University of

Zimbabwe
ACCN 403
CORPORATE GOVERNANCE AND BUSINESS ETHICS
By
Paul Chavhunduka (Ph.D)
Tel 0776740995
 Introduction to Corporate
Governance
Corporate governance is the system of rules, practices and processes by
which a firm is directed and controlled. Corporate governance essentially
involves balancing the interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers, financiers,
government and even the community at large. Since corporate
governance also provides the framework for attaining a company's
objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement (M
and E) and corporate disclosure. The Governance mechanisms include
monitoring the actions, policies, practices, and decisions of
corporations, their agents, and affected stakeholders.
 The six pillars of successful corporate
governance

• Accountability
• Fairness/equity
• Transparency
• Assurance
• Leadership and
• Stakeholder management.
 Accountability
Accountability embraces ownership of strategy and task required to
attain organisational goals. This also means owning reward and
risk in a clear context of predetermined value propositions. When
the idea of accountability is approached with this positive outlook,
people will be more open to it as a means to improve their
performance. This applies from the staff all the way up to top
leadership embracing risk management within defined formal
appetite for risk. This also includes fostering a culture of
compliance to create real and perceived belief that the entity is
operational within internal and external boundaries.
 Fairness/ Equity
Fairness means “treating all stakeholders including
minorities, reasonably, equitably and providing effective
redress for violations. We can also talk of the 4 Es as
espoused in Auditing – Economy, Efficiency, Equity,
and Effectiveness. Establishing effective communication
mechanism is important to ensure just and timely
protection of resources and people as well correcting of
wrongs.
 Transparency
Transparency “means having nothing to hide” that allows its
processes and transactions observable to outsiders. It also
makes necessary disclosures, informs everyone affected
about its decisions. Transparency is a critical component of
corporate governance because it ensures that all of entity’s
actions can be checked at any given time by an outside
observer. This makes its processes and transactions
verifiable, so if a question does come up about a step, the
company can provide a clear answer.
 Independent Assurance
In progressing transparency it is important for non-direct actors to
obtain confidence that executive actors are leading the entity towards
pre-defined intent and not using it for self-enrichment. This is done
by obtaining expert advisory on how applied approaches can be
improved. Assurance services provide independent and professional
opinions that reduce the information risk (risk that comes from
incorrect information). Independent assurance is the verification by a
third party (not directly responsible for Quality Assurance) and
acceptance of the product/deliverable and/or the reliability of test
results obtained from quality control and acceptance testing.
 This independent assurance
insures that:-
(1) the representation or acceptance test results are
accurate and provide a fair and equitable basis for
acceptance and
(2) quality control testing is accurate and thus will properly
indicate process quality of company transactions.
 Leadership
Leadership means offering leadership on organisation’s agenda
within the values and principles that frame the way business should
be done. Those charged with governance are responsible for these
key strategic issues and for providing leadership in establishing
the right culture to drive the performance of the business. Without
clear direction, policy and procedures, the organisation will flounder
and likely never to realise its long term goals and potential. This
should include leadership and core expertise renewal to both retain
knowledge/experience, ensure appropriate representation and
continuity (going concern concept).
 The Red Flags
Over the years, I've seen many bad habits in middle and upper
management. It hasn't gotten better--if anything, it's worse now
with remote work. Here are six red flags that really stand out.
1. Managers who can't give clear directions
You know the saying about the left hand not knowing what the
right hand is doing? This manager says one thing on Monday and
changes their mind by Wednesday, often without telling anyone.
Team members are left guessing because communication is a
mess.
 Cont’d
2. Managers who need to control everything
This person micromanages down to the last detail. The work
environment is suffocating because they need to control
every decision. They don't trust the team and refuse to
delegate. There's no room for discussion or input because
their management style is all about control. Creativity and
learning new things? Forget about it. Loyal employees just
end up following orders without finding any real meaning in
their jobs.
 Cont’d
3. Managers who triangulate
Picture a sensitive situation in which a manager does not
communicate directly with a subordinate or peer but gladly reaches
out to communicate with a third person, which can lead to that
person (who may not even be involved in the situation) becoming
part of the problem. Sometimes, this manager will even play the two
people against each other. Welcome to triangulating. This is a
dysfunctional pattern by managers who don't have the courage to
deal directly with an issue and communicate effectively to diffuse
the situation.
 Cont’d
4. Managers who have no self-awareness
Ever worked for a manager who doesn't see the elephant in
the room? What seems so obvious to others about their
behavior and how it affects team members, they miss. Even
if it's pointed out to them by their superiors, they won't fix
the damage by apologizing or trying to make things right.
Hubris does not have 20/20 vision.
 Cont’d
5. Managers who are never wrong
Ever work with a manager who's always right and you're
always wrong? They have a hard time taking blame or
ownership for things and will never admit to having made a
mistake. They're more concerned with preserving their
reputation and saving face.
 Cont’d
6. Managers who play the blame game
The first thing you'll notice is the blame game. But you
know the saying, "For every finger you point, there's three
pointing back at you." Their behavior is directly related to a
lack of personal accountability, which is often a character
issue. In which case, one must ask and confront the powers
that be: How did this person get promoted to management
in the first place.
 Stakeholder Engagement
Those charged with governance should identify the key
stakeholders and how they interact with the business and how they
are engaged with it to ensure the best outcome for the organisation.
Stakeholder engagement should be included in the annual agenda
and strategic plan.
The responsibility an individual assumes when he becomes charged
with governance of an entity is considerable and one that should only
be taken with a clear understanding of, and commitment to, fulfilling
this responsibility to the best of one’s ability foremost for the
stakeholder interest.
 Cont’d
Having a clear understanding of the principles and practices of good
governance will enhance the performance of both the individual and the
organisation – so how do you and your organisation stack up against this
checklist of good governance? This is a question to be addressed
continually.
The purpose of corporate governance is to facilitate effective, entrepreneurial
and prudent management that can deliver the long-term success of the
company.
Boards of directors are responsible for the governance of their companies. The
shareholders’ role in governance is to appoint the directors and the auditors
are to satisfy themselves that an appropriate governance structure is in place.
 The responsibilities of the
board include the following
• Setting the company’s strategic aims,
• Providing the leadership to put them into effect,
• Supervising the management of the business and
• Reporting to shareholders on their stewardship.
 Cont’d
• Corporate governance is therefore about what the board of a company does and how it
sets the values of the company, and it is to be distinguished from the day to day
operational management of the company by full-time executives.
• In the UK for listed companies corporate governance is part of the legal system as the
UK Corporate Governance Code applies to accounting periods beginning on or after 29
June 2010 and, as a result of the new Listing Regime introduced in April 2010, applies to
all companies with a Premium Listing of equity shares regardless of whether they are
incorporated in the UK or elsewhere.
• But good governance can have wider impacts to the non listed sector because it is
fundamentally about improving transparency and accountability within existing
systems.
• Many academic studies conclude that well governed companies perform better in
commercial terms.
 Corporate Governance
Structure
• An established Corporate Governance Structure provides a
comprehensive framework to
• (i) enhance accountability to shareholders and other stakeholders,
• (ii) ensure timely and accurate disclosures of all material matters,
• (iii) deal fairly with shareholders and other stakeholder interests,
and
• (iv) maintain high standards of business ethics and integrity.
 Corporate governance structure
necessitates companies tries to ensure

