INTORDUCTION: CORPORATE GOVERNANCE AND

BUSINESS ETHICS

Dr Stephen Nhuta
Graduate School of Business Leadership
Midlands State University
 STRUCTURE
▪ Share Holders (majority and minority)
▪ Company Formation(Articles and Memorandum of Association)
▪ Agency Theory
▪ Board of Directors (Non Executive, Executive, CEO, Company Secretary}
▪ Board Committees (Audit, remuneration/Compensation, HR, Risk etc.)
▪ Chief Executive Officer (COO, Managing Director, General Manager)
▪ Executive Management (HR Director, Marketing Director, Finance Director, Company Sec etc.)
▪ Employees
▪ Customers
▪ Community
▪ Government
▪ Creditors
▪ Environment
 WHAT IS CORPORATE GOVERNANCE
❑ The root of the word Governance is from ‘gubernate’, which means to steer. Corporate governance would
mean to steer an organization in the desired direction.
❑ The responsibility to steer lies with the board of directors/ governing board.
Corporate or a Corporation is derived from Latin term “corpus” which means a “body”. Governance means
administering the processes and systems placed for satisfying stakeholder expectation.
❑ It is concerned with structures & processes associated with management, decision-making & control in
organizations (King)
❑ Include the structures, processes, cultures and systems that engender the successful operation of
organizations ( Keasey et al)
❑ The Organization for Economic Co-operation and Development (OECD) “Corporate governance is a system
through which business companies are managed and controlled. The structure of corporate governance
defines the division of rights and duties between the individual stakeholders in a company and lays down
detailed rules and procedures for the decision-making on business matters of a company. On this basis a
structure is created that establishes the company goals and the means of reaching the goals and
monitoring performance“.
❑ Ways of bringing the interest of investors & managers into line &ensuring that firms are run for the benefit
 WHAT IS CORPORATE GOVERNANCE
❑ The classic definition of the context of the UK Code:
“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.
❑ Narayana Murthy
“The primary purpose of corporate leadership is to create wealth legally and ethically. This translates
to bringing a high level of satisfaction to five constituencies - customers, employees, investors,
vendors and the society-at-large. The raison d'être of every corporate body is to ensure predictability,
sustainability and profitability of revenues year after year”.
❑
 DEFINITIONS OF CORPORATE
GOVERNANCE
❑ The corporate governance framework consists of :
“Corporate
✔ explicitgovernance
and implicit involves a set of the
contracts between relationships
company and between
the stakeholders for
adistribution
company’s of management,
responsibilities,its board,
rights, andits shareholders and
rewards
other stakeholders. Corporate governance also provides the
✔ procedures for reconciling the sometimes conflicting interests of
structure throughinwhich
stakeholders the objectives
accordance with their of the company
duties, privileges, are
andset,
roles
and the means of attaining those objectives and monitoring
✔ procedures for proper supervision, control, and information flows to serve as
a system of checks and balances performance are determined.”
❑
OECD Corporate Governance Principles, 2004
 WHAT IS CORPORATE GOVERNANCE

What do we learn from the above definitions

▪ the mix of laws, regulations, board decisions and high level policies that influence the way a
company is managed.
▪ ensure a company's economic efficiency and reduce the risk that senior managers will seek to
enrich themselves in the short term at the expense of the company’s overall health
▪ deals with environmental issues
▪ covers the responsiveness of the board of directors to the wishes and the needs of the
stakeholders.
▪ the mechanisms, processes and relations by which corporations are controlled and directed.
Governance structures and principles identify the distribution of rights and responsibilities among
different participants in the corporation (such as the board of directors, managers, shareholders,
creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for
making decisions in corporate affairs
 WHAT IS CORPORATE GOVERNANCE
What do we learn from the above definitions continued
❑ Corporate Governance means a set of systems procedures, policies, practices, standards put in place
by a
corporate to ensure that relationship with various stakeholders is maintained in transparent and hon
est manner
❑ The heart of corporate governance is transparency, disclosure, accountability and integrity. It is to be
borne in mind that mere legislation does not ensure good governance. Good governance flows from
ethical business practices even when there is no legislation.
❑ The common understanding of corporate governance is often narrowly confined to the structure and
functioning of the board and the rights of shareholders in corporate decision-making (Monks and
Minow, 2001; Clarke, 2007)
❑ With the earlier widened definitions, we may divide the governance of the corporation into four
levels of legal, cultural and institutional arrangements, including regulatory governance, market
governance, stakeholder governance and internal (or shareholder) governance
❑ Unlike popular perception, Corporate Governance is not merely ensuring adherence to a set of rules.
It is also not about smart brand-building exercises to manage "perceptions." It is less about policing
 WHY RECENT INTEREST IN C.G.

