CORPORATE GOVERNANCE
Learning Objectives
By the end of the lesson the learner should be able to define corporate governance, understand the
motives of corporate governance, tell and appreciate the role of corporate governance in
shareholder’s wealth maximization.
What is corporate governance?
Corporate governance seek to address the question ‘who is in the best position to make a given
decision about the direction of the organization and does the person have the necessary
authority?’
It is the set/system of rules, practices and processes by which a company is directed and
controlled. It essentially involves balancing the interests of a company’s many stakeholders, such
as shareholders, management, customers, suppliers, financiers, government and community.
Since corporate governance also provides the framework for attaining company’s objectives, it
includes practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.
It can be thought as the set of rules, controls, policies, and resolutions put in place to dictate
corporate behavior. The board of directors is a pivotal in governance and can have major
ramifications for equity valuation.
It is a framework of rules and practices by which a board of directors ensures accountability,
fairness, and transparency in a company’s relationship with all its stakeholders. The CG
framework consist of;
a) Explicit and implicit contracts between the company and stakeholders for the distribution
of responsibilities, rights, and rewards.
b) Procedures for reconciling the sometimes conflicting interest of stakeholders in
accordance with their duties, privileges and roles.
c) Procedures for proper supervision, control, and information flows to serve as a system of
checks and balances.
CORPORATE GOVERNANCE AND THE BOARD OF DIRECTORS
They are the primary direct stakeholders influencing CG. Directors are elected by the
shareholders or appointed by the other board members and they represent shareholders of the
company. They are tasked in making important decisions such as corporate officer’s,
appointment, executive compensation, and dividend policy. In some instances their mandate will
stretch beyond financial optimization, when shareholder resolutions will call for certain social or
environmental concerns to be prioritized. BOD is always made of inside and independent
members. Insiders are major shareholders, founders and executives. Independent directors are
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chosen because of their experience managing and or directing large companies. They are
considered helpful for governance because they dilute the concentration of power and help align
shareholder interest with those of insiders.
They exerts corporate governance over all employees of the company including the CEO and can
fire any of them at any time.
Corporate Governance Seek To:
a) Reduce the conflict of interest between the stakeholders, in accordance with their duties
and powers
b) Make sure that the right people make decisions
c) Create and implement internal organization of the company and define more closely and
represent more presently the interest to which the management should respond to and the
goals towards which they should strive.
d) Ensure that corporate power is exercised to the interest of the society.
e) Ensure that proper management and management structure are in place to achieve long-
term strategic objectives.
f) Make sure that the CG structure functions to maintain the company’s integrity, reputation
and accountability to its relevant constituencies and checks and balances are the basis of
merit for the corporate governance systems.
CORPORATE GOVERNANCE STRUCTURE
Shareholders (AGM)
Auditors Directors (BOD)
Senior Management
Employees
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Shareholders
Appoint directors and auditors and satisfy themselves that an appropriate governance structure is
in place. They are expected to remove directors if unhappy with their actions.
Board of Director
They are the link between the shareholders who provide the capital and the people who use
capital to create value. Their primary role is to monitor and influence the performance of
management on behalf of the shareholders in an informal way.
The functions of the BOD are,
a) Governance of the company
b) Setting the company’s strategic goal
c) Provide leadership and general direction of the company
d) Supervise the management of the business
e) Creating momentum movement, improvement and direction
f) Report to the shareholders on their stewardship
g) Representing the interest of the shareholders and that of the society
Why has the BOD failed to protect the interests of the shareholders?
Do they effectively oversee the management?
Auditors
Provide the shareholders with an external and objective check on the company’s financial
statements which forms the basis of their report to shareholders.
Management
Comprises of the CEO and senior management team. Their primary role is performance
A major challenge addressed by corporate governance is how to grant managers too
much discretionary power over the conduct of the business while holding them
accountable for the use of power
Balancing the two is essential to ensure that the decisions made by management are in the
long term interests of the shareholders
Specific management practices that have been found to improve corporate performance
Why is there keen interest on CG lately?
Advantages of Good Corporate Governance
a) Protects investor’s interest
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b) Promotes corporate growth; enhances corporate performance, capital formation and
maximization of shareholders wealth
c) Promotes standards of self-regulations
d) Greater investors’ confidence and access to capital
e) Lead to less cost of litigation by investors and substantial compensation payments
f) Enhances efficient and effective use of capital by management
g) It provides greater loyalty from stakeholders
h) Creates a mechanism that selects monitors and replaces the managers in a timely manner
i) Enhances corporate image and positive reputation of the company
j) Leads to greater access to financial markets
Corporate Governance Guideline by Capital Market Authority (CMA)
Audit committees; Consisting of at least 3 independent non-executive directors who shall report
to the board. The committee has written terms of reference which deal clearly with its authority
and duties.
Director’ remuneration; their package should be competitive and comparable to similar firms so
as to retain the best directors and to ensure decisions made are not affected by inadequate supply
of information. Relevant, accurate and timely information should always be provided.
Directors; The BOD should assume a primary role of fostering the long term business of the
corporation consistent with their fiduciary responsibility to shareholders.
Board Balance; the composition of the BOD should be as such that at least one third of the
members are non-executive directors.
Appointment to the Board; A formal and transparent system of appointment should be in place.
Re-Election of Directors; this should happen at least every three years and no directors should
be allowed to continue serving if his contribution is not adding value.
Remuneration Committee; The BOD should appoint a remuneration committees consisting of
independent non- executive directors with a mandate to recommend to the board the
remuneration of the executive directors and structure of their compensation package.
Corporate Governance and Investor protection
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