• orderly,
• Informed,
• fair market.
• It also tries to ensure risks are managed prudently,
while pursuing business objectives.
 Evolution of Corporate Governance

Corporate Wrongs over the Recent Past and over the past three decades, the
investment world has seen a large number of scandals relating to companies which
are attributed to failure of governance. These have been caused by a combination
of number of factors, principally the three corporate sins, leading to such things as:
• Company managers (principally the executive directors) lost sense of business or
corporate ethics.
• Earnings became the prime measure of a company’s success. Directors were not
prepared to show low profits or losses. This led to the use of unethical practices
(like creative accounting, falsification of books etc to increase or show higher
earnings.
• Boards were generally ineffective and played into the hands of executive directors,
approving improper financial statements and condoning unfair corporate decisions.
 Cont’d
• Managers awarded themselves huge bonuses and stock options, often at the
expense of other stakeholders.
• Companies concentrated on short term gains and showing higher current
profits, often sacrificing the long term objectives.
• Auditors colluded or failed to stop the executive directors from using improper
accounting policies. In the process they lost their independence which they
surrendered for getting higher audit fees.
• The disparity in remunerations between higher and lower level employees grew
to uncomfortable levels. A culture of greed developed among senior managers.
• Most small investors lost interest in long term investments and concentrated
on short term gains through share price movements.
 Some major corporate tragedies
arising out of poor governance in USA
• WorldCom This Telephone and Communications Company used age-old
technique of using improper accounting policies to misallocate $3.8
billion in expense and treated them as assets, thereby inflating profits
and awarding huge bonuses to executive directors. Its Chairman
borrowed over $408 million from the company to cover personal debts.
• Enron This energy company created outside partnerships that
helped it to hide its poor financial conditions. It regularly misstated its
earnings and assets. Executives paid themselves huge bonuses and
also earned billions of dollars selling company’s shares, given to them as
part of their remuneration package. The company eventually went
bankrupt.
 Cont’d
• Waste Management Company misstated its earnings by
$17 billion over six years period (1992-97). Its directors
were ultimately sued for accounting fraud. The Chief
executive of this company, Dennis Kozlowiski was
charged with deliberately dodging sales tax on purchase
of artwork for his personal residence, routing it through
company books.
 Some Major Corporate Tragedies
Arising out Of Poor Governance in UK
• Barings Bank The management of this bank failed completely in its internal controls, letting a
single employee cause a loss of $1.4 billion in stock trading. This was a fatal internal control
failure that allowed his activities go completely unchecked. The bank never questioned the
legitimacy of huge payments authorized by Leeson to Singapore Money Exchange (SIMAX) and
Osaka Stock Exchange (OSE). The bank with 233 years history and considered one of Britain’s
best merchant banks eventually had to close its operations in Singapore.
• Mirror Group of Newspapers Robert Maxwell, born in Czechoslovakia, became a naturalized
British. He rose from extreme poverty to being a very influential businessman. His many
investments included Mirror Group of Newspaper. He is presumed to have fallen overboard
from his luxury yacht and his body was subsequently found floating in the Atlantic Ocean.
• It was in October 1991 when the exposure of his frauds became inevitable. It was subsequently
found that he had misappropriated hundreds of millions of pounds from his various companies,
even from the pension fund of Mirror Group. The Group was declared bankrupt as were his
sons.
 Cont’d
• Polly Peck International
• This company went from being a small firm with a market
capitalization of just £300,000 to being a constituent of FTSE 100
index in less than 10 years with a market value of over £1.7 billion. Its
principal owner, Asil Nader, set up or bought over 200 subsidiary
companies in various parts of the world including interests in
Japanese Company Sansui, but mostly in Turkey and Northern
Cyprus. A large number of irregular payments to Cyprus companies
were detected, totalling over £58 million. Asil Nader was formally
charged with 70 counts of fraud when the company collapsed in 1991.
 Cadbury Report 1992 (UK)
Following serious financial scandals and collapses (e.g. BCCI and
Mirror Group), and a perceived general lack of confidence in the
financial reporting of many UK companies, the Financial
Reporting Council, the London Stock Exchange and the
Accountancy Profession established the Committee on the
Financial Aspects of Corporate Governance, in May 1991. It was
chaired by Sir Adrian Cadbury and came out with its landmark
report in Dec. 1992, recommending a Code of Best Practice with
which the boards of all listed companies should comply.
1

Abstracts of Cadbury Report

Cont’d
Cont’d
Cont’d
Cont’d
Cont’d
 THE KINGS REPORTS
WHAT IS THE KINGS REPORT
• The King Report on Corporate governance is a booklet of guidelines for the
governance structures and operation of companies in South Africa.(Kumar 2010)
OBJECTIVES OF THE KINGS REPORT
• To create an ethical culture in organisations
• To improve the performance of organisations and increase the value they create
• To ensure there are adequate and effective controls in place
• To build trust between all stakeholders
• To ensure legitimacy
 EVOLUTION OF THE KING
REPORT
The King’s Report has undergone many changes since 1994. With all
the changes in business, it was inevitable that the King Report and King
Code would have to be updated from time to time. Each version of King
builds on the one before.
• VERSIONS OF KINGS REPORTS THAT WERE ISSUED
• King 1 – issued in 1994
• King 2 – issued in 2002
• King 3 – issued in 2009
• King 4 – issued in 2017
 FIRST KING’S REPORT
• It was the first King Report on corporate governance and the first corporate governance
code for South Africa. It included not only financial and regulatory aspects, but also
advocated an integrated approach that involved all stakeholders. It sought to educate
and align the newly democratic South Africa to the machinations of the capitalist market
system. It shifted the focus of corporate governance firmly onto the stakeholder.
• According to Decker 2002, it is widely accepted as the game changer in terms of
corporate governance as it stresses on the business life of companies and the impact of a
wide group of stakeholders over the shareholders focused emphasis on the creation of
value.
• Over and above the financial and regulatory aspects of corporate governance, King 1
advocated an integrated approach to good governance in the interest of a wide range of
stakeholders.
 SECOND KING’S REPORT
The global economic environment and legislative developments necessitated the
update of King 1 version to King 2 version. King 1 version was revised to include new
sections such as sustainability, the role of the corporate board and risk management.
The key principles from the second king report covered the following areas:
• Directors and their responsibility – what about them – a brief detail can assist the
reader
• Risk management
• Internal audit
• Intergrated sustainability reporting
• Accounting and auditing
 THIRD KING’S REPORT
The third version of the King’s report was necessitated by
the new Companies Act no. 71 of 2008 and changes in
international governance trends. Mervin King was of the
opinion that the second version of the King report was
wrong to include sustainability as a separate chapter,
leading companies to report on it separately from other
factors. Resultantly King 3 saw the integration of issues
such as governance, strategy and sustainability.
 FOURTH KINGS REPORT
The objective of King 4 is to promote corporate governance
as integral to running an organisation and delivering
governance outcomes. (KPMG 2016). The application
regime for King 4 is apply and explain and this is
highlighted in the table below:
 SOURCE: Institute of Directors Southern Africa (2016)