❑ Corporate directors’ duties have expanded beyond traditional legal responsibility of duty of
loyalty to the corporation and its shareholders.
❑ The wave of dismissal of CEOs e.g. IBM, Kodak Honeywell (in the US), massive bankruptcies
and criminal malfeasance of Enron and WorldCom in the early 2000s gave CG considerable
press attention creating a wave of institutional shareholder activism
❑ Zimbabwe financial shenanigans in the banking sector
❑ A company is a congregation of various stakeholders, namely, customers, employees,
investors, vendor partners, government and society hence it should be fair and transparent to
its stakeholders in all its transactions.
❑ With the advent of globalization, our corporate world requires a world-class governance
system promoting compliance of the law in letter and in spirit, transparency, accountability
and fulfilling the fair expectations of all the stakeholders.
❑ Unless a corporation embraces and demonstrates ethical conduct, it will not be able to
succeed, hence corporate governance is one such tool to achieve this goal.
 WHY RECENT INTEREST IN C.G.
❑ Good corporate governance requires that the board must govern the corporation with
integrity, be accountable to the stakeholders of the corporation for achieving the corporate
objectives
❑ The conduct of the board in regard to factors such as business ethics and the environment
have an impact on legitimate societal interests (stakeholders) and thereby influence the
reputation and long-term interests of the business enterprise
❑ Corporate Governance is not just a legal compliance but a need to balance between
economic and social goals while promoting corporate fairness, transparency, accountability
and ethicalness.
 CORPORATE WRONGS OVER THE RECENT PAST
❑ The investment world has seen large number of scandals relating to or attributed to failure of
corporate governance. These were caused by a combination of factors namely :
❑ Company managers/directors lost sense of business/corporate ethics
❑ Earnings became measure of company success leading to unethical practices (creative accounting,
falsifying books etc)
❑ Boards ineffective and playing into the hands of executive directors
❑ Managers awarding themselves big bonuses and stock options at the expense of other stakeholders
❑ Companies concentrated on short term gains sacrificing long term objectives
❑ Auditors colluded with Executive Directors, surrendering their independence in the process and
benefitting higher audit fees
❑ Culture of greed among senior managers creating disparity in remuneration between higher and lower
employees to uncomfortable levels.
 MAJOR CORPORATE TRAGEDIES ARISING FROM
POOR CORPORATE GOVERNACE
Parmalat
The dairy company was formed in 1961 by 22 year old Calisto Tanzi
Calisto Tanzi, began expanding the business shortly after his father’s death in 1961, transforming
it from a small sausage and cheese shop into an international food and beverage concern. It
grew into a powerful multi national, financing acquisitions by taking on huge debts
Along the way, he formed close relationships with the Christian Democrats, who governed Italy
throughout the postwar period
Parmalat then became a leading producer of such items as pasteurized milk, cheese, yogurt,
cookies, juice and iced tea, most of which are sold under a variety of names in different countries
❑ Tanzi secretly siphoned off at least 500 million euros ($630 million) from Parmalat to a family
owned subsidiary
❑ He also set up numerous shell companies to generate fake profits for Parmalat and subsidiaries
 MAJOR CORPORATE TRAGEDIES ARISING FROM POOR
CORPORATE GOVERNACE
❑ Parmalat’s finance director, Fausto Tonna, participated in a “cut and paste” forgery, in which a document
with Bank of America letterhead was scanned and then added to a document verifying a deposit account
with that bank holding over $4.98 billion. The document was then passed through a fax machine several
times in order to appear authentic
❑ Tanzi, 71, had already been given a 10-year sentence for stock market manipulation
❑ The firm changed its outside auditor in 1999 from the up-and coming firm Grant Thornton to DeLoitte and
Touche, one of the “big four” auditing companies. Grant Thornton, which had been struggling for years to
compete against giant multinational firms, was desperate to keep one of its most valuable and high-profile
clients. Rather than lose Parmalat, the accounting firm suggested that Parmalat spin off its travel concern
and a few other businesses, and allow these to remain under its watch
✔ Parmalat then used the spun off concerns to generate illicit payments to the parent firm
✔ The executives created debts owed to Parmalat by the subsidiaries, and the latter would create false
accounts from which to pay the debts.
✔ Grant Thornton accountants then presented records of these transactions to DeLoitte accountants, who
rubber-stamped most of them
 MAJOR CORPORATE TRAGEDIES ARIS ING FROM
POOR CORPORATE GOVERNACE
Renaissance
❑ RMB as at December 31, 2010, reported core capital of about US$4,43 million which was
significantly lower than prescribed minimum capital requirement of US$10 million required for
merchant banks
❑ Investigations showed that executive management at the bank controlled close to 90 percent of
the institution, in violation of banking regulations, which limits an individual and his related
interests in a bank to 25 percent
❑ Mr Timba himself had direct and indirect shareholding amounting to 44,7 percent while RFHL has
direct and indirect shareholding amounting to 24,2 percent
❑ Major shareholders maintained their stake in the bank through schemes that involved borrowed
funds and abuse of deposits. It was also discovered that the bank bought back some of its shares
using depositors funds in violation of Section 32 of the Banking Act
 EXECUTIVE COMPANSATION
❑ Executive compensation, with the forms of base salary, bonus, stock options, restricted share plans
(stock grants), pension and other benefits (car, healthcare etc.), was a highly controversial subject
that has attracted the attention of regulators, media and academics
❑ Criticisms
✔ the level of executive pay
✔ its relationship with company performance
✔ the failure of executive pay setting (e.g. board of directors, compensation committees) to stop this
managerial excess
❑ Agency problems are likely to exist where a separation of ownership and control takes place between
three parties: the shareholders/owners, the board of directors and executives/managers of the
company
❑ The shareholders own the company, the board of directors have the responsibility to control the
decision making process on behalf of the shareholders/owners and the executives are responsible to
check the daily decision making process
 EXECUTIVE COMPANSATION

