Corporate Governance

Below are several definitions of corporate governance;

Corporate governance deals with the manner in which power is exercised in the management of

resources for sustainable organization’s and society’s development. It is vital in efficient

production and delivery of goods and services, accountability in the use of power, protection of

shareholders’ rights and freedom and maintenance of an organized corporate framework within

which each stakeholder can contribute fully towards finding innovative solutions to common

problems.

Corporate governance is a set of rules that define the relationship between stakeholders,
management, and board of directors of a company and influence how that company is operating.
At its most basic level, corporate governance deals with issues that result from the separation of
ownership and control.

Corporate Governance is said to be a set of mechanisms used to manage the relationships or

conflicting interests among stakeholders and to determine and control the strategic direction and
performance of organizations aligning strategic decisions with company values.

"Corporate governance involves a set of relationships between a company’s management, its

board, its shareholders and other stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the means of attaining those objectives
and monitoring performance are determined." (OECD 2004)

The process carried out by the board of directors, and its related committees, on behalf of and for
the benefit of the company's Shareholders and the other Stakeholders, to provide direction,
authority, and oversights to management, “It means how to make the balance between the board
members and their benefits and the benefits of the shareholders and the other stakeholders”.
(M.Tarek Youssef, 2007)

Good Corporate Governance ensures that the business environment is fair and transparent and
that companies can be held accountable for their actions. On the other hand, weak Corporate
Governance leads to waste, mismanagement, and corruption. It is also important to remember
that although Corporate Governance has emerged as a way to manage modern joint stock
corporations it is equally significant in state-owned enterprises, cooperatives, and family
businesses. Regardless of the type of venture, only Good Governance can deliver sustainable
Good Business Performance.
So,a company that is well-governed is one that is accountable and transparent to its shareholders
and other stakeholders.
What is the aim of good corporate governance in the Organization?

Good corporate governance seeks to promote:-

1. Efficient, effective and sustainable Organizations that contribute to the welfare of

the stakeholders and society in general by creating wealth, employment and
solutions to emerging challenges.
2. Responsive and accountable organizations.
3. Organizations that are managed with integrity and transparency.
4. Recognition and protection of stakeholders and other stakeholder’s rights.
5. An approach based on corporate ideas, legitimate representation and participation.
PRINCIPLES OF GOOD CORPORATE GOVERNANCE.

1. Authority and duties of stakeholders.

Stakeholders of the Organization must severally and jointly protect, preserve and actively
exercise the supreme authority of the /Organization in general meetings i.e. they must
ensure among other things:-

- Only competent and reliable persons, who can add value, are elected into the Board of
Directors.
 - The Board is constantly held accountable and responsible for the efficient
and effective governance of the Organization so as to achieve stated
objectives.

- Change the composition of the Board that does not perform to their expectation in
accordance with their mandate.

2. Leadership.
The Board should exercise leadership, enterprise, integrity and judgment in directing the
Organization and act in the best interest of the Organization in a manner based on accountability,
transparency and responsibility.

3. Strategy and Values.

The Board should determine the purpose and values and the strategies to achieve them.

4. Structure and Organization.

The management structure, organization, systems and people must ensure that the structure
functions in order to achieve the Organization’s objective.

5. Viability and Financial sustainability.

At least on annual basis, the Board must monitor and evaluate the implementation of strategies,
policies and management performance.

6. Corporate Compliance.

The Organization must comply with all relevant laws, regulations, governance practices,
accounting and auditing standards.

7. Communication.
The board must communicate with all stakeholders effectively. Stakeholders should receive
any information that would materially affect their stakeholder relationship or any resolution
of interest to them as stakeholders.

8. Internal control and procedures.

Systems, processes and procedures must be reviewed regularly. This will ensure accuracy in
decision making.

9. Development and strengthening of skills.

The Board and employees must be trained continuously in line with technological and
management developments. Equally, the stakeholders must be enlightened regularly to ensure
that they effectively exercise their rights.

10. Adoption of Technology.

In order to survive and thrive the technology, skills and systems must be adequate to run
the Organization and compete in the competitive market environment.

11. Recognition of Risk.

It is crucial to identify the key risk areas and the key performance indicators and
constantly monitor these factors.

12. Social and Environmental responsibility.

The Organization should operate within the mandate entrusted to it by society and shoulder its
social responsibility e.g. exploiting its labour, failing to conserve resources, neglecting the needs
of the local community, evading taxation or engaging in other anti social practices.