Cont’d

APPLY PRINCIPLES EXPLAIN PRACTICES

All principles are phrased as Explanation should be provided in
aspirations and ideals that the form of a narrative account,
organisations should strive for with reference to practices that
in their journey toward good demonstrate application of the
governance and realising the principle. The explanation should
governance outcomes. The address which recommended or
principles are basic and other practices have been
fundamental to good implemented and how these
governance and application is achieve or give effect to the
therefore assumed. principle.
 Cont’d
• King 4 is comprised of 3 elements which are practices,
principles and governance outcomes. The practices are
recommended at an optimum level of corporate governa nce
and should be adapted by each organisation to achieve the
principle.
• The governance outcome is the positive effect or benefits of
good corporate governance for the organisation and includes
ethical culture, performance and value creation, adequate and
effective control and trust, good reputation and legitimacy.
 Cont’d
• The philosophy of King 4 is focused around the following:
• Company’s role and responsibility in society
• Ethical and effective leadership
• Corporate citizenship
• Sustainable development
• Stakeholder inclusivity and responsiveness
• Integrated reporting and integrated thinking
Corporate Governance Theories

• Corporate governance is often analysed around major theoretical frameworks.

The most common are agency theories, stewardship theories, resource-
dependence theories, and stakeholder theories.
• Agency Theories
• Agency theories arise from the distinction between the owners (shareholders)
of a company or an organization designated as "the principals" and the
executives hired to manage the organization called "the agent." Agency
theory argues that the goal of the agent is different from that of the
principals, and they are conflicting (Johnson, Daily, & Ellstrand, 1996). The
assumption is that the principals suffer an agency loss, which is a lesser
return on investment because they do not directly manage the company.
 Cont’d
• Part of the return that they could have had if they were managing the
company directly goes to the agent. Consequently, agency theories
suggest financial rewards that can help incentivize executives to maximize
the profit of owners (Eisenhardt, 1989). Further, a board developed from
the perspective of the agency theory tends to exercise strict control,
supervision, and monitoring of the performance of the agent in order to
protect the interests of the principals (Hillman & Dalziel, 2003). In other
words, the board is actively involved in most of the managerial decision
making processes, and is accountable to the shareholders. A non profit
board that operates through the lens of agency theories will show a
hands-on management approach on behalf of the stakeholders.
 Stewardship Theories
• Stewardship theories argue that the managers or executives of a
company are stewards of the owners, and both groups share common
goals (Davis, Schoorman, & Donaldson, 1997). Therefore, the board
should not be too controlling, as agency theories would suggest.
• The board should play a supportive role by empowering executives
and, in turn, increase the potential for higher performance (Hendry,
2002; Shen, 2003). Stewardship theories argue for relationships
between board and executives that involve training, mentoring, and
shared decision making (Shen, 2003; Sundaramurthy & Lewis, 2003).
 Resource-Dependence
Theories
• Resource-dependence theories argue that a board exists as a provider of
resources to executives in order to help them achieve organizational goals
(Hillman, Cannella, & Paetzold, 2000; Hillman & Daziel, 2003). Resource-
dependence theories recommend interventions by the board while advocating
for strong financial, human, and intangible support to the executives.
• For example, board members who are professionals can use their expertise to
train and mentor executives in a way that improves organizational
performance. Board members can also tap into their networks of support to
attract resources to the organization. Resource-dependence theories
recommend that most of the decisions be made by executives with some
approval of the board.
 Stakeholder Theories
• Stakeholder theories are based on the assumption that shareholders are not the only
group with a stake in a company or a corporation. Stakeholder theories argue that
clients or customers, suppliers, and the surrounding communities also have a stake in a
corporation. They can be affected by the success or failure of a company. Therefore,
managers have special obligations to ensure that all stakeholders (not just the
shareholders) receive a fair return from their stake in the company (Donaldson &
Preston, 1995).
• Stakeholder theories advocate for some form of corporate social responsibility,
which is a duty to operate in ethical ways, even if that means a reduction of long-term
profit for a company (Jones, Freeman, & Wicks, 2002). In that context, the board has a
responsibility to be the guardian of the interests of all stakeholders by ensuring that
corporate or organizational practices take into account the principles of sustainability
for surrounding communities.
 Benefits of Good Corporate
Governance
• Good corporate governance structures encourage companies
to create value (through enterpreneurism, innovation,
development and exploration) and provide accountability and
control systems commensurate with the risks involved.
• Strong corporate governance maintains investors’ confidence,
whose support can help to finance further economic growth.
Companies who implement the principles of good corporate
governance into working environment life will ensure corporate
success and economic growth. They are the basis on which
companies can grow.
 Zimbabwean National Code on
Corporate Governance
History
• Published in April 2015, the National Code of Corporate Governance of
Zimbabwe (“ZimCode”) is the first national corporate governance code for
private and state-owned companies. Prior to this code, corporate governance in
Zimbabwe was regulated by the Companies Act (Chapter 24:03)(now repealed),
the Zimbabwe Stock Exchange Act (Chapter 24:18) (“ZSE”) listing requirements
(now repealed), Public Finance Management Act (Chapter 22:19) (PFMA) as
well as the rules of various professional bodies. At the time, the ZSE listing
rules were based on those of the London Stock Exchange and the Johannesburg
Stock Exchange, which enforce corporate governance standards as derived
from the United Kingdom Cadbury Report and the South African King Report.
 Cont’d
• Many elements of the United Kingdom Cadbury Report
and South African King Reports have made their way into
the ZimCode. In line with international standards, the
ZimCode adopts a stakeholder inclusive approach to
corporate governance, that requires directors to consider
not only the interests of shareholders, but of all
stakeholders when making decisions.
 Scope of Application of the
ZimCode
• The ZimCode is a non-binding code that applies to all business entities in Zimbabwe,
whether private, public, or non-profit making. However, the Zimbabwe Stock Exchange
requires, as a condition of listing, that companies comply with the provisions of the
Zimcode. The Code recognises the need for sector-based codes but in the event that the
sector-based code is inconsistent with the ZimCode, the ZimCode will take precedence.
The ZimCode is therefore the overarching standard of good corporate governance
practices. The Code adopts a principles-based, rather than a rules-based approach. It
avoids taking a mandatory approach for businesses in the private sector; instead, it
provides them with flexibility to adopt systems and procedures, in line with the
recommended practices, that best suit their individual circumstances. Regards public
entities, the Public Entities Corporate Governance Act [Chapter 10:31] as well as the
Companies and Other Business Entities Act [Chapter 24:31] mandate that the boards in
these companies, conduct the affairs of the entity in line with the principles in the
ZimCode.
 Cont’d
• The Code itself is incorporated in the Public Entities
Corporate Governance Act. The code is therefore binding
on public commercial entities. There is however no legal
penalty where such entities do not act in line with the
ZimCode.
Compliance and Enforcement
• The ZimCode employs an “apply or explain” methodology, meaning that
Boards must consider whether to follow each recommendation, based
on the best interests of the particular company. Boards can therefore
decide to apply the recommendations in ZimCode differently or apply
another practice while still achieving the objective of recommendation.
Boards are expected to explain how the principles and
recommendations in the ZimCode have been applied or, if not applied,
the reasons thereof. Rather than being a rigid set of rules with legal
penalties, the Code comprises several principles forming the core of
the Code. Below is are some of the noteworthy corporate governance
principles of the Code.
 Principle 1 – Ownership and
Control
• The code recommends, amongst other things, that there be a
functional balance of power between shareholders, management,
and the board of directors; the code suggests that this be
achieved by ensuring that corporate power is not vested in one
person or a small group of people. The rights of minority
shareholders must also be respected. Further, the shareholders,
board and management are called to protect and promote the
interests of the company and its stakeholders, through
introduction of share ownership schemes for employees and
managers as well as community initiatives.
 Principle 2 – Board of Directors
and Directors
• Organisations should be headed by an effective and appropriately qualified board of
directors, who act in the best interests of the company. The code recommends that
the board comprise mostly non-executive independent directors and that the
chairperson of the board and the chief financial officer be separate. Responsibilities
and accountability within the organisation should be clearly identified. Directors
should be appointed through formal process, and a nominations committee should
assist, where appropriate. Appropriate board committees ought to be formed to
assist the board in the effective performance of its duties (e.g. remunerations
committee, corporate conflict resolution committee, audit committee, risk
committee, nomination of directors committee etc). Ideally, boards should be
assisted by a suitably qualified company secretary, who should maintain an arms’
length relationship with the company and is a gatekeeper of good corporate
governance.
Principle 3 – Governance of Risk
• The board should be responsible for risk governance and
should ensure that the organisation develops and executes
a comprehensive and robust system of risk management.
The board also ought to ensure the maintenance of a
sound internal control system and is encouraged to
establish a risk committee. Internal audit is also
recommended, as an important form of risk control and
should be independent and objective.
 Principle 4 – Information
Management and Disclosure
• The board should present a fair, balanced, and
understandable assessment of the organisation’s financial,
environmental, social and governance position, as well as
its performance and outlook, in its annual report and on
its website. The code therefore supports sustainable
reporting in line with the international standards.
 Principle 5 – Corporate Conflict
Prevention and Resolution
• The board should establish processes, procedures and
systems for the prevention and resolution of corporate
conflicts and should establish a conflict resolution
committee to assist in this regard. Disputes ought to be
resolved using alternative dispute resolution where
possible, and insider trading is prohibited.
 Principle 6 – Compliance and
Enforcement
• The Board should ensure compliance with applicable laws
and non-binding rules, codes and standards and it should
guarantee that the company, its officers, employees, and
agents comply with and adhere to them.
 Principle 7 – Stakeholder
Relationships
• The board should be responsible for ensuring that an appropriate
dialogue takes place among the organisation, its shareholders, and
other key stakeholders. The board should respect the interests of
its shareholders and other key stakeholders within the context of
its fundamental purpose. The Code specifically defines
stakeholders to include shareholders, institutional investors,
creditors, lenders, suppliers, customers, regulators, employees,
trade unions, the media, analysts, consumers, society in general,
communities, auditors and potential investors. It therefore
supports the stake-holder inclusive approach to governance.
 Shortcomings
• Unlike the South African King Report IV, the ZimCode does not provide
specific recommendations for technological advancements which have
revolutionized businesses. The code does not address I.T governance and
security. With the advances in technology which have brought about new
risks, opportunities, and disruptions, businesses in Zimbabwe ought to
identify and take cognitive steps to address governance of I.T, despite the lack
of recommendations in the ZimCode. Specifically, boards should prepare
technology and information policies and delegate the implementation to
management. The policies ought to address the monitoring of cyber security
and social media risks and appropriate responses thereof, as well as
protection of privacy and security, optimizing of technological investments
and disposing of obsolete technology.
 Cont’d
• Another shortcoming, is the “apply or explain” approach to
disclosure, advocated for by the Code. It is suggested that the Code
move away from “apply or explain” to “apply and explain” to
encourage a higher standard of good corporate governance. Under
“apply and explain” the application of the principles is expected, and
an explanation must be disclosed on the practices that have been
implemented and how these support the achieving of the associated
governance principle. The current “apply or explain” merely implies
a consideration by the board of how the principles can be applied,
permitting them to explain if they do not apply the principles.
 Cont’d
• In addition, without law enforcing mandatory compliance, for many
companies the decision to carry out good corporate governance hinges
on a cost–benefit analysis by companies to determine if compliance will
boost their profits. Due to the widespread misconception that practicing
good corporate governance is costly and that the cost does not justify the
result, it would therefore be more appropriate to draft these standards as
legislative amendments in Companies Act and not as guidelines only, to
ensure the best performance and commitment to these rules. Legislative
amendments could also impose penalties for failure to adhere to the
principles and set benchmarks for measuring and assessing corporate
governance practices in, not only public, but private companies as well.
 Codes of best practice