❑ There is a possibility that managers can use the company’s assets to enhance their own lifestyles by
taking advantage of their control power to satisfy their personal needs such as living a luxury life
with expensive cars and personal trips while leaving the cost to fall on the shareholders
❑ The implementation of share options was meant to be a corporate governance mechanism, believing
that executive pay could solve the agency problems by influencing the self interested manager to
adopt investment policies that may increase the shareholders’ wealth
❑ It was also believed that executive pay was the rescue from agency problems hoping for a better
economy with more honest and trustworthy relations between executives, shareholders and general
public
❑ The agency problem is confirmed by the fact that executives continue to take advantage of their
position and act fraudulently to achieve high executive compensations
❑ Additionally, a spate of unexpected company failures, financial scandals and examples of ‘corporate
excesses’, such as high pay awards to the executives of poorly performing companies threatened to
undermine investor confidence
 EXECUTIVE COMPANSATION

❑ Accounting scandals of well-known companies, such as Enron, WorldCom, , General Electric (GE),
Royal Bank of Zimbabwe, revealed the problematic side of executive remuneration
❑ Lessons have been taken regarding the shareholders as principals and executives as agents where
there is no alignment between their interests and as a result, the performance-based pay for
executives exacerbates the agency problems
❑ The use of executive pay schemes as a solution to align agent principal’s interests was ‘an illusion’
hence executive compensation is viewed not only as a potential instrument for addressing the
agency problem but also as part of the agency problem itself
❑ earnings manipulation by executives, specifically CFOs, plays a significant role in the ‘true and fair
view’ of company’s financial statements.
❑ By cooking the books, executives change the numbers of financial statements in terms of their
own preferences to show higher profits and at the end, to get higher executive compensation
 EXECUTIVE COMPANSATION
❑ Stock options have faced difficulties on the alignment of managerial incentives with shareholders
goals.
❑ Due to the combination of stock price appreciation and dividends on shareholder returns, CEO
increases dividends in favour of using the cash aiming to increase the stock price
❑ The performance based pay was criticized negatively arguing that the problem of executive
remuneration was not the high levels of compensations received by CEOs but the fact that their
compensation was not related to companies’ performance
❑ In addition, after their retirement, executives receive a compensation, characterized as ‘Gratuitous
Goodbye Payments’ where they can live a luxury life receiving retirement packages with huge
amount of money and free access to corporate jets, apartments and other benefits
❑ A significant interest in executive compensation and corporate governance can be observed due to
the prevailing financial climate, the financial collapses of well-known firms and the accusation of
rewards for failure and a lack of accountability
❑ The huge amounts of executive pays drive the corporate governance to erosion sending the
message that boards of directors spend shareholders’ money lavishly and without the appropriate
supervision
 ZIMBABWEAN EXAMPLES
Zimbabwe Broadcasting Corporation SAGA
❑ Remuneration was the Zimbabwe Broadcasting Corporation saga where it was revealed
through public media that the ZBC bosses were pocketing hefty salaries
✔ The CEO was alleged to be getting $44 500 per month amid revelations that the ordinary ZBC
