Module 1: Introduction to Corporate Governance

Corporate governance has earned its place as an essential tool in the management and growth of companies, and
will continue to grow in importance as time goes on. It is advisable that all companies take steps to increase the quality
of their corporate governance systems in order to improve the performance of the business.

At a glance, corporate governance will ensure that the board of directors will meet regularly, retain control over the
business and are clear in the division of their corporate responsibilities as well as maintaining a system of risk
management.

Employing good corporate governance helps the company to regulate the commission of fraud, and opportunity for
corruption. Scandals and fraud within a company happens when its directors and officials do not follow a formal code of
governance. Furthermore, a good corporate governance scheme will make it clear to every office of the company of
their duties that they will have to keep in mind when making decisions.

Where a company practices good governance, with full disclosure, the public will feel that the company and the
Company brands carried by them can be trusted, ultimately helping the company’s good reputation to grow.

WHAT IS 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.
• Governance - comprises all the processes of governing – whether undertaken by the government of a country,
by a market or a network – over a social system and whether through the laws, norms, power or language of
an organized society.
• Governance – 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 leader of a country and/or organizations.
• Governance - can be used in several contexts such as corporate governance, international governance,
national governance, and local governance

CHARACTERISTICS OF GOOD GOVERNANCE

Whatever context good governance is used, the following major characteristics should be present.

1. Participation 5. Consensus-oriented

2. Accountability 6. Responsiveness

3. Effectiveness and Efficiency 7. Transparency

4. Equity and Inclusiveness 8. Rule of Law

PARTICIPATION

It is the involvement of all stakeholders in decision-making from creation to implementation.

Participation by both men and women

Direct or through legitimate intermediate institutions or representatives – representative democracy does not
necessarily mean that the concerns of the most vulnerable in society would be taken into consideration in
decision-making

Needs to be informed and organized – freedom of association and expression on the one hand and an
organized civil society on the other hand

ACCOUNTABILITY

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 decision or actions taken are internal or external
to an organization or institution.

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.

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.

Basis for Comparison Efficiency Effectiveness

Meaning The virtue of being efficient is known as The magnitude of nearness of actual result
efficiency with the intended result, is known as
effectiveness
What is it Work is to be done in a correct manner Doing accurate work (doing the right things)
(doing things right)
Emphasis on Inputs and outputs Means and ends
Time horizon Short run Long run
Approach Introverted Extroverted
Ascertainment Strategy Implementation Strategy Formulation
Orientation Operations Strategies

Efficiency and effectiveness used in the context of 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. It also covers the
sustainable use of natural resources and the protection of the environment.

EQUITY AND INCLUSIVENESS

A society’s well-being depends on ensuring 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.

CONSENSUS-ORIENTED

Good governance requires mediation of the different interests in society to reach a broad consensus in society
on what is in the best interest of the whole community and how this can be achieved – there are several actors
and as many view points in a given society.

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 of the historical, cultural
and social contexts of a given society or community.

RESPONSIVENESS

Good governance requires that institutions and processes try to serve all stakeholders within a reasonable
timeframe.

TRANSPARENCY

Means that decisions taken and their enforcement are done in a manner that follows rules and regulations

Means that information is freely available and directly accessible to those who will be affected by such
decisions and their enforcement

Means that enough information is provided and that it is provided in easily understandable forms and media

Transparency is an important aspect of good governance, and transparent decision making is critical for the
private sector to make sound decisions and investments.

Accountability and the rule of law require openness and good information so higher levels of administration;
external reviewers and the general public can verify performance and compliance of law.

Governments have access to a vast amount of important information. Dissemination of this information
through transparency and open information systems can provide specific information that firms and individuals
need to have to be able to make good decisions.

Capital markets depend for example on information openness.

RULE OF LAW

It is a principle in governance where all persons and institutions and entities, public or private are accountable
to laws that are publicly promulgated, equally enforced and independently adjudicated, consistent with human
rights, norms and standards.

Refers to the institutional process of setting, interpreting and implementing laws and other regulations –
decisions taken by government must be founded in law and that private firms and individuals are protected from
arbitrary decisions.

Good governance – requires fair legal frameworks that are enforced impartially

- 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

A good rule of law must have the following:

• Measures to ensure adherence to the principles of • Separation of powers

supremacy of law
• Participation in decision-making
• Equality before the law
• Legal certainty
• Accountability to the law
• Avoidance of arbitrariness
• Fairness in application of the law
• Procedural and legal transparency

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
organization, whatever size or structure.

The Corporate Governance Structure specifies the distribution of rights and responsibilities among different
participants in the corporation, such as the board, managers, shareholders, and other stakeholders, 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 these 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 governance is to enhance
shareholder’s value and protect the interest of other stakeholders by improving the corporate performance and
accountability. It is also what about the board of directors of a company does, how it sets the values of the company.

OBJECTIVES OF THE CORPORATE GOVERNANCE

1. Fair and equitable treatment of shareholders

It can be manifested by:

- Same treatment to shareholders of the same class

- Votes should be cast as agreed
- Insider trading and abusive self-dealing should be prohibited

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 are seen to have higher valuation attached to their shares by businessmen. This
only reflects the positive perceptions that good corporate governance induces potential investors to decide to invest in
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 right 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 effective
corporate governance are threefold as presented below:

Positive answers to the following questions indicate a firm’s compliance to the basic principles of good corporate
governance:

A. Transparency and Full Disclosure

- Does the board meet the information needs of investment communities?

- Does it safeguard integrity in financial reporting?
- Does the board have sound disclosure policies and practices?
- Does it make timely and balanced disclosures
- 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 and proper behavior?
- Is the organization’s senior official committed widely accepted standards of correct and proper behavior?

C. Corporate Control

- Has the board built a 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 risks?
- 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?