• Codes of best practice have developed over time into recognised

methods of encouraging managers to achieve stakeholder
objectives, applying best practices to many key areas of
corporate governance relating to executive remuneration,
risk management, risk assessment, auditing, internal
control, executive responsibility, and board accountability.
Codes of best practice have emphasised and supported the key
role played by non-executive directors in supporting
independent judgement and in following the spirit of
corporate governance regulations.
 Cont’d
• A code of practice provides detailed information on how you can achieve the
standards required under the work.
• Regardless of whether your organization is legally mandated to have a code of
conduct (as public companies are), every organization should have one. A code
has value as both an internal guideline and an external statement of
corporate values and commitments.
• A well-written code of conduct clarifies an organization’s mission, values and
principles, linking them with standards of professional conduct. The code
articulates the values the organization wishes to foster in leaders and employees
and, in doing so, defines desired behaviour. As a result, written codes of conduct
or ethics can become benchmarks against which individual and organizational
performance can be measured.
 Cont’d
• Additionally, a code is a central guide and reference for
employees to support day-to-day decision making. A
code encourages discussions of ethics and compliance,
empowering employees to handle ethical dilemmas they
encounter in everyday work. It can also serve as a
valuable reference, helping employees locate
relevant documents, services and other resources
related to ethics within the organization.
Externally, a code serves several
important purposes
• Compliance: Legislation (i.e., the Sarbanes-Oxley Act of 2002)
requires individuals serving on boards and organizational
leaders of public companies to implement codes or clearly explain
why they have not.
• Marketing: A code serves as a public statement of what the company
stands for and its commitment to high standards and right conduct.
• Risk Mitigation: Organizations with codes of ethics, and who
follow other defined steps can reduce the financial risks associated
with government fines for ethical misconduct by demonstrating
they have made a “good faith effort” to prevent illegal acts.
 Cont’d
• A best practice is a technique or methodology that, through
experience and research, has proven to reliably lead to a desired
result. A commitment to using the best practices in any field is a
commitment to using all the knowledge and technology at one's
disposal to ensure success.
• A best practice is a method or technique that has been generally
accepted as superior to any alternatives because it produces results
that are superior to those achieved by other means or because it has
become a standard way of doing things, e.g., a standard way of
complying with legal or ethical requirements.
 Cont’d
• Best practices are used to maintain quality as an alternative to
mandatory legislated standards and can be based on self-assessment or
benchmarking. Best practice is a feature of accredited management
standards such as ISO 9000 and ISO 14001.
• Some consulting firms specialize in the area of best practice and offer
pre-made templates to standardize business process documentation.
Sometimes a best practice is not applicable or is inappropriate for a
particular organization's needs. A key strategic talent required when
applying best practice to organizations is the ability to balance the unique
qualities of an organization with the practices that it has in common with
others.
 Cont’d
• Good operating practice is a strategic management term.
More specific uses of the term include
good agricultural practices, good manufacturing practice,
good laboratory practice, good clinical practice and good
distribution practice.
CORPORATE ACTIONS REQUIRING
SHAREHOLDERS APPROVAL
The two routine corporate actions requiring shareholders’ approval under the Anglo-US
model are:
• 1. Election of Directors
• 2. Appointment of Auditors
• The following are non routine
• 3. Establishment or amendment of stock options (because these plans affect executive and
board compensation)
• 4. mergers and takeovers
• 5. Restructuring
• 6. Amendments of the articles of association
• 7. Amendment of the Memorandum of association
Emergence of Corporate Governance Models

• Corporate Governance refers to the way companies are financed

and structured in an economy in terms of entrepreneurial and
functional decision-making. Over the past forty years or so, three
main models of corporate governance have emerged in the
world. Most countries in the world have one or other of these
models. These are:
• 1. Anglo-American Model (AAM)
• 2. Japanese Model (JM)
• 3. German Model (GM)
Salient Features of Anglo- American Model

• This model is based on free-economy theory and operates

essentially on the premise that the free inter-play of market
forces sets the price for capital as well as decide who gets to
run a company. Companies in this model operate to maximize
the wealth of its shareholders who decide who to assign the
responsibility of running the company. The prime measure of the
efficiency of the BoD is the rate of return earned on the
investors. The AAM works on a triangular (Principal-
Watchdogs-agent) relationship comprising of shareholders, BoD
and the managers.
 JAPANESE MODEL
• The Japanese model is characterized by a high level of stock ownership by affiliated
banks and companies
• ● a banking system characterized by strong, long-term links between banks and
corporation
• ● A legal, public policy and industrial policy framework designed to support and
promote "keiretsu"
• ● BOD composed of solely insiders and comparatively low(in some corp., non-
existent)level of input of outside shareholders
• ● Equity Financing is important for Japanese Corporations
• ● Insiders and their affiliates are the major shareholders in most Japanese
corporations.
 KEY PLAYERS
• The Japanese system of Corporate Governance is many-sided, centering around a main
bank and a financial/industrial network or keiretsu
• ●The bank provides its corporate clients with loans as well as services related to bond
issues, equity issues, settlement accounts and related consulting services.
• ●The main bank is generally a major shareholder in the corporation.
• ●In the US, Anti-monopoly prohibits one bank from providing this multiplicity of services
• ●Many Japanese corporation also have a strong financial relationships with a network of
affiliated companies. These networks, characterized by crossholding of a debt and equity,
trading of goods and services, and informal business contacts, are known as Keiretsu
• ●Government-directed industrial policy plays a key role in Japanese Governance, this
includes official and unofficial representation on corporate boards, when a corporation
faces financial difficulty
 Cont’d
• In the Japanese model, the four key players are:
• 1. Main Bank(a major inside shareholder)
• 2. Affiliated company or keiretsu(a major inside shareholder)
• 3. Management and the
• 4. Government Interaction among these players serves to link relationship rather balance power,
as in the case of Anglo-US Model - non-affiliated shareholders have little or no voice in Japanese
Governance -As a result, there are few truly independent directors(representing outside
shareholders)
• Share Ownership Pattern In Japan, Financial institutions and corporations firmly hold ownership
of the equity market. Insurance companies Banks 43 % Corporations 25 % Foreign 3 %
• Composition of the board of directors Executive managers – the heads of major divisions of the
company and its central administrative body. COMMON PRACTICE:
 Cont’d
• If a company’s profit fall over an extended period, the
main bank and member of the keiretsu may remove
directors and appoint their own candidates to the
company’s board.
• Appointment of retiring government bureaucrats to
corporate boards
• The average Japanese board contains 50 members
 UNIQUE ELEMENTS of the
GERMAN MODEL
• In the German Model we see – a Two-tiered Board
Structure which means it consists of a management board
and supervisory board. The 2 boards are completely
distinct; no one may serve simultaneously on the two
boards. The size of supervisory board is set by law cannot
be changed by shareholders.
 Cont’d
Voting right restrictions:
• Voting right restrictions are legal; these limit a
shareholder to voting a certain percentage of the
corporation’s total share capital, regardless of share
ownership position. Austrian governance applies in
Netherlands German, Scandinavia, France, and Belgium.
 Key characteristics of the governance system

Board size
• According to the Corporate Library's study, the average board size is 9.2 members,
and most boards range from 3 to 31 members. Some analysts think the ideal size is
seven.
• Like most of the questions people ask in relation to good governance, and particularly in
relation to the King Report on Corporate Governance, the answer to this one is, It
depends. This is in line with King IV’s principle “Apply and explain”: a good
governance code must be flexible enough to allow the board to put the most
appropriate measures to achieve the desired outcomes ̶ provided it explains its logic.
When it comes to board size, there is some research to back up the view that smaller
boards perform better than large ones in the main. PwC’s Non-executive directors’
practices and fees trends report for 2014 shows that the majority of JSE boards have
between three and seven members.
 Cont’d
• In the United States, according to November 2015 research “Does Optimal
Corporate Board Size Exist?”, the most common board size for publicly
traded companies ranges between eight and 11 directors.
Most interestingly, it appears that US companies with fewer board
members produce better returns for shareholders, according to a 2014 study
by governance researchers GMI Ratings prepared for The Wall Street Journal.
One reason for this could be that smaller boards can support a collegial,
collaborative environment. Directors will find it easier to contribute, and
assertive directors will be less likely to hold the floor. The chair will be better
able to identify those who are side-lined, and solicit their participation.
 Cont’d
• Board members are likely to enjoy themselves more, and thus to give
that little bit extra ̶ even if it is subconsciously. On a more mundane level,
smaller boards are easier to manage simply because there are fewer
people, and fewer schedules to coordinate.
Conversely, bigger boards may be harder to manage, and shyer or
less well prepared board members can sink more gracefully into the
background.
However, we repeat, there is no magic number that will guarantee a
well-functioning board. The board must exercise its collective mind in
coming to a conclusion about what its optimal number of members
should be.
 Positions – who can be CEO CFO,