employees had spend 7 months without receiving their salaries
✔ The General Manager for ZBC was also cited as getting $26 876
✔ General Manager News and General Manager Radio Services also alleged to be pocketing $26
876 each (Herald 23 January 2014)
✔ Allegations were also leveled against these Parastatals bosses for bribing ministers with top of
the range vehicles such as Mercedes Benz and Toyota Land cruisers as well as fuel and airtime
over and above their official government allocations
❑ This resulted in the suspension of CEO and his managers, and eventually the dissolving of the
ZBC board
❑ Such practices exposed a serious deficiency on good stewardship and leadership of parastatals,
a situation that damages credibility on the government
     
 ZIMBABWEAN EXAMPLES
Public Service Medical Aid Society (PSMAS)
❑ There were revelation that the Public Service Medical Aid Society was paying its Chief Executive Officer
half a million dollars ($500.000) a month in salary and benefits
❑ The above salary and allowances were being paid against the background of PSMAS failing to meet its
obligations to contributors and was debt ridden to the tune of $38 million (Herald 24 January 2014)
❑ Top management for Premier Service Medical Aid Society (PSMAS) were alleged to be gobbling US$1
million in basic monthly salaries
❑ The PSMAS annual wage bill rose from US$15 547 171 in 2011 to US$33 413 373 in 2012, almost half of
which was paid to the top 14 managers
❑ Shockingly revelations suggested that the CEO approved a lump sum payments of US$300 000 for each
of the group executives, and these payments were to be made with arrears subscriptions recovered
from the private sector
❑ The most painful fact is that all these practices were happening at a time when the society was failing
to pay doctors and other debtors.
 ZIMBABWEAN EXAMPLES
Air Zimbabwe
❑ The governing body, chief executive and other senior managers should conduct themselves, in
accordance with high standards of behaviour, as role models to others
❑ In contrast Air Zimbabwe for the past decade has been performing badly a situation that resulted in
the airline line retrenching more than half of its employees
❑ Revelations suggest that Air Zimbabwe executives allegedly dabbled in corrupt activities including
$11million insurance scam, which resulted in the national airliner failing to meet its national
mandate
❑ Air Zimbabwe allegedly suffered an actual prejudice of US$1 298 827,88 and €5 895 695,90,”
❑ The Legal Officer appointed Navistar as Airzim’s aviation insurance brokers on March 18, 2009
without following the procedures prescribed by law and company policy
❑ She equally authorized payment of a fraudulent invoices valued at US$142 300 from Navistar,
thereby prejudicing the already struggling airline.
❑ As if not enough she authorized a debit notes from Navistar amounting to US$1 062 370, 52 for
aviation insurance cover for two A320 Airbuses from November 2011 to April 3, 2012
 ZIMBABWEAN EXAMPLES

Harare City Council

❑ Harare City council, is seen as lacking good leadership
❑ Senior managers were also giving themselves hefty salaries against a backdrop of poor service
delivery
❑ The roads need proper maintenance with the sewer system extremely bad
❑ Garbage and refuse collection is currently posing a health threat, yet instead of focusing on
service delivery the senior executives were busy spending a lot of cash and other benefits
❑ Water has been a real problem in Harare and management chose to have a blind eye
❑ Town clerk $37,000 Directors Housing/water $ 36,000. Chamber secretary$34,000
Source Herald 23 January 2014
 FAILURES OF CORPORATE GOVERNANCE

