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Corporate Governance

Among the earliest versions of corporate regulations is the UK Code on Corporate Governance (also referred to as the Code), produced in 1992 by the Cadbury Committee. As stated by the UK Financial Reporting Council (2010), the code provided the classic definition of corporate governance:

Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the board include setting the company's strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The board's actions are subject to laws, regulations and the shareholders in general meeting.

The concept of corporate governance became further formalised in 1999 when the Organisation for Economic Co-operation and Development (OECD) sought to promote its importance. The term, as described by OECD (2004), covers the following:

Corporate governance involves a set of relationships between a company's management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.

The OECD (2004) recognised that '[t]here is no single model of good corporate governance', but that '[t]he presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy'. It does so by specifying the distribution of rights and responsibilities among different participants in the corporation, such as the board of directors and management, providing the structure by which the company objectives are set, outlining the means of attaining those objectives, and monitoring performance. These are reflected in the principles of corporate governance outlined below.

PRINCIPLES OF CORPORATE GOVERNANCE

Among the many countries that have issued corporate governance reports are the following:

• OECD (2004): Principles of Corporate Governance;

• Australian Stock Exchange Corporate Governance Council (2010):

Corporate Governance Principles and Recommendations (2nd edition);

• UK Financial Reporting Council (2010): The UK Corporate Governance Guide; and

• US Business Roundtable (2010): Principles of Corporate Governance.

Organisation for Economic Co-operation and Development

The corporate governance approach suggested by the OECD (2004) provides insights and guidance to its member countries at a macro level through the following set of six principles. They play a key role in ensuring good corporate governance practices and provide guidance on their implementation.

1. 'Ensuring the basis for an effective corporate governance framework.'

The OECD (2004) recommends that the company promotes 'transparent and efficient markets' in which it operates and that they comply with the rule of law. It emphasises establishing dear lines of responsibilities among different levels of organisational management.

2. 'The rights of shareholders and key ownership functions.' Corporate governance practices should 'protect and facilitate the exercise of shareholders' rights'.

3. 'The equitable treatment of shareholders.'

In addition to principle two, all classes of shareholders should receive equal treatment and have the right to have their concerns heard and resolved. Classes indude minority and foreign shareholders.

4. 'The role of stakeholders in corporate governance.'

Stakeholders are recognised as playing an important part in creating the organisation's wealth and jobs and sustaining its financial viability. The organisation should work with stakeholders to achieve these outcomes.

5. 'Disclosure and transparency.'

Material containing important information should be disclosed in a timely and accurate manner. This indudes information about the corporation's financial situation, performance, ownership and approach to governance.

6. 'The responsibilities of the board.'

Three board responsibilities are identified: provide strategic guidance, monitor the performance of management, and be accountable to the organisation and its shareholders.

Australia

The Australian Stock Exchange (ASX) Corporate Governance Council (2010) provided recommendations that are intended to provide a reference point for companies about their corporate governance structures and practices. It is acknowledged that, in themselves, they cannot prevent corporate failure or poor corporate decision-making, but they are intended to lay a solid foundation for good management and oversight. There are the following eight principles:

1. 'Lay solid foundations for management and oversight.'

This is achieved by establishing and disclosing the respective roles and responsibilities of the board and management.

2. 'Structure the board to add value/

Attention is given to the composition and size of the membership of the board and members' commitment to adequately discharge their responsibilities and duties.

3. 'Promote ethical and responsible decision-making.'

This principle is self-explanatory.

4. 'Safeguard integrity in financial reporting.'

There should be an approach such as using independent auditors to verify and confirm procedures that safeguard the integrity of financial reporting.

5. 'Make timely and balanced disclosure.'

Information about the company that is considered of a material nature should be disclosed in a timely and balanced manner.

6. 'Respect the rights of shareholders.'

Not only should shareholders' rights be respected but the company should facilitate their exercise.

7. 'Recognise and manage risk.'

A sound system of risk oversight and management and internal control should be established.

8. 'Remunerate fairly and responsibly.'

Attention is given to the nature of the remuneration paid so that its composition and size is sufficient and there is a clear connection with the expected level of performance.

United Kingdom

The UK Financial Reporting Council (2010) recognised that '[t]he Code is not a rigid set of rules. It consists of principles (main and supporting) and provisions.' The UK adopted the 'comply or explain' approach as the trademark of corporate governance to ensure flexibility in its interpretation and application. The code addresses the following topics:

1. 'Leadership.'

The board is responsible for the long-term success of the company but needs to distinguish between its board responsibilities and those of the executive in the running of the company's business.

2. 'Effectiveness.'

For the board and its committees to carry out their duties and responsibilities effectively it needs to possess the appropriate mixture of skills, experience, independence and knowledge of the company. Directors should receive an induction on joining, regularly refresh their skills and knowledge, and undertake an evaluation of the board's performance.

3. 'Accountability.'

Part of the board's responsibility, when assessing the company's position and prospects, is to determine 'the nature and extent of the significant risks it is willing to take in achieving its strategic objectives'. They should disclose in a formal and transparent manner their corporate reporting and risk management and internal control principles.

4. 'Remuneration.'

Levels of remuneration should be adequate to attract directors of quality, but not excessive. A significant part of the package should be linked to corporate and individual performance and be determined by transparent policy and procedure.

5. 'Relations with Shareholders.'

It is suggested that the Annual General Meeting (AGM) be used

to communicate with shareholders and seek their participation in the affairs of the company. This can take the form of a dialogue to develop mutual understanding of the organisation's objectives.

United States

In the US, expectations on the board of directors, senior management and the corporation itself are as follows:

1. Provide competent and ethical operation of the corporation on a day-to-day basis.

2. Produce long-term value for shareholders.

3. Develop and implement the corporation's strategic plans, and identify, evaluate and manage the risks inherent in the corporation's strategy.

4. Produce financial statements that fairly present the financial condition.

5. Engage an independent accounting firm to audit the financial statements.

6. Play a leadership role in shaping the governance of the corporation and the composition of the board.

7. Adopt and oversee the implementation of compensation policies aligned with the corporation's long-term strategy.

8. Engage with long-term shareholders in a meaningful way on issues and concerns that are of their widespread interest.

9. Deal with its employees, customers, suppliers and other constituencies in a fair and equitable manner and exemplify the highest standards of corporate citizenship.

There is now external scrutiny over the way companies operate and how they comply with guiding principles of corporate governance. Boards of directors and senior executives have been made accountable and responsible for their decisions and actions. In essence, corporate governance has imposed the responsibility that key decisions are in line with corporate vision, value and strategy, and systems are implemented that dictate how the organisation is directed and controlled. Under corporate governance, objectives that are pursued are in the interests of the organisation and its shareholders/ stakeholders and subjected to risk management.

Across all principles, flexibility is stressed. This is best summarised by the OECD (2004):

The Principles are evolutionary in nature and should be reviewed in light of significant changes in circumstances. To remain competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and grasp new opportunities.

In other words, the principles as such are not intended to be prescriptive by telling organisations exactly what constitutes good governance and how to achieve it. Rather, they provide guidelines for organisations wanting to achieve excellence in corporate governance.

 
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