CORPORATE

GOVERNANCE
RESPONSIBILITIES
AND ACCOUNTABILITIES
Chapter II
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 corporate 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 is 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.
When corporate governance is discussed, it is often spoken of in terms of a
company's corporate governance framework. The key elements within an effective
governance framework, and the issues relating to each element, are set out on the
following pages and are relevant to organizations large and small, in both the private
and the public sectors. The table provides a useful structure for any company to
consider its' own approach to corporate governance and the matters which may assist it
to achieve its strategic objectives.
 Many of the matters listed may not be directly relevant in all situations and
some may not, in particular circumstances, be within the board's control, but
it provides a useful context in which any organization can consider its
governance needs so that they might be most appropriately addressed.
The essence of any system of good corporate 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.
 Governance starts with the shareholders/owners 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 a 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.
 A broad group of stakeholders has an interest in the quality of corporate
governance because it has a relationship to economic performance and the
quality of financial reporting. For example, it is likely that many employees
have significant funds invested in pension plans. Those pension plans are
designed to protect the financial interests of those employees in their
retirement. We use the word society in the diagram to indicate those broad
interests. In a similar fashion, employees and creditors have a vested interest
in the organization and how it is governed. Regulators are a response to
society's wishes to ensure that organizations, in their pursuit of returns for
their owners, act responsibly and operate in compliance with relevant laws.
While shareholders / owners delegate_ responsibilities to various patties
within the corporation, they also require accountability as to how well the
resources1hat 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. For instance, management has a responsibility to provide
financial reports, and in some cases, reports on internal control effectiveness.
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 statement contain accurate and complete
disclosure.
PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR
RESPECTIVE BROAD ROLE AND SPECIFIC RESPONSIBILITIES

■ Corporate governance and financial reporting reliability are receiving

considerable attention from a number of parties including regulators,
standard setting bodies, the accounting profession, lawmakers and
financial statement users.
Party Overview 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 Directors Broad Role:

The major representative 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 organization's 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 communication 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 Director
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 Committees of Broad Role:
the Board of Directors
Provide oversight of the internal and external audit function and
the 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 the 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 Set accounting and auditing standards dictating underlying

Accountancy financial reporting and auditing concept; 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 and Exchange Broad Role:
Commission
Ensure the accuracy timeliness and fairness of public reporting
of 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 Auditors Broad Role:

Perform audits of company financial statements to ensure that

the statements are free of material misstatements including
  Specific activities include among others:
 Audit of public company financial statements
 Audits of nonpublic company financial statements
 Other services such as tax or consulting
8. Internal Auditors Broad Role:

Perform audits of companies 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
END