❑ Regulatory governance refers to the public order and control over corporations by state statutes,
governmental and professional bodies’ regulations, and government policies.
❑ Market governance is the use of various market mechanisms (such as supply and demand, price
signal, free competition, market entrance and exit, market contract and market bid) to control
and discipline corporate behaviour and action
❑ Stakeholder governance is the direct and indirect control or influence over corporate business,
decision-making and corporate behaviour by key stakeholder groups who have direct or indirect
interests in the corporation
❑ Internal corporate governance is the institutional arrangement of checks and balances among the
shareholder general meeting, the board of directors and management within the corporation,
prescribed by corporate laws and corporate internal rules
 FAILURES OF CORPORATE GOVERNANCE

❑ The concept of corporate governance in the first and second views (Regulatory/market) is
restricted to the internal level of corporate governance, such as board independence, executive
compensation and the exercise of shareholder rights. Such an understanding of corporate
governance does not include the external regulatory, market and stakeholder governance and
control over the corporation
❑ A systemic failure of corporate governance means the failure of the whole set of regulatory,
market, stakeholder and internal governance
Regulatory governance failure
❑ A regulatory failure in governing financial companies before the financial crisis was manifested in
substantial deregulation and lack of regulation in the finance industry
❑ ‘There must be a strict supervision of all banking and credits and investments; there must be an
end to speculation with other people’s money’ (Rosenman, 1938, p. 14).
 FAILURES OF CORPORATE GOVERNANCE
Market governance failure
❑ The claim that the market is the most efficient and rational way of allocating resources,
monitoring corporations and disciplining corporate underperformance and misbehavior has
been advocated and promoted by neoclassical economists and modern finance theorists.
❑ However the optimal market governance hypothesis does not work well in practice. In capital
market, for instance, the share prices of many corporations did not reflect the managerial
inefficiencies.
❑ Information failure is inherently embedded in a ‘complex system’ of financial markets where
price volatility and liquidity were nonlinear functions of patterns arising from the interactive
behaviour of many independent and constantly adapting market participants (Schwarcz,
2011).
 FAILURES OF CORPORATE GOVERNANCE
Stakeholder governance failure
❑ Stakeholder governance is typically seen in German and Japanese corporations where banks,
employees, suppliers and major customers exert significant influence on corporate decision making
through specific institutional arrangements.
❑ However, there is no formal stakeholder governance system and structure established hence
corporate governance system failed due to the absence of stakeholder involvement in corporate
governance
Internal governance failure
❑ The triple relationship between shareholders, the boardroom and management has been broken
since the separation of ownership from control .
❑ Shareholders are largely reluctant to monitor corporations and passive in attending shareholder
general meetings. Both institutional and individual shareholders do not behave like owners (Monks,
2011).
❑ The issues of board incompetence and lack of independence as well as CEO dominance and abuse of
power have long been concerned, but unsolved (Sun, 2009).
 GOALS OF CORPORATE GOVERNANCE

❑ Improve access to capital, encouraging new investment, boosting economic growth, and providing
employment.
❑ Safeguard against mismanagement
❑ Make companies more accountable and transparent to investors
❑ Enforce ethical Behavior through ethics and integrity
❑ To clearly explain to the board, the stakeholders, and the shareholders what their duties and
responsibilities are within the company
❑ Mitigates/reduces amount of risk involved thereby preventing scandals, fraud and criminal liability
of the company
❑ It is a form of self-policing
 GOALS OF CORPORATE GOVERNANCE

❑ Sustainable development of all stakeholder/Ensure growth of all individuals associated with or

effected by the enterprise on sustainable basis
❑ Effective management and distribution of wealth/Ensure that enterprise creates maximum wealth
and judiciously uses the wealth so created for providing maximum benefits to all stakeholders an
d enhancing its wealth creation capabilities to maintain sustainability.
❑ Discharge of social responsibility: Ensure that enterprise is acceptable to the society in which it is
functioning.
❑ Application of best management practices/Ensure excellence in functioning of enterprise
and optimum creation of wealth on sustainable basis.
❑ Compliance of law in letter and spirit/Ensure value enhancement for all stakeholders guaranteed
by the law for maintaining socio-economic balance.
❑ Adherence to ethical standards: Ensure integrity, transparency, independence and accountability
❑ in dealings with all stakeholders.
 SIGNIFICANCE OF CORPORATE GOVERNANCE

