What is Corporate Governance?

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What is Corporate Governance?

• Alison Dillon Kibirige

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Corporate Governance

• Contemporary corporate governance started in 1992
  with the Cadbury report in the UK
• Cadbury was the result of several high profile
  company collapses
• is concerned primarily with protecting weak and
  widely dispersed shareholders against
  self-interested Directors and managers

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Corporate Governance Parties

• Shareholders those that own the company
• Directors Guardians of the Companys assets for
  the Shareholders
• Managers who use the Companys assets

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Corporate Governance

• 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

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Corporate Governance

• 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

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Four Pillars of Corporate Governance

• Accountability
• Fairness
• Transparency
• Independence

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Accountability

• Ensure that management is accountable to the
  Board
• Ensure that the Board is accountable to
  shareholders

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Fairness

• Protect Shareholders rights
• Treat all shareholders including minorities,
  equitably
• Provide effective redress for violations

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Transparency

• Ensure timely, accurate disclosure on all
  material matters, including the financial
  situation, performance, ownership and corporate
  governance

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Independence

• 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

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Corporate Governance in Africa

• In 1994, The King Report in South Africa also
  included within its Code of Corporate Governance
  requirements on sustainability and ethical
  standards
• This was due to the context of a developing
  country and business ethics in Africa

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Sustainability

• 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

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Sustainability

• development that meets the needs
• of the present without compromising
• the ability of future generations
• to meet their own needs

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Stakeholders

• 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

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Business Ethics

• 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

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Elements of Corporate Governance

• Good Board practices
• Control Environment
• Transparent disclosure
• Well-defined shareholder rights
• Board commitment

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Good Board Practices

• Clearly defined roles and authorities
• Duties and responsibilities of Directors
  understood
• Board is well structured
• Appropriate composition and mix of skills

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Good Board procedures

• Appropriate Board procedures
• Director Remuneration in line with best practice
• Board self-evaluation and training conducted

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Control Environment

• Internal control procedures
• Risk management framework present
• Disaster recovery systems in place
• Media management techniques in use

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Control Environment

• Business continuity procedures in place
• Independent external auditor conducts audits
• Independent audit committee established

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Control Environment

• Internal Audit Function
• Management Information systems established
• Compliance Function established

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Transparent Disclosure

• Financial Information disclosed
• Non-Financial Information disclosed
• Financials prepared according to International
  Financial Reporting Standards (IFRS)

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Transparent Disclosure

• Companies Registry filings up to date
• High-Quality annual report published
• Web-based disclosure

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Well-Defined Shareholder Rights

• Minority shareholder rights formalised
• Well-organised shareholder meetings conducted
• Policy on related party transactions

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Well-Defined Shareholder Rights

• Policy on extraordinary transactions
• Clearly defined and explicit dividend policy

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Board Commitment

• The Board discusses corporate governance issues
  and has created a corporate governance committee
• The company has a corporate governance champion
• A corporate governance improvement plan has been
  created
• Appropriate resources are committed to corporate
  governance initiatives

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Board Commitment

• Policies and procedures have been formalised and
  distributed to relevant staff
• A corporate governance code has been developed
• A code of ethics has been developed
• The company is recognised as a corporate
  governance leader

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Other Entities

• 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

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Country Perspective

• Corporate Governance is by way of legislation or
  best practice Code
• US adopted legislation in 2002 - Sarbanes Oxley
  Act
• Most 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 II Code in South Africa

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Country perspective - Codes

• These Codes are voluntary and are enforced by
  shareholders
• Most of them operate on a comply or explain
  approach
• The Media also play a part in highlighting good
  or bad practices

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Country Perspective

• Countries in Africa have tended to adopt a hybrid
  approach whereby they have followed the comply
  and explain approach but have enshrined some of
  the principles in law to assist in enforceability
• The reason is the weakness of the shareholder
  base and of the media

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Why Corporate Governance?

• Better access to external finance
• Lower costs of capital interest rates on loans
• Improved company performance sustainability
• Higher firm valuation and share performance
• Reduced risk of corporate crisis and scandals

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Why Corporate Governance?

• In 2002, L Klapper and I Love from the World
  Bank found evidence that improving a companys
  corporate governance has proportionately greater
  impact in countries with weak legal environments.
  
• They have suggested that companies can partially
  compensate for ineffective laws and enforcement
  by establishing good corporate governance at the
  company level and providing credible investor
  protection

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• Convince your Editor