• What skills the particular company needs. For example, a company facing multiple lawsuits or
intense competition, or wanting to expand into a new market might require a broad set of skills.
• Different industries also require different skills. For example, a company operating in a highly regulated
sector like mining or banking might need a bigger range of specialist skills than one in the hospitality
industry, and thus might have a bigger board.
• The size of the company and its geographical footprint would also be part of the equation.
• The need to strike a balance between executive and non-executive directors is critical in terms of good
governance, and would necessarily impact board size. King IV recommends that the majority of the
board should be non-executive, and mostly independent.
• Positions – who can be CEO CFO,
• Some considerations would be:

• What skills the particular company needs. For example, a company facing multiple lawsuits or
intense competition, or wanting to expand into a new market might require a broad set of skills.
 Cont’d
• Different industries also require different skills. For example, a
company operating in a highly regulated sector like mining or banking
might need a bigger range of specialist skills than one in the
hospitality industry, and thus might have a bigger board.
• The size of the company and its geographical footprint would also be
part of the equation.
• The need to strike a balance between executive and non-executive
directors is critical in terms of good governance, and would
necessarily impact board size. King IV recommends that the majority
of the board should be non-executive, and mostly independent.
 Cont’d
• Is the board diverse enough not just to satisfy South African regulations
but, more importantly, to enable it to guide the company effectively in
a highly complex business, social and political environment?
• Are there sufficient skilled people to participate in the requisite board
committees? The Companies Act stipulates at least an audit
committee and a social and ethics committee. Bigger companies are
likely to conclude that they should also have standing risk,
remuneration and nomination committees. Following King IV’s
principle of proportionality, smaller companies might not constitute
formal committees.
 Cont’d
• The spirit of King IV is what should guide us. In this
light, then, while one might believe that a lean board has
intrinsic advantages from many practical points of view,
the key criterion must be to ensure the board has the
right mix of skills, knowledge and experience to guide a
particular organisation in a particular sector at a
particular time.
 Board Structure
• A board of directors (B of D) is a group of individuals,
elected to represent shareholders. A board’s mandate is to
establish policies for corporate management and
oversight, making decisions on major company issues.
Every public company must have a board of directors.
Some private and non- profit organizations also have a
board of directors
 BREAKING DOWN 'Board of
Directors (B of D)'
• In general, the board makes decisions as a fiduciary on behalf of
shareholders. Issues that fall under a board's purview include the
• hiring and firing of senior executives,
• development of dividend policies, options policies, and
• executive compensation.
• helping a corporation set broad goals,
• supporting executive duties, and
• ensuring the company has adequate, well-managed resources at its
disposal.
 General Board Structure
• The structure and powers of a board are determined by an
organization’s bylaws. Bylaws can set
• the number of board members,
• the manner in which the board is elected (e.g., by a shareholder
vote at an annual general meeting), and
• how often the board meets.
• The board of directors should be a representation of both
management and shareholder interests, and consists of both
internal and external members.
 Election and Removal Methods of Board
Members

• While members of the board of directors are elected by shareholders,

those put up for nomination are decided by a nomination committee. In
2002, the NYSE required that the nomination committees consist of
independent directors. Ideally, directors’ terms are staggered to ensure
only a few directors are up for election in a given year.
• Removal by resolution in a general meeting can present challenges.
Most bylaws allow a director to review a copy of a removal proposal
and then respond to it in an open meeting. In addition many directors’
contracts include a disincentive for firing – a golden parachute clause
that requires the corporation to pay the director a bonus upon being let
go.
 Cont’d
• Breaking foundational rules can lead to the expulsion of a director.
• These infractions include but are not limited to the following:
• Using directorial powers for something other than the financial benefit
of the corporation
• Using proprietary information for personal profit
• Making deals with third parties to sway a vote at a board meeting
• Engaging in transactions with the corporation that result in a
conflict of interest.
• In addition, some corporate boards have fitness-to-serve protocols.
 Board Tenure
• The purpose of this policy is to ensure the board is at all times operating in a co-ordinated
and effective manner so as to best promote the interests of the company and its
shareholders. The Nominations Committee recommends nominations for the board, and
re-election of existing board members. It reviews, at least annually, the size and structure of
the board to ensure that it comprises appropriately qualified and experienced people. This
committee is also responsible for the formal evaluation of the board’s performance as a
whole, in accordance with this policy.
• Directors appointed by the Board to fill a casual vacancy on the board are required to
submit their names for election at the next annual general meeting of shareholders.
Directors who have been in office for three years since their last election must retire and
may seek re-election at the Company’s next annual general meeting. In order to revitalise
the board, directors should not seek re-election after three elected terms of three years
unless the board (through the Nominations Committee) requests them to do so.
 Cont’d
• The board may invite a director to seek re-election beyond nine years if this
would be advantageous for reasons such as board leadership or continuity.
Non-executive directors cannot be removed by board resolution.
Shareholders may resolve to remove directors in accordance with the
Corporations Act, at a meeting convened by shareholders or by directors.
Directors cease to hold office under the constitution if they
• resign,
• become of unsound mind, or
• if they fail to attend board meetings for three months without leave.
 Cont’d
• Directors may resign at any time by notice to the Company Secretary.
• The board expects directors to:
• contribute effectively to the performance of the Company and the board
• stay up-to-date with and comply with all relevant legal obligations and best practice
guidelines published by relevant authorities or industry/professional bodies
• comply with all applicable policies and constituent documents (including the Code of
Conduct and Constitution)
• maintain the highest levels of personal and professional integrity and ethics
• conduct themselves in a civil manner, respectful of the contributions of all board members,
and the need for co-operation.
• The above are guides only and companies can incorporate other conditions or discard
others.
 Committee structure, nature, composition
and duties of individual committees