❑ Specifies relationship among stakeholders and mitigates conflict of interest

❑ Ensures strategic decisions are made effectively
❑ Establish order between the firm’s owners and its top-level managers
❑ Provides system by which corporations are directed and controlled.
❑ Specifies the distribution of rights/responsibilities of: Shareholders, board of directors, managers,
creditors, auditors, regulators, other stakeholders
❑ Specifies the rules and procedures
❑ Provides the structure
❑ Mechanism for monitoring the actions, policies and decisions of corporations
❑ Alignment of interests among the stakeholders
❑ Nature and extent of corporate accountability
 SIGNIFICANCE OF CORPORATE GOVERNANCE

❑ Good corporate governance builds a transparent, efficient and fair system of decision making.
Transparency, independence and absence of conflicts of interest are the main ingredients of good
governance
❑ Encourages companies to create value and to minimize problems and optimize performance and
accountability (Wright Cui)
❑ If properly applied it can become an important competitive advantage used to maximize a company's
performance, and increases potential for capital investment.
❑ Corporate governance remains an essential ingredient for nurturing long-term trust between business and
stakeholders
❑ It improves strategic thinking at the top by inducting independent directors who bring a wealth of
experience, and a host of new ideas
Take Note that Corporate Governance is not a guarantee against failure. Practice of good Corporate
Governance is a journey not a destination.
 SIGNIFICANCE OF CORPORATE GOVERNANCE

▪ Owners can not easily observe the corporate officers who are managing the
owners’ investment
▪ Board of Directors have failed to provide proper checks and balances
▪ Markets have stirred distrust instead of building confidence (e.g. Enron)
▪ Rules for Board of Directors
 OBJECTIVES OF CORPORATE GOVERNANCE

Ensure that a properly structured Board capable of taking independent and objective decisions is in
place at the helm of affairs
Ensure that the Board is balanced as regards the representation of adequate number of
non-executive who will take care of the interests and well-being of the independent directors and all
the stakeholders
That the Board adopts transparent procedures and practices and arrives at decisions on the strength
of adequate information
That the Board has an effective machinery to sub serve the concerns of stakeholders
That the Board keeps the shareholders informed of relevant developments impacting the company
That the Board effectively and regularly monitors the functioning of the management team, and
That the Board remains in effective control of the affairs of the company at all times
FACTORS INFLUENCING QUALITY OF CORPORATE
GOVERNANCE

The quality of economic, regulatory, fiscal, institutional and, judicial structures

The quality of a country’s legal traditions and institutions impacts on prospects for economic
and financial development, through the enforcement of contracts, and property rights.
A group in power does design policies and institutions that guarantee self-entrenchment and
self-enrichment at the expense of financial deepening and financial development.
Centralized or autocratic political systems will, in contrast, tend to be intolerant of competition,
transparency and accountability and are, therefore, bound to retard rather than encourage
financial development
Ability of the board and Commitment level of individual board members
Adequacy of the process and Quality of corporate reporting
 ELEMENTS OF GOOD CORORATE GOVERNANCE

❑ Role and powers of Board: The absence of clearly designated role and powers of Board
weakens accountability mechanism and threatens the achievement of organizational goals.
Therefore, the foremost requirement of good
governance is the clear identification of powers, roles, responsibilities and accountability of the Board,
CEO, and the Chairman of the Board. The role of the Board should be clearly documented in a Board Charter.
❑ Legislation: Clear and unambiguous legislation and regulations are fundamental to effective corporate
governance.
❑ Management environment: Management environment includes:
✔ setting-up of clear objectives and appropriate ethical framework
✔ establishing due processes, providing for transparency and clear enunciation of responsibility and accountability
✔ implementing sound business planning, encouraging business risk assessment, having
right people and right skill for the jobs
✔ establishing clear boundaries for acceptable behaviour
✔ establishing performance evaluation measures and evaluating performance and sufficiently
recognizing individual and group contribution.
 ELEMENTS OF GOOD CORORATE GOVERNANCE

