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CORPORATE governance involves the rights and responsibilities of a company's management, its board of directors, shareholders, and stakeholders. The efficient running of a company affects market confidence and the company's performance.
Weak corporate governance weakens a company's potential and may lead to financial difficulties and fraud by certain officials who are in power.
Good corporate governance is defined by the rules and practices that govern the relationship between the managers, shareholders, employees, and creditors of an organisation. Good relationship among the relevant parties will contribute to the growth and financial stability of the company as it gains market confidence, financial credibility, and economic efficiency.
The main areas of the Organisation for Economic Cooperation and Development, OECD, Principles of Corporate Governance cover six key areas:
(a) Ensuring the basis for an effective corporate governance framework. The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly state the division of responsibilities among different supervisory, regulatory, and enforcement authorities.
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(b) The rights of shareholders and key ownership functions. The corporate governance framework should protect and facilitate the exercise of shareholders' rights.
(c) Equitable treatment of shareholders. The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. They should be given the opportunity to obtain effective redress for violation of their rights.
(d) Role of stakeholders in corporate governance. The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
(e) Disclosure and transparency. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
(f) Responsibilities of the board. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability to the company and the shareholders.
Rights of Investors
The rightful owners of a company are its shareholders which include institutional investors. They should be able to exercise ownership rights to influence major decisions taken by the company. They should participate in the election of board members and also in the removal of board members who are not performing in the interest of the company. They should be able to voice their views about executive and board remuneration policies.
To make boards more responsible and accountable, boards should act objectively and independently and be accountable to shareholders. Boards must monitor potential conflicts of interest. They should be responsible for corporate ethics, compliance with laws and standards and for overseeing internal control systems such as accounting and financial reporting.
A new principle recommended by OECD advocates protection for whistleblowers, including institutions through which their complaints or allegations can be addressed and provides for confidential access to a board member.
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In a report, the Committee on the Financial Aspects of Corporate Governance of the United Kingdom states: "The principles on which the Code is based are those of openness, integrity and accountability. They go together.
"Openness on the part of companies, within the limits set by their competitive position, is the basis for the confidence which needs to exist between business and all those who have a stake in its success. An open approach to the disclosure of information contributes to the efficient working of the market economy, prompts boards to take effective action and allows shareholders and others to scrutinise companies more thoroughly.
"Integrity means both straight-forward dealing and completeness. What is required of financial reporting is that it should be honest and that it should present a balanced picture of the state of the company's affairs. The integrity of reports depends on the integrity of those who prepare and present them.
"Boards of directors are accountable to their shareholders and both have to play their part in making that accountability effective. Boards of directors need to do so through the quality of the information which they provide to shareholders, and shareholders through their willingness to exercise their responsibilities as owners."
Advantages of a Strategic Board
Susan Shultz, in her book The Board Book, lists the advantages of a strategic board. A well-selected board:
* Allows a company to gain from the valuable expertise of its members
* Enables strategic relationships and provides access to relevant contacts of assistance to the company
* Facilitates financing. Bankers and venture capitalists are more comfortable when they see well-qualified and prominent persons on the board
* Serves as a think tank for big issues and strategic thinking. A strategic board will focus on critical success factors to ensure success
* Establishes accountability. It gives a forum within which the CEO can measure himself against corporate goals against the strategic plan.
* Relieves isolation. Being a CEO is a lonely job. The board shares the CEO's commitment to the success of the business.
* Facilitates cross-fertilisation and exposure to new ideas, and
* Provides great value for minimal expense.
Independent Directors
The Malaysian Report on Corporate Governance believes that "Every company should have independent directors, that is, directors that are not officers of the company; who are neither related to its officers nor represent concentrated or family holdings of its shares; who, in the view of the company's board of directors, represent the interests of public shareholders, and are free of any relationship that would interfere with the exercise of independent judgement".
The listing rules of the Singapore Exchange Securities Trading Ltd require an issuer to describe its corporate governance practices with specific references to the principles of the Code of Corporate Governance 2005 in its annual report. An issuer is required to disclose any deviation from any guideline of the code together with an appropriate explanation for sch deviation in the annual report.
Let us look at several principles and how some companies have adhered to them.
Principle 2: There should be a strong and independent element on the Board, which is able to exercise objective judgement on corporate affairs independently, in particular, from management. No individual or small group of individuals should be allowed to dominate the Board's decision-making.
The Oceanus Group Ltd is in the business of aquaculture production and abalone processing and distribution. In its 2008 annual report under Principle 2, it listed the names of three executive directors and three independent directors.
It states: "The independent directors have confirmed that they do not have any relationship with the company or its related companies or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the directors' independent business judgement with a view to the best interests of the company. The nominating committee has reviewed and determined that the said directors are independent. The independence of each director has been and will be reviewed annually by the nominating committee."
Principle 9: Each company should provide clear disclosure of the remuneration policy, level, and mix of remuneration, and the procedure for setting remuneration in the company's annual report. It should provide disclosure in relation to its remuneration policies to enable investors to understand the link between remuneration paid to directors and key executives, and performance.
Oil palm plantation company Golden Agri-Resources Ltd states in its 2008 annual report: "The names of the three remuneration committee members and the remuneration bands:
Variable bonus is based on performance in the same financial year."
It then disclosed details of the group's restricted share plan for key management and executives.
Principle 11: The board should establish an audit committee with written terms of reference which clearly set out is authority and duties.
CapitaMall Trust, CMT, a real estate investment trust, handled this principle in its 2008 annual report thus: "The manager is of the view that the audit committee members have the relevant expertise to discharge the functions of the audit committee." It then sets out the terms of reference of the committee. "The audit committee is authorised to investigate any matters within its terms of reference. The audit committee has full access to and cooperation of the management and the internal auditors and has full discretion to invite any executive director or officer to attend its meetings. The internal auditors and CMT's external auditors, have unrestricted access to the audit committee. Reasonable resources have been made available to the audit committee to enable it to discharge its duties ...".
Updates
In 2004, the governments of the 30 OECD countries have approved a revised version of the OECD's Principles of Corporate Governance adding new recommendations for good practice in corporate behaviour with a view to rebuilding and maintaining public trust in companies and stock markets.
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