholders.