CORPORATE GOVERNANCE, BUSINESS ETHICS, RISK MANAGEMENT AND INTERNAL CONTROL

Module 1
LCR

INTRODUCTION TO CORPORATE GOVERNANCE

After studying the chapter, you should be able to...
 Describe what governance involves
 Enumerate the different contexts in which governance can be applied
 Name and explain the characteristics of good governance
 Explain the meaning, purpose and objectives of corporate governance
 Know and describe the principles of effective corporate governance
 Understand how the principles of good corporate governance can be applied

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
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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 tie best interest of the whole community and how this can e 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 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 well-being.

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 lights and responsibilities among
different participants in the corporation, such as the board, managers, shareholders, and other stakeholder, 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
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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 a 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 arc 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 m 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 Him s conformance compliance with the basic
principles of good corporate governance:

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A. Transparency and Full Disclosure

 Does the board meet the information needs of investment communities?
 Does it safeguard integrity in financial repotting?
 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 avoided such that the organization's best interests prevail at all
times?
ILLUSTRATIVE APPLICATION OF THE BASIC PRINCIPL CORPORATE GOVERNANCE
AND BEST PRACTICE RECOMMENDATIONS

Principles of Good Corporate Best Practice Recommendations

Governance
1. A company should lay solid foundation 1-a. Formalize and disclose the functions reserved to
for management and oversight. It should the board and those delegated to management.
recognize and publish the respective roles
and responsibilities of board and
management.
2. Structure the board to add value. Have a 2-a. A board should have independent directors.
board of an effective composition, size 2-b. The roles of chairperson and chief
and commitment to adequately discharge Executive officer should not be exercised by the same
its responsibilities and duties. . individual.
2-b. The board should establish a nomination
committee

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3. Promote ethical and responsible 3-a.Establish a code of conduct to guide the directors,
decision- . Making. Actively promote the chief executive officer (or equivalent), the chief
ethical and responsible decision-making. 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. 4-a. Require the chief executive of (or equivalent) and
Have a structure to independently verify the chief financial officer (or equivalent) to state in
and safeguard the integrity of the writing to the board that the company's financial
company's financial reporting. 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. Make timely and balanced disclosure. 5-a. Establish written policies and procedures designed
Promote timely and balanced disclosure to ensure compliance with IFRS.
of all material matters concerning the • 5-b. Listing Rule disclosure requirements and to ensure
company. accountability at a senior management level for
compliance.

6. Respect the rights of shareholders and 6-a. Design and disclose a communications strategy to
facilitate, the effective exercise of those promote effective communication with shareholders
rights. 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.

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7. Recognize and manage risk. Establish a 7-a. The board or appropriate board committee should
sound system of risk oversight and establish policies on risk oversight and management.
management and internal control. 2-a. The chief executive officer (or equivalent) and the
chief financial officer (or equivalent) should state to
the board in writing that:
• 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 policies adopted by the board;
and
• The company's risk management and internal
compliance and control system is operating
efficiently in all material respects.

8. Encourage enhanced performance. Fairly 8-a. Disclose the process for performance evaluation of
review and actively encourage enhanced the board, its committees and individual directors,
board and management effectiveness. and key executives.

9. Remunerate fairly and responsibly. 9-a. Provide disclosure in relation to the company's
Ensure that the level and composition of remuneration policies to enable investors to
remuneration is sufficient and reasonable understand:
and that its relationship to corporate and • The costs and benefits of those policies; and
individual performance is defined. • 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 nonexecutive
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.

(GBE 1) Governance, Business Ethics, Risk Management, and Internal Control

Module 1
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Name: ___________________________________________________________
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Exercise
1. Define corporate governance

2. What does corporate governance structure involve?

3. State the purpose of corporate governance

4. Explain the basic objectives of corporate governance

5. Explain the three basic principles of effective corporate governance

6. What do you think are the benefits of Good Governance to the following:
a) Management and Employees

b) Investors/ Financier

c) Supplier

d) Government

e) The community

Explain whether the following statement is true or false then explain why do you think so?
“Responsiveness usually results to effectiveness and efficiency”

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