Page 1 Corporate Governance

03-08-2014 2:16:53 PM http://www.financialmarketsjournal.co.za/8thedition/printedarticles/corporategovernance.htm

Corporate Governance
By Belinda Olivier
orporate Governance can be defined as the set of processes, customs, policies, laws and institutions affecting the way a corporation
is directed, administered or controlled. Corporate governance can therefore be viewed as the structures and the relationships which
determine corporate direction and performance with a view to achieving long term strategic goals. The relationship which exists
between the board of directors and the primary stakeholders, typically shareholders and management is critical and central to corporate
governance.
Corporate governance also includes the relationships among the many other stakeholders involved and the goals for which the corporation is
governed. These stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the
community at large. The corporate governance framework therefore consists of the legal, regulatory, institutional and ethical environment in
which the corporation finds itself.
Key elements of good corporate governance structure therefore include fairness, honesty, trust and integrity, openness and transparency,
performance orientation, responsibility and accountability, mutual respect, and commitment to the organisation and its stakeholders
Of importance is developing a model or governance structure that aligns the values and goals of all corporate participants and stakeholders and
ensures an outcome that meets the needs of the individuals involved as well as those of the community as a whole. The aim is to therefore to
align the interests of individuals, corporations and society.
Principles of corporate governance
Commonly accepted principles of corporate governance include:
Equitable and Fair Treatment of Shareholders
The four primary pillars of corporate governance are fairness, accountability, responsibility and transparency. Consequently, organisations
should respect the rights of shareholders and enable shareholders to exercise their rights by effectively communicating information that is
relevant, timely, understandable and easily accessible. Fairness implies being unbiased and carries with it the requirement of independence and
objectivity, giving due consideration to the interests of all stakeholders involved. It is therefore recommended that the Board of Directors be
comprised of a mix of executive, nonexecutive and independent directors
Interests of Other Stakeholders
Organisations should recognise that they have legal and other ethical obligations to all legitimate stakeholders. Directors, in exercising their
fiduciary responsibilities must act in the interest of all stakeholders and direct and control their organisations according to acceptable local and
international governance norms.
Accountability
Corporate accountability refers to the obligation and responsibility to give an explanation or reason for ones actions and conduct. The board
should be willing to engage in effective two-way communication with the stakeholders about their actions and provide reasons for those
actions.
Responsible and Ethical Behaviour
Ethical and responsible decision-making is not only important for good public relations, but it is also a necessary element of risk management.
Organisations should develop codes of ethical conduct for their directors and executives that promotes responsible decision making. Many
organisations establish compliance and ethics programs to minimise the risk of the firm stepping beyond ethical and legal boundaries.
Ethical procedures and principles of conduct can be regarded as a form of self regulation, placing the responsibility to act professionally and
ethically with the organisation. It has been empirically established that organisations that practise good corporate governance are more
sustainable in the long term and display superior performance results. The board has an obligation to act responsibly when making decisions
involving the corporations assets and ultimately stakeholders interests and investments. Being socially and environmentally responsible is as
important as being financially responsible.
Disclosure and Transparency
Corporate governance entails an inclusive approach when developing corporate strategy, meaning that the purpose, goals and values of the
organisation and of the owners and shareholders be identified and communicated to all stakeholders, thereby building mutually beneficial
relationships. Transparency refers to the openness and willingness to disclose financial performance figures which are truthful and accurate.
Disclosure of material matters concerning the organisations performance and activities should be timely and accurate to ensure that all
investors have access to clear, factual information which accurately reflects the financial, social and environmental position of the organisation.
Organisations should clarify and make publicly known the roles and responsibilities of the board and management to provide shareholders with
a level of accountability. Procedures should be implemented to independently verify and safeguard the integrity of the company's financial
reporting. The quantity, quality and frequency of financial and managerial disclosure should be clearly defined and ad heard to.
The Role and Responsibilities of the Board of Directors
The board of directors need to possess a range of skills and expertise in order to participate independently in the decision-making process,
enabling them to deal effectively and fairly with various business issues. While the board relies on management to be responsible for the day-
to-day operations of the organisation they should be able to review and challenge managements performance and actions if necessary.
Page 2 Corporate Governance
03-08-2014 2:16:53 PM http://www.financialmarketsjournal.co.za/8thedition/printedarticles/corporategovernance.htm
One of the boards main functions is to safeguard and protect invested capital. Regular board meetings allow potential problems to be
identified, discussed and resolved. Executive directors possess superior knowledge of the decision-making process and therefore evaluate top
management on the basis of the quality of its decisions that lead to financial performance outcomes.
The board is ultimately accountable and responsible for the affairs and performance of the company and should act fairly and independently to
ensure that all relevant information is available to the stakeholders as needed. For this reason the board should retain full and effective control
over the organisation and be involved in all decisions which materially impact the financial, social, legal and environmental standing of the
organisation.
To ensure an appropriate balance of power and independent objective decision-making, the board should delegate certain of its responsibilities
to management. The appointment of various committees such as an audit, remuneration and risk management committee comprising of
independent non-executive directors is a viable option when delegating powers but it should be kept in mind that the ultimate responsibility and
accountability for the performance and affairs of the company lies with the board of directors
The CEOs responsibilities should preferably be separate from those of the chairperson and there should be a good balance between executive
and nonexecutive directors, with the majority being nonexecutive. Independence ensures objectivity and discourages conflict of interest.
Responsibilities should be outlined clearly. Policies surrounding the adoption of strategic plans, monitoring of operational and managerial
performance, risk management and internal control systems, and director selection, orientation and evaluation should be clearly defined.
Strategic risk management is a core element of corporate governance, the responsibility of which should reside with the board. The designing,
implementation, and monitoring of an effective risk management process will be the responsibility of management but the board will have to
oversee the process and ultimately judge its effectiveness through a systematic documented assessment.
Directors who employ a focused and devoted approach displayed through a passionate commitment and obligation to engage in the day-to-day
challenges of the organisation will lead the management team by example. They are more likely to be supportive of managements suggestions
and regard it their mission to help the management team lead the company and manage the critically important issues facing the company.
Good corporate governance, which is based on the principles of fairness, honesty, accountability transparency and consideration, should
therefore form the cornerstone of any responsible organisation. The mutual benefits flowing from a well governed organisation ensure
sustainability, growth, profitability and the creation of a positive corporate culture.