• The structure of Committees and roles within committees may vary

according to their purpose and length of operation. The traditional
structure includes the Chair (or President), Treasurer and Secretary,
each with defined and distinctive roles. These are generally
supplemented by general committee members or portfolio
representatives.
• Charged with providing leadership and direction to the committee, the
President is responsible for ensuring that the committee fulfils its
responsibilities for the governance and success. The President is
generally the spokesperson and should work to maintain key
relationships within and outside the committee.
 Desirable Attributes
• The President should:
• be well informed of all organisation activities and able to provide oversight
• be a person who can develop good relationships internally and externally
• be forward thinking and committed to meeting the overall goals of the
committee
• have a good working knowledge of the committee constitution, rules and
duties of office bearers
• be able to work collaboratively with other committee members
• be a competent public speaker
 Specific duties include but are
not limited to:
• Chair committee meetings ensuring that they are run efficiently and
effectively
• Act as a signatory for the committee in all legal and financial
purposes
• Regularly focus the committee's attention on matters of governance
that relate to its own structure, role and relationship
• Serve as a spokesperson when required
• Assist in the development of partnerships with other boards and
organisations that are relevant to the goals of the committee.
 The Treasurer
• The Treasurer is responsible for the financial supervision
to provide good governance. The Treasurer is the chief
financial management officer whose tasks include the
preparation of annual budgets, planning for the
organisations financial future and monitoring the
organisations revenue and expenditure. It is desirable that
the treasurer is well organized and possesses a level of
financial expertise.
 Desirable Attributes
• Good organisational skills
• Has some financial expertise
• Ability to maintain accurate records
• Honest/trustworthy
• Good communication skills
 Specific duties include but are
not limited to
• Provide advice to the committee in their management of finances
• Administer all financial affairs
• Lead the annual budget process and ensure an appropriate annual budget is
provided to the committee for approval
• Ensure development and committee review of financial policies and procedures
• Support any required auditing processes
• Receipt of all incoming monies
• Bank all monies received
• Pay all accounts
 Cont’d
• Maintain accurate records of all income and expenditure
• Ensure that all receipts and payments concur with bank
deposits and withdrawals
• Be a signatory on committee account
 The Secretary
• The Secretary is responsible for the documentation and
communication of the activities of the committee. The
secretary is the primary administration officer of the
committee and provides the links between the committee,
members and outside agencies. The Secretary should be a
good communicator, maintain confidentiality on relevant
matters and have the ability to delegate tasks and
supervise others. Amongst the Secretary's tasks are to
prepare agendas, control and distribute minutes, receive
and disseminate correspondence to and from the
committee etc.
 Cont’d
• The Secretary should:
• be organized
• have computer skills
• be able to keep confidential matters confidential.
 Specific duties include but are
not limited to:
• Maintain records of the committee and ensure effective management records
• Manage minutes of committee meetings, including ensuring the minutes Secretary does so, and
ensuring minutes are distributed to members shortly after each meeting
• Development of the agenda in consultation with other committee members and distribution
prior to the meeting
• Is sufficiently familiar with documents to note applicability during meetings
• Is responsible for ensuring that accurate and sufficient documentation exists to meet legal
requirements
• Enable and authorise people to help with the committee's business.
• Ensure that the records of the committee are maintained as required by law and made available
when required by authorised persons. These records may include founding documents, lists of
committee members, committee meeting minutes, financial reports, and other official records
 Cont’d
• Provide an up-to-date copy of the constitution and bylaws
at all meetings.
• Ensure that proper notification is given of committee
meetings as specified in the bye-laws.
• Manage the general correspondence of the committee
except for such correspondence assigned to others
• Help and lead the committee in providing systematic
communication from the committee to relevant
stakeholders.
 Separating the Shareholder
Roles and Director Roles
• The role of directors is one of stewardship. Directors are
responsible for managing or, under some statutes,
supervising the management of, the corporation. If the
Board of Directors is dissatisfied with company
management, its recourse is through the company's CEO.
If the CEO is not performing as expected, the Board may
replace him.1
• Shareholders make a financial investment in the
corporation, which entitles those with voting shares to
elect the directors. Shareholders do not normally have any
rights to be involved directly in company management.
 Cont’d
• Their connection to company management is typically via the Board
of Directors as described above. If shareholders are not satisfied
with the performance of the directors, they may remove the
directors or refuse to re-elect them.
• Except for certain fundamental transactions or changes,
shareholders normally do not participate directly in corporate
decision-making and while, as a practical matter, boards want to
know the views of the shareholders, strictly speaking, directors are
not normally required to solicit or comply with the wishes of
shareholders.
 Duties of Directors
• A director's duty is owed first and foremost to the corporation. This duty is grounded in basic
principles of
• good faith,
• stewardship and
• accountability. Requirements imposed both by common law and various statutes seek to establish
the parameters of this duty without limiting the flexibility of these principles.
To whom are Directors Accountable?
• Directors are required by corporate statutes to discharge their duties “with a view to the best
interests of the corporation.” Traditionally, this phrase has been interpreted to extend only to the
“shareholders as a whole.” However, in reaching their decisions, directors are often confronted
with a number of competing interests. In recent years, some courts have been prepared to give
directors more scope in considering the interests of different persons affected by corporate acts
without encroaching on the principle of acting in the corporation's best interests.
 Cont’d
• The courts recognize that acting with a view to the best
interests of the corporation does not mean that directors
must disregard the interests of “stakeholders” such as
employees, creditors, and the community or country in
which the corporation carries on business who may be
affected by the actions of the corporation. Considering
these interests is often in the long-term best interests of
the corporation. Nevertheless, no court has ever
recognized a duty to such stakeholders.
 Cont’d
• Courts have held that directors owe a duty to the corporation and not its
individual shareholders. In many instances, the distinction is not
significant, since what is good for the corporation will also benefit its
shareholders. Maximizing the return to shareholders is also, in many
cases, consistent with the best interests of the corporation.
• Nevertheless, there may be instances where the interests of the
corporation and its particular shareholders or classes of shareholders
diverge. The interests of the common shareholders may lie in realizing a
short-term gain on their investment, a goal which the directors may
conclude is not necessarily in the long-term best interests of the
corporation.
 Cont’d
• Additionally, the interests of majority shareholders may
not be the same as the interests of the corporation. A
controlling shareholder may want the corporation to take
certain action that may be in its interest, but not
necessarily in the best interests of the corporation. The
right solution to these kinds of issues depends very much
on the facts of each situation.
Directors Duty to the Interests of Other Stakeholders

• Directors recognize that their decisions have an impact beyond the corporation and its
shareholders. Employees and the community will be affected by a decision to close a plant.
Debenture holders may be affected by high-risk business strategies or by corporate
reorganizations. The national interest may be affected by a decision to move operations
offshore. Directors may feel a responsibility to consider the interests of these stakeholders.
• The modern interpretation of a director's duty to the corporation permits directors to consider
these interests in coming to a decision about what is in the best interests of the corporation.
• If today the directors of a company were to consider the interests of its employees, no one
would argue that in doing so they were not acting bona fide in the interests of the company
itself. Similarly, if the directors were to consider the consequences to the community of any
policy that the company intended to pursue, and were deflected in their commitment to that
policy as a result, it could not be said that they had not considered bona fide the interests of
the shareholders
 Directors' Conflict of Interest
• Directors may have a number of relationships that will put them in a position of conflict or give rise to an obligation to
disclose details of a relationship.
• When Does a Conflict Arise?