Benefits of Corporate Governance

1.Benefits to the Company;

 Improving access to capital and financial markets

 Help to survive in an increasingly competitive environment through mergers,
acquisitions, partnerships, and risk reduction through asset diversification
 Provide an exit policy and ensure a smooth inter-generational transfer of wealth and
divestment of family assets, as well as reducing the chance for conflicts of interest to arise (very
important for the investors).
 Also, adopting good CG practices leads to a better system of internal control, thus leading
to greater accountability and better profit margins.
 Good CG practices can pave the way for possible future growth, diversification, or a sale,
including the ability to attract equity investors – nationally and from abroad – as well as reduce
the cost of loans/credit for corporations.
 Many businesses seeking new funds often find themselves obliged to undertake serious
corporate governance reforms at a high cost and upon the demand of outsiders, often in a time of
crisis. When the foundations are already in place investors and potential partners will have more
confidence in investing in or expanding the company’s operations.

2. Benefits to the National Ecomony of a country;

 Empirical evidence and research conducted in recent years supports the proposition that it
pays to have good CG. It was found out that more than 84% of the global institutional investors
are willing to pay a premium for the shares of a well-governed company over one considered
poorly governed but with a comparable financial record.
 The adoption of CG principles - as good CG practice has already shown in other markets
- can also play a role in increasing the corporate value of companies.

3.Benefits to shareholders;

 Good CG can provide the proper incentives for the board and management to pursue
objectives that are in the interest of the company and shareholders, as well as facilitate effective
monitoring.
 Better CG can also provide Shareholders with greater security on their investment.
 Better CG also ensures that shareholders are sufficiently informed on decisions
concerning fundamental issues like amendments of statutes or articles of incorporation, sale of
assets, etc.
Good corporate governance should assume the following
- Enterprise prosperity and survival : corporations should be managed effectively and
efficiently to ensure there is survival and prosperity
- Ethics, Integrity and Responsibility: Organizations should ensure highest standards of
integrity and ethics are maintained.
- Employee participation in decision making: i.e employee empowerment
- Administration of justice on employees and other stakeholders through application of
rules and regulation.
- Protection of employee rights by providing job security
- Establishing of positive corporate culture
Issues involving corporate governance principles include:
 Internal controls and internal auditors
 The independence of the entity's external auditors and the quality of their audits
 Oversight and management of risk
 Oversight of the preparation of the entity's financial statements
 Review of the compensation arrangements for the chief executive officer and other senior
executives
 The resources made available to directors in carrying out their duties
 The way in which individuals are nominated for positions on the board
 Dividend policy

Challenges faced by the Corporate Govarnance:

1.Governance Standards; Corporate Governance faces a different type of struggle. A board of

executives can make good decisions on company policy and propagate standards throughout the
business. But what if managers prefer not to listen? Rebellious managers can ignore or subvert
corporate decisions at many levels of the business, and there are often a few troublemakers in all
businesses. Corporate boards need methods of enforcing standards and disciplining managers
when necessary, a component of governance few boards consider.

2.Board matters and issues; Board terms are a complex issue. In a board of directors, directors
typically only sit on the board for a brief term, rarely more than several years. Life-term board
members can cause problems with ingrained beliefs and concentration of power, so businesses
prefer to cycle board members. But the corporation must decide how to cycle. If all directors
switch around at the same time, the corporation may be left open for a hostile acquisition. If the
board decides to stagger member terms, it must decide when to stagger and how to accomplish it.

3.Accountability; Corporate governance has earned a negative connotation in society, mostly

because of the questionable practices of key executives and board members. Not all corporations
commit fraud, of course, but those that do receive a lot of attention, and many executives have
become used to taking questionably large bonuses even in a contracting economy. This has lead
to an atmosphere of distrust among consumers and investors, which corporations fight by
showing increased transparency in their work and mission.

4. Bureaucratic Layers; They require many layers of management and long lists of vice
presidents and presidents for information to pass through. This makes it very difficult for the
company leaders to receive accurate, important data from the lower levels of the company,
especially if managers along the way want to distort the message to make themselves sound
better. Ultimately, the chain of command becomes so long that the business is unwieldy,
responding slowly to change. Flat business structures with few layers of management are the
goal of many corporations.

Features of poor corporate governance

1. Lack of supervision
2. Lack of adequate controls
3. Lack of involvement by board
4. Domination by a single individual
5. Lack of indepence and scrutiny

Characteristics of Good corporate Governance

 1. Discipline
2. Transparency
3. Accountability
4. Independence
5. Fairness and equity
6. Social responsibility
Need for a Good Corporate Governance

- It creates wealth through effective and efficient competition

- It enhances responsibity, accountability and transparency
- It promotes efficient and effective utilization of limited resources
- It creates employement
- It enhances organizational survival and growth
- It contributes to good governance and improves infrastrure
- It contributes to a nations economic growth and development
- Organizations can attract investors since they are sure that their investments will be
secure.

Social Responsibility

Social responsibility seriously considers the impact of the company’s action on society. It is the
responsibility of the business to improve the overall welfare of the society by refraining from
harmful practices or by making a positive effect to help society. It is defined as the implied,
enforced or failed obligation of managers acting in their official capacity to serve or protect the
interest of groups other than themselves.

Benefits of Social Responsibility

1. It is in the best interest of the business to promote and improve the communities where it
does business. The creation of a better social environment benefits both the society and
the business. Society benefit from employment opportunities, while business benefit from
a better community, which is a source of its workforce and the consumer of its products
 and services.

2. Social actions can be profitable.

3. It is the ethical thing to do.

4. It improves the public image of the firm.

5. Social involvement may be in the interest of the shareholders as it may improve the value
of their shares quoted in stock market.

6. It is necessary to avoid government regulation and intervention. This creates greater

freedom and flexibility in decision making for the business.

7. Since the society gives the business the charter to exist, then the firm must live up to the
society’s expectation.

8. Business has a great deal of power which is reasoned should be accompanied by an equal
amount of societal responsibility.

9. Businesses should attempt to solve problems which other institutions have not been able
to solve after all they have been known to come up with new ideas.

10. Businesses have first resources, which they should specifically use to solve societies
problems.

11. It is better to prevent events than to cure them. Organizations should assist in the problem
of street children instead of dealing with hardcore criminals in the future.

Arguments Against
1. It might be illegal to use shareholders resources in social activities.

2. Social actions cannot be measured

3. It violates profit Maximization.
4. It would increase prices too much.
5. Business and managers lack social skills to solve societies problems
6. It would dilute the primary purpose of a business.
7. Business already has too much power and such involvement will give members power.
8. Businesses lack accountability to the public or society they are accountable to
shareholders.
9. It may lack broad public nor societal support.

Main Social Responsibility Areas

1. Improving the safety of its products and services. The managers should seek solution to
the following questions.
(a) A product safe and well design?
(b) Are they priced fairly?

(c) Are the advertisements clear and not deceptive?

(d) Are customers treated fairly by the company’s sales force?
(e) Are credit terms clear and is adequate product information available?

2. Improving the safety of the employees and work environment. The managers should seek
solutions to the following questions
(a) Are employees paid a fair wage?
(b) Are they provided with a safe work environment?
(c) Are workers hired, promoted and treated fairly without regard to sex, race or
colour?
(d) Are they given good training and educational opportunities?
(e) Are handicapped people given employment opportunities and is the company
 assisting disadvantaged members of the societies?
(f) Does the business help to rehabilitate employees with mental and physical
disabilities?

3. Protect and improve the physical environment

The business should do more than is provided by the law to eliminate water, air and solid
waste and noise pollution. They should be concerned with deforestation and pouring of
waste chemicals into the river and oil spills. They should ask the following questions?
(a) Is the environment adequately protected among clean water, excessive noise and
other types of pollutions?
(b) Are products degradable or can they be recycled?
(c) Are any by-product that pose a safety hazard to the society carefully handled and
properly treated and disposed of?

4. Concern for society in general. The questions requiring solutions include:

(a) Are donations made to help develop and support education and other community
programs?
(b) Does the firm support the community enterprises by purchasing from them?
(c) Is the social impact of plant locations and relocations considered by the managers
who make such decisions?
(d) Is appropriate information concerning business operations made public?

5. To obey the spirit and the letter of the laws of the land. There are many laws that
companies this days do not obey e.g. import export requirements, remission of employee
returns and statutory deductions to central government, pollution of the environment etc.
6. Contributing towards supporting the informal sector
.Developing equipment’s to meet employees and societies needs for socializing.
7. Providing customers education about their products and services.