CORPORATE

GOVERNANCE
INTRODUCTION
 WHAT IS GOVERNANCE?
• Refers to the process whereby element In society wield power, authority, and
influence and enact policies and decisions concerning public life and social upliftment.
• It comprises all the process 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.
• The process of decision making and the process by which decision are implemented
or not through the exercise of power or authority by leaders of the country and
organizations.
 CHARACTERISTICS OF GOOD GOVERNANCE

• Participation- it could be either direct or through legitimate institutions or representatives.

Participation needs to be informed and organized. This means freedom of association and
expression on one hand and an organized civil society the other hand.
• Rule of law – good governance requires fair legal framework that are enforced impartially. It
also requires full protection of human rights, particularly those of minorities. Impartial
enforcement of laws require an independent judiciary and an impartial and incorruptible
police force.
• Transparency- means that decision taken and their enforcement are done in a manner that
follows the rules and regulations.
• Responsiveness- good governance requires that institutions and
processes try to serve the needs of all stakeholders within a reasonable
timeframe.
• Consensus Oriented- Good Governance requires mediation of the
different interest in society to reach a broad consensus on what is in the
best interest of the whole community and how this can be achieved.
• Equity and Inclusiveness- Ensures that all its members feel that they
have a stake in it and do not feel excluded from the mainstream of society.
• Accountability- is the key requirement of good governance. Who is
accountable to whom varies depending on whether decisions or actions taken
are internal or external to an organization or an institutions. In general, an or
organization or institution is accountable to those who will be affected by its
decisions or actions.
• Effectiveness & Efficiency- good governance means that processes and
institutions produce result 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.
 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
interest of company’s many stakeholders , such as shareholder, management,
customers, suppliers, financiers, government and community.
• 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 organization 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 term, 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

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 shareholder deserve equitable treatment and this equity is safeguarded
by a good governance structure in any organization.
Self- Assessment
• Corporate governance enables firm to assess their behavior
and actions before they are scrutinized by regulatory agencies.
Business establishment with a strong corporate governance
system are better able to limit exposure to regulatory risk 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.
Increase shareholders’ wealth
• Another corporate governance’s main objective to protect
the long-term interests of the shareholders. Firms with
strong corporate governance structure are seen to have
higher valuation attached to their shares by businessman.
This only reflects the positive perception that good
corporate governance induces potential investors to decide
to invest in a company.
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 right of shareholders and includes both strategic
and operational risk management. It is concerned in
both long term earning potential as well as actual
short-term earnings and holds directors accountable
for their stewardship of business.
 Transparency and full Disclosure Accountability

Is the board telling us what is going on? Is the board taking responsibility?

GOOD AND EFFECTIVE

GOVERNANCE

Corporate Control

Is the board doing the right thing?

 THE NEED FOR CORPORATE GOVERNANCE:
SARBANES- OXLEY ACT
• Is the effective way of directing and controlling companies.
• Corporate officers such as CEOs, CFOs, directors, and others must act for
the long-term best interests of shareholders and other stakeholders.
• The term “corporate governance” became a household name ever since the
Enron and WorldCom fiascos struck the business world. As presented in
the opening vignette, the Sarbanes- Oxley Act (SOX Act) was passed in the
United States right after those scandals. The SOX act is primarily a
corporate governance regulation.
• Sox seeks to strengthen the functioning of the board of
directors in the oversight of managerial performance as
well as enhancing board independence.
• Sox regulations also require evaluation of internal controls
to ensure reliable and transparent financial reporting to
investors.
 IMPORTANT PROVISION OF SOX

Strengthening of external auditor’s independence:

• The external auditor of a corporate issuer is prohibited from performing eight non-audit
services, namely: bookkeeping, information systems design and implementation, appraisal or
valuation services, internal audit, management functions or human resources, investment adviser,
and legal services unrelated to the audit.
• Corporate officers and directors are prohibited from fraudulently misleading or coercing their
external auditors in the performance of their examination of the financial statements.
• Members of the audit team must wait for a one-year period before accepting employment as
CEO, CFO, or its equivalent in an audit client.
• Audit engagement partners must be rotated every five years.
Proactive and more independent audit committees:
• All covered companies must have audit committees wherein
majority are to be “independent”
• Audit committee members may not accept any consulting, advisory
or other compensatory fees from the issuing company.
• Audit committees are directly responsible for the appointment,
compensation, and oversight of the auditor’s work.
• Disclosure as to the existence of a “financial expert” on the audit
committee.
Fraud prevention
• Provide criminal penalties for obstruction of justice
or destruction of accounting and other documents.
• Provides protection to “whistleblowers” who report
fraud and other irregularities of corporate officials.