❑ Board skills:
To be able to undertake its functions efficiently and effectively, the Board must possess the necessary
blend of qualities, skills, knowledge and experience. Each of the directors should make quality
contribution.
❑ Board appointments:
To ensure that the most competent people are appointed in the Board, the Board positions should be
filled through the process of extensive search. Appointment mechanism should satisfy all statutory and
administrative requirements. High on the priority should be an understanding of skill
requirements of the Board particularly at the time of making a choice for appointing a new director.
❑ Board induction and training:
Directors must have a broad understanding of the area of operation of the company’s business,
corporate strategy and challenges being faced by the Board.
❑ Board independence: Independent Board is essential for sound corporate governance. This goal
may be achieved by
associating sufficient number of independent directors with the Board. Independence of directors
 ELEMENTS OF GOOD CORORATE GOVERNANCE
Board meetings: Directors must devote sufficient time and give due attention to meet their obligations
. Attending
Board meetings regularly and preparing thoroughly before entering the Boardroom increases the
quality of interaction at Board meetings.
Code of conduct: It is essential that the organization’s explicitly prescribed norms of ethical practices
and code of
conduct are communicated to all stakeholders and are clearly understood and followed by each
member of the organization. Systems should be in place to periodically measure, evaluate and if
possible recognise the adherence to code of conduct.
Strategy setting:
The objectives of the company must be clearly documented in a long-term corporate strategy
including an annual business plan together with achievable and measurable performance targets
and milestones.
Business and community obligations:
Though basic activity of a business entity is inherently commercial yet it must also take care of
community’s obligations.
Financial and operational reporting:
The reports and information provided by the management must be comprehensive but not so
 ELEMENTS OF GOOD CORORATE GOVERNANCE

Monitoring the Board performance: The Board must monitor and evaluate its
combined performance and also that of individual
directors at periodic intervals, using key performance indicators besides peer review. The Board
should establish an appropriate mechanism for reporting the results of Board’s
performance evaluation.
Audit Committees: The Audit Committee is inter alia responsible for internal and statutory
auditors, reviewing the adequacy of internal control and compliance with significant
policies and procedures, reporting to the Board on the key issues. The quality of Audit Committe
e significantly contributes to the governance of the company.
Risk management:
Risk is an important element of corporate functioning and governance. There should be a clearly
established process of identifying, analysing and treating risks, which could prevent the company
from effectively achieving its objectives. Appropriate control procedures in the form of a
risk management plan must be put in place to manage risk throughout the organization.
CORPORATE GOVERNANCE AND BUSINESS
ETHICS

A COMPANY
By
Dr Stephen Nhuta
Graduate School of Business Leadership - MSU
 WHAT IS A COMPANY

❑ A voluntary association formed and organized to carry on a business.

❑ A legal person which has capacity and powers to act on its own

❑ An "artificial person", invisible, intangible, created by or under Law,

❑ A legal entity

❑ It is not affected by the death, insanity or insolvency of an individual member

❑ Types of companies include sole proprietorship, partnership, limited liability, corporation,

and public limited company
 TYPES OF COMPANIES

Private companies limited by shares

❑ Limited by shares & must have the word 'Limited‘(Ltd) at the end of its name.
❑ Advantage of trading through a limited company is to have limited liability.
❑ There is no minimum capital requirement for a private company
❑ A private company may not offer shares or debentures to the public
Public Limited Companies (PLC)
❑ Must have a minimum share capital of which at least one-quarter plus any share premium must be paid
up before the company can obtain its trading certificate
❑ May raise capital by offering securities (shares or debentures) to the public, done by obtaining a listing
on the Stock Exchange
❑ Subject to more stringent legal requirements than private companies but or not limited to share capital,
directors and accounts.
.
 TYPES OF COMPANIES

❑ Companies Limited by Guarantee

❑ Private company, but it does not have a share capital.

❑ Widely used for charities, clubs, community enterprises &co-operatives.

❑ There are no shares & so no shareholders

❑ Members meet and control the company through general meetings.

