Governance, Business Ethics, Risk Management

& Internal Control

CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

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.
➢ It 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.

CHARACTERISTICS OF GOOD GOVERNANCE

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
➢ 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.
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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

Consensus Oriented
➢ Good governance requires mediation of the different interests
in society to reach a broad consensus on what is in the best interest of
the whole community and how this can be achieved. This can only
result from an understanding of the historical, cultural and social
contexts of a given society or community.

Equity & 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 & 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 environments.

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. 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
➢ 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.
➢ Its structure specifies the distribution of rights and responsibilities
among different participants in the corporation. By doing this, it also
provides the structure through which the objectives are set and the
means of attaining those objectives and monitoring performance.
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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

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 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.

BASIC OBJECTIVES OF CORPORATE GOVERNANCE

1. Fair and Equitable Treatment of Shareholders o 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 o 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.

is 3. Increase Shareholders’ to protect the long- term

Wealth interests of the
o Another corporate governance’s main shareholders. Firms with
objective strong corporate
governance structure are
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 in a company.

4. Transparency and Full Disclosure o Good corporate governance aims at ensuring a

higher degree of transparency in an organization by encouraging full disclosure of
transactions in the company accounts.
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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

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
longterm earning potential as well as actual short-term earnings and holds directors
accountable for their stewardship of the business.

THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE AND BEST PRACTI

CE
RECOMMENDATIO
NS

1. A company should lay solid foundation for management and oversight. It should
recognize and publish the respective roles and responsibilities of board and
management.

a. Formalize and disclose the functions reserved to the board and

those delegated to management.

2. Structure the board to add value. Have a board of an effective composition, size and
commitment to adequately discharge its responsibilities and duties.

a. A board should have independent directors

b. The roles of chairperson and chief executive officer should not
be exercised by the same individual.
c. The board should establish a nomination committee

3. Promote ethical and responsible decision- making. Actively promote ethical and
responsible decision-making.
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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

a. Establish a code of conduct to guide the directors, the chief

executive officer (or equivalent), the chief 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
b. Disclose the policy concerning trading in company securities by
directors, officers and employees.

4. Safeguard integrity in financial reporting. Have a structure to independently verify

and safeguard the integrity of the company's financial reporting.

a. Require the chief executive of (or equivalent) and the chief

financial officer (or equivalent) to state in writing to the board
that the company's financial 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.
b. The board should establish an audit committee.
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. Promote timely and balanced disclosure of all
material matters concerning the company.

a. Establish written policies and procedures designed to ensure

compliance with IFRS
b. Listing Rule disclosure requirements and to ensure
accountability at a senior management level for compliance.

6. Respect the rights of shareholders and facilitate the effective exercise of those rights.

a. Design and disclose a communications strategy to promote

effective communication with shareholders and encourage
effective participation at general meetings.
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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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

7. Recognize and manage risk. Establish a sound system of risk oversight and
management and internal control.

a. The board or appropriate board committee should establish

policies on risk oversight and management.
b. 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
intermal 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 review and actively encourage enhanced

board and management effectiveness.

a. Disclose the process for performance evaluation of the board, its

committees and individual directors, and key executives

9. Remunerate fairly and responsibly. Ensure that the level and composition of
remuneration is sufficient and reasonable and that its relationship to corporate and
individual performance is defined.

b. Provide disclosure in relation to the company's remuneration

policies to enable investors to understand:
• The costs and benefits of those policies, and
• The link between remuneration paid to directors and
key executives and corporate performance.
a. The board should establish a remuneration committee.
b. Clearly distinguish the structure of non- executive director's
remuneration from that of executives.
c. Ensure that payment of equity-based executive remuneration is
made in accordance with thresholds set in plans approved by
shareholders.

10. Recognize the legitimate interests of stakeholders. Recognize legal and other
obligations to all legitimate stakeholders.
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CHAPTER 1: INTRODUCTION TO CORPORATE GOVERNANCE

a. Establish and disclose a code of conduct to guide compliance

with legal and other obligations to legitimate stakeholders.