Corporate governance is the system by which business corporations are directed and controlled. 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 company objectives are set, and the means of attaining those objectives and monitoring performance.
Scope and Deliverables
Organizations typically serve the interests of widely dispersed stakeholders – investors, customers, governments, community members, employees, suppliers, citizens. But day-to-day control is entrusted to a small group of managers who may have little direct interaction with stakeholders. How then to ensure that managers serve the interests of stakeholders, rather than their own private interests?
Governance arrangements are an important part of the answer. They encompass:
- the power given to management;
- control over management’s use of power (e.g. via institutions such as boards of directors);
- management’s accountability to stakeholders;
- the formal and informal processes by which stakeholders influence management decisions.
In the private and quasi-private sectors, the traditional governance model positions management as accountable solely to investors (shareholders). But a growing number of corporations accept that stakeholders other than shareholders are affected by corporate activity, and that the corporation must therefore be answerable to them. This idea is the foundation of corporate social responsibility, and provides the link between CSR and governance.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the organisation’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and authorities. Individuals may be members of the board of directors of multiple corporations.
All parties to corporate governance have an interest, whether direct or indirect, in the effective performance of the organisation. Directors, workers and management receive salaries, benefits and reputation; whilst shareholders receive capital return. Customers receive goods and services; suppliers receive compensation for their goods or services. In return these individuals provide value in the form of natural, human, social and other forms of capital.
A key factor in an individual’s decision to participate in an organisation (e.g. through providing financial capital or expertise or labor) is trust that they will receive a fair share of the organisational returns. If some parties are receiving more than their fair return (e.g. exorbitant executive remuneration), then participants may choose to not continue participating…potentially leading to organisational collapse (e.g. shareholders withdrawing their capital). Corporate governance is the key mechanism through which this trust is maintained across all stakeholders.
Key elements of good corporate governance principles include honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the organisation.
Of importance is how directors and management develop a model of governance that aligns the values of the corporate participants and then evaluate this model periodically for its effectiveness. In particular, senior executives should conduct themselves honestly and ethically, especially concerning actual or apparent conflicts of interest, and disclosure in financial reports.
Commonly accepted principles of corporate governance include:
- Rights and equitable treatment of shareholders: Organisations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.
- Interests of other stakeholders: Organisations should recognise that they have legal and other obligations to all legitimate stakeholders.
- Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person.
- Integrity and ethical behaviour: Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.
- Disclosure and transparency: Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information.
Issues involving corporate governance principles include:
- oversight of the preparation of the entity’s financial statements
- internal controls and the independence of the entity’s auditors
- review of the compensation arrangements for the chief executive officer and other senior executives the way in which individuals are nominated for positions on the board
- the resources made available to directors in carrying out their duties
- oversight and management of risk
- dividend policy
What We Will Do
- Agree upon the corporate governance framework that is applicable to your organization.
- Assess the current state of your organization’s corporate governance policies & practices against the comprehensive OECD Principles, as well as any other applicable framework (SEC, Sarbanes-Oxley, C198, COBIT3, business ethics, etc).
- Take into account all other potential stakeholder issues including:
- Data Security
- Environment, Health, Safety
- Anti-terrorism issues
- Other internal initiatives
- Provide third-party feedback to the board of directors, and relevant managers on the current state of your corporate governance.
- Provide benchmarking information comparing your organization to world leading organizations with regard to corporate governance.
- Create and submit draft policies to the board of directors that address any identified gaps in corporate governance.
- Provide action plans to meet all identified requirements.
- Employ Policy Deployment tactics to ensure that the corporate governance framework is fully integrated into the organization.
What We Need You To Do
- Obtain board of directors level approval to proceed with this project.
- Provide us with contact information for all of the board members, as well as key internal managers.
- Authorize these personnel to provide us with information we require for our analysis.
- Ensure timely review and approval of submitted documents.
- Ensure timely deployment of committed actions.
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