An Overview
Nov 14, 2015
An Overview
Contemporary corporate governance started in 1992 with the Cadbury report in the UKCadbury was the result of several high profile company collapsesis concerned primarily with protecting weak and widely dispersed shareholders against self-interested Directors and managers
Shareholders those that own the company
Directors Guardians of the Companys assets for the Shareholders
Managers who use the Companys assets
Primarily concerned with public listed companies i.e. those listed on a Stock Exchange
Focused on preventing corporate collapses such as Enron, Polly Peck and the Maxwell companies
What relevance does it have to Africa where there are few public listed companies
Most companies are non-listed, private family owned businesses where the shareholders and the managers are often the same people
Accountability
Fairness
Transparency
Independence
Ensure that management is accountable to the Board
Ensure that the Board is accountable to shareholders
Protect Shareholders rights
Treat all shareholders including minorities, equitably
Provide effective redress for violations
Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance
Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest
Independent Directors and Advisers i.e. free from the influence of others
In 1994, The King Report in South Africa also included within its Code of Corporate Governance requirements on sustainability and ethical standards King Report II on Corporate Governance (2002)King Report III on Corporate Governance (2009)This was due to the context of a developing country and business ethics in Africa
No generally accepted definition
Most commonly used is from the Brundtland Report for the World Commission on Environment and Development 1987 which defines it as:
development that meets the needsof the present without compromising the ability of future generationsto meet their own needs
Sustainability recognizes stakeholder rights i.e. the rights of interested parties e.g. employees, the community, suppliers, customers etc.
Encourage co-operation between the company and its stakeholders in creating wealth, jobs and economic stability
Established values and principles a company uses to inform and conduct its activities
Should permeate a companys culture and drive its strategy, business goals, policies and activities
Usually found in a code of ethics
Good Board practices
Control Environment
Transparent disclosure
Well-defined shareholder rights
Board commitment
Clearly defined roles and authorities
Duties and responsibilities of Directors understood
Board is well structured
Appropriate composition and mix of skills
Appropriate Board procedures
Director Remuneration in line with best practice
Board self-evaluation and training conducted
Internal control procedures
Risk management framework present
Disaster recovery systems in place
Media management techniques in use
Business continuity procedures in place
Independent external auditor conducts audits Independent audit committee established
Internal Audit Function
Management Information systems established
Compliance Function established
Financial Information disclosed
Non-Financial Information disclosed
Financials prepared according to International Financial Reporting Standards (IFRS)
Companies Registry filings up to date
High-Quality annual report published
Web-based disclosure
Minority shareholder rights formalised
Well-organised shareholder meetings conducted
Policy on related party transactions
Policy on extraordinary transactions
Clearly defined and explicit dividend policy
The Board discusses corporate governance issues and has created a corporate governance committeeThe company has a corporate governance championA corporate governance improvement plan has been createdAppropriate resources are committed to corporate governance initiatives
Policies and procedures have been formalised and distributed to relevant staffA corporate governance code has been developedA code of ethics has been developedThe company is recognised as a corporate governance leader
Corporate Governance applies to all types of organisations not just companies in the private sector but also in the not for profit and public sectors
Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises
Corporate Governance is by way of legislation or best practice CodeUS adopted legislation in 2002 - Sarbanes Oxley ActMost other developed and emerging market countries have adopted best practice Codes e.g. Combined Code in the UK, Cromme Code in Germany and the King III Code in South Africa
These Codes are voluntary and are enforced by shareholdersMost of them operate on a comply or explain approachThe Media also play a part in highlighting good or bad practices
Better access to external financeLower costs of capital interest rates on loansImproved company performance sustainabilityHigher firm valuation and share performance Reduced risk of corporate crisis and scandals