GGSR

CHAPTER 1

INTRODUCTION TO CORPORATE GOVERNANCE

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 decísion-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.

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.

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. 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 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 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.

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.

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 Zasblo, 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 structures 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

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:

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 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 PRINCIPLES OF CORPORATE GOVERNANCE AND BEST

PRACTICE RECOMMENDATIONS

Principles of Good Corporate Governance Best Practice and Recommendations

1-a. Formalize and disclose the functions reserved to

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

2-a. A board should have independent directors.

2. Structure the board to add value. Have a board of an 2-b. The roles of chairperson and chief executive officer
effective composition, size and commitment to should not be exercised by the same individual.
adequately discharge its responsibilities and duties. 2-c. The board should establish a nomination
committee.
3. Promote ethical and responsible decision-making.
Actively promote ethical and responsible 3-a. Establish a code of conduct to guide the _directors,
decision-making. 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
3-b. Disclose the policy concerning trading in company
securities by directors, officers and employees.

4. Safeguard integrity in financial reporting. 4a. Require the chief execulive of for equivalent) and
Have a structure to independently verify and safeguard the chief financial officer (or equivalent) to state in
the integrity of the company's financial reporting. writing to the board that the company's financial reports
presenta 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 thali 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 of all material to ensure compliance with IFS.
matters concerning the company.
5-b. Listing Rule disclosure requirements and to ensure
accountability at a send management level for
compliance.

6. Respect the rights of shareholders and facilitate the

effective exercise of those rights. 6-a. Design and disclose a communications strategy to
promote effective communication with shareholders and
encourage effective participation al general meetings.

6-b. Request the external auditor to attend the annual

general meeting and be avallable to answer
shareholder questions about the audit.

7. Recognize and manage risk. Establish a sound 7-a. The board or appropriate board committee should
system of risk oversight and management and internal establish policies on risk oversight and management.
control. 7-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 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 review and 8-a. Disclose the process for performance evaluation of
actively encourage enhanced board and management the board, its committees and individual directors, and
effectiveness. key executives

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

10. Recognize the legitimate interests of stakeholders. 10-a. Establish and disclose a code of conduct to guide
Recognize legal and other obligations to all legitimate compliance with legal and other obligations to legitimate
stakeholders. stakeholders.