❑ The directors are often called a management committee or council of management

❑ The articles state that the members guarantee to pay its debts, but only up to a fixed amount
each
 TYPES OF COMPANIES

Unlimited companies
❑ Private firm i.e. sole proprietorship or general partnership whose owner accept personal and
unlimited liability for its debts and obligations
❑ Unlimited liability firms are exempt from filing their annual accounts with a public authority
(such as Registrar Of Companies)
If the company needs money to pay its debts it calls on its shareholders to contribute a fixed
amount on each share held by them.
This type of company is suitable for a business where the risk of insolvency is very low or
non-existent
 WHAT IS A BUSINESS
Features of Business H
▪ There is exchange of goods and services
▪ Profit is the main objective
▪ Business skills are required for economic success
▪ There are risks and uncertainties involved.
▪ Parties involved are the buyer and seller
▪ There are production processes involved
▪ Marketing and distribution of goods has to take place
▪ Transactions in consumer goods and services
▪ Ultimately there has to be satisfaction of human wants and other social obligations
 DIFFERENCES BETWEEN A COMPANY AND A
BUSINESS
▪ A company is a legal entity created through incorporation/other legal means whereas a business
is a way of making money.
▪ You do not have to be a company to run a business
▪ A business structure does not allow for corporate tax rates. The proprietor is personally taxed on
all income
▪ A company is a business, but a business is not really a company. If you are engaged in an activity
that earns you money on a continuous basis, you are said to be doing business even if you are not
a registered company
▪ You do not have to register yourself as a company or any other legal entity to have a legal
sanctity for your business.
 DIFFERENCES BETWEEN A COMPANY AND A
BUSINESS

❑ It’s less troublesome to launch a business than get it registered as a company

❑ Setting up a company is a costly affair and you can structure it legally as a separate entity
than its owner.
❑ In a business you are liable for the debts but when you have got the business registered as a
company, you have a limited liability
❑ Core difference comes down to the legal and financial structures.
❑ Company has shareholders, who own the company, and directors, who run the company
 COMPANY REQUIREMENTS
Memorandum of Association
❑ A Memorandum of Association (MOA) is a legal document prepared in the formation and
registration process of a limited liability company to define its relationship with shareholders
❑ It contains the fundamental conditions upon which the company is allowed to operate.
❑ States the company's name; the registered office address & the company objects, share capital
& what the company can & can't do.
❑ It is the company’s charter that governs the relationship between the company and the outside
❑ Does not restrict what a company is permitted to do. Restrictions should form part of the
articles of association
❑ The signatories to the MOA are deemed to be the first Directors of the Co.
❑ States the nature of business or businesses which the company is authorized to engage in
❑ States whether the company is private or public
❑ States the names & addresses of subscribers to the MOA & the number of shares subscribed
 COMPANY REQUIREMENTS
Articles of Association

❑ The articles of association is a document that specifies the regulations for a company's
operations, and they define the company's purpose and lay out how tasks are to be
accomplished within the organization, including the process for appointing directors and how
financial records will be handled.

❑ Describes the conduct expected from the directors, governs administrative matters

❑ Sets out the rules for the running of the company's internal affairs

❑ States the arrangement between the members of a company; the management and employee
relationship

❑ Regulates the right, duties and obligations between the members and between the members
and the company, and company’s internal affairs
 COMPANY REQUIREMENTS
Articles of Association continued
❑ Typically, the articles of association need to cover the distinct rules and regulations about the
following:
✔ General administrative provisions
✔ Financial accountability of members of the company
✔ Powers of company directors
✔ Selection and dismissal of directors
✔ Dispersal of company profits
✔ Responsibilities and powers of members
✔ Issue and transfer of shares
❑ Articles of association often identify the manner in which a company will issue stock shares, pay
dividends and audit financial records and power of voting rights. This set of rules can be
considered a user's manual for the company because they outline the methodology for
accomplishing the day-to-day tasks that must be completed.
 COMPANY REQUIREMENTS

Articles of association continued:

❑ States the share capital, classes of shares, the rights attached to each type of share and the
transmission of shares on death or bankruptcy
❑ States directors names , powers, duties, their rotation & removal.
❑ Indicates meetings of the company, their notice & how convened
❑ Shows the seal of the company, either common seal or official seal

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