• Directors who have an interest in a contract or proposed contract with the corporation must consider the matter carefully. If
the contract is material from the corporation's perspective, the directors will be under a statutory obligation to declare
their interest and, with some exceptions, to refrain from voting on the matter.
• Voting on a matter in these circumstances would constitute a breach of their fiduciary obligation to act in the best
interests of the corporation. Under the corporate statutes, directors have an interest in a contract not only if they
themselves are a party to the contract, but also if they have a material interest in any person who is a party to the contract.
• The statutes do not define when a director has a material interest in a person, but material interest is generally interpreted
to mean an interest that is sufficient to result in some benefit to the director.
• Directors who are also substantial shareholders of the corporation are not automatically in a position of conflict. Such
directors must, however, separate their role as directors from their interests as shareholders. In voting on matters in their
capacity as shareholders, those directors may, of course, vote without regard for the interests of other shareholders. In
voting as directors, however, they must still act in the best interests of the corporation in respect of any matter before
them.
 Cont’d
• The corporate statutes require directors to disclose in writing to the
corporation their interest in any material contract or to request that
the interest be entered in the minutes of a meeting of the board.
• Whether the contract is material will be determined with reference
to the materiality threshold of the corporation.
• The nature of a director's interest must be disclosed in sufficient
detail to allow the other directors to understand what the interest is
and how far it goes. A director's interest must also be disclosed
within the timeframe prescribed by the relevant corporate statute.
 Voting and Abstaining from Voting

• Directors cannot normally vote on a contract in which they have a

material interest. There are exceptions for contracts that involve the
directors' remuneration or an indemnity in which they have an interest.
Exceptions are also made if the contract in question relates to security for
money lent to the director or obligations undertaken by the director for
the benefit of the corporation or if it relates to an affiliate of the
corporation. As a result of this last exception, directors who serve on
boards of affiliated corporations are not required to refrain from voting on
contracts between the two corporations that they serve.
• Two results may flow from a director's failure to disclose an interest in a
material contract or, in some cases, from voting when not entitled to do so.
 Cont’d
• First, the director may be required to account to the
corporation or its shareholders for any gain or profit
realized from the contract.
• Second, the corporation, its shareholders or, in some
cases, securities regulators, may apply to the court to
have the contract set aside. Under some statutes, the
director may nevertheless avoid these results if the
contract is confirmed or approved by special resolution of
the shareholders after appropriate disclosure of the
director's interest in the contract.
 Cont’d
• If the director failed to make the necessary disclosure and the contract was not reasonable
and fair to the corporation at the time it was approved by the shareholders, there is no
protection for the director under the corporate statute.
• Directors should be aware that the specific provisions in the corporate statutes dealing with a
director who is in a position of conflict apply only in relatively limited circumstances. They apply
only to certain contracts or proposed contracts with the corporation and would, arguably, not
include litigation, for example. Further, these provisions apply only to contracts that are
material to the corporation, not to contracts that do not meet this threshold.
• In practice, however, most directors apply the rules broadly. They do not confine the
restrictions to the statutory requirements, but concern themselves with the issue of perceived,
and actual, conflict and what seems to be the right thing to do. In practice, directors will take
themselves completely out of the consideration of a particular matter where there may be a
perception of conflict or a perception that they may not bring objective judgment to the
consideration of the matter.
 Cont’d
• In appropriate circumstances, directors will declare
their position and absent themselves not only from the
vote, but also the discussion. However, directors should be
aware that abstaining from voting, except in certain
limited circumstances, may not protect them from liability
under the corporate statutes. In particularly difficult
situations, it may be necessary or appropriate for a
director to resign.
 Rights and liabilities of
shareholders
• A shareholder of a company enjoys a number of rights and powers in
exchange for their investment in the company.
• The Role of a Shareholder
• A shareholder is a part owner of a company. They must be a legal entity (i.e.
can own property, sue or be sued) and may be a natural person or a
corporation. All companies must have at least one shareholder.
• As a company is a separate legal entity, the company (and not the shareholder)
owns the assets of the company. However, the shareholder can have a say in
the running of the company. For example, majority shareholders or smaller
shareholder blocs can vote on key issues and therefore play a significant role in
influencing the direction of the company.
Shareholder Rights Generally
• In return for investing in a company, a shareholder receives a bundle of rights in the company.
These shareholder rights differ between and within companies depending on the class of shares
held. Australian law allows for the creation of different classes of shares, but most companies only
have one class of share (i.e. ordinary shares).
• The company will decide what rights will attach to the different classes of shares. As a general
rule, shareholders enjoy the following rights:
• attending shareholder meetings and voting on key issues (e.g. election and dismissal of directors);
• transferring ownership (often in restricted circumstances);
• receiving company reports and announcements;
• receiving dividends and other distributions; and
• participating in corporate actions (e.g. further issues of shares, share buybacks, mergers and de-
mergers).
 These rights are usually set
out in:
• the company’s constitution (or the replaceable rules, to
the extent applicable);
• the company legislation; and/or
• any shareholders agreement.
 Rights in a Shareholders
Agreement
• A shareholders agreement often fills in the gaps in areas not covered by
company legislation or a company’s constitution. It can be a useful tool to
define the commercial arrangements between shareholders and assign
personal rights to those shareholders.
• Additional rights detailed in a shareholders agreement may include the
right to:
• be employed by the company;
• ensure other shareholders do not compete with the company;
• ‘drag along’ and ‘tag along’ in the event of a proposed sale; and
• confidentiality in respect of information provided by a shareholder.
 Shareholder Liabilities
• Due to the separate legal existence of a company, shareholders are not
responsible for the company’s obligations simply because they are a
shareholder.
• The liability of a shareholder is usually limited to:
• any unpaid amounts on the shares held by that shareholder;
• any liability or obligations expressly provided for in the company’s
constitution or shareholders agreement; and
• liability for breach of directors’ duties if shareholders are considered to be
directors (e.g. if shareholders are provided with powers that would
ordinarily be exercised by directors).
 Duties and liabilities of
directors
• The directors of a company are responsible for its day-to-day management.
They may exercise certain powers on behalf of the company. They owe
certain duties to the company. They may also be exposed to
certain liabilities in their capacity as directors.
• Directors' powers
• Directors are empowered to act on a company's behalf by:
• the company's articles of association
• the Companies Ordinance (Cap 622) (CO)
• common law and
• certain resolutions of its members
 Cont’d
• The directors' powers and their ability to delegate their
powers to others will be subject to:
• any provisions in the company's articles of association
limiting those powers
• CO, including in particular, the directors' general duties as
set out in CO and any matters reserved to the members by
CO
• common law and
• certain resolutions of its members
 Directors' duties
• The directors of a company owe a number of duties to it. Many of those duties have been
developed by the courts over hundreds of years forming the common law rules and equitable
principles applicable today. Several have been codified into statute. The main duties include:
• a duty to act in good faith and to use powers for a proper purpose for the benefit of the
company as a whole.
• a duty to exercise independent judgment and not to delegate powers except with proper
authorisation
• a duty to exercise reasonable care, skill and diligence
• a duty to avoid a situation in which the director has, or could have, a direct or indirect
interest that conflicts, or possibly may conflict, with the interests of the company
• a duty not to enter into transactions in which the directors have an interest except in
compliance with the requirements of the law
 Cont’d
• a duty not to gain any advantage from use of position as a
director
• a duty not to make any unauthorised use of the company’s
property or information
• a duty not to accept any personal benefit from third
parties conferred because of the director’s position as a
director and
• a duty to keep proper accounting records
 These duties are important for
two key reasons:
• a failure by a director to comply with any of the duties has serious
consequences for that director (although it may be possible for a director
to have a breach of duty ratified in order to protect himself or herself from
the consequences of a breach of duty or to obtain relief from a breach of
duty, depending on the circumstances) and
• the directors' report prepared for each financial year of a company must
contain sufficient disclosure for shareholders to understand the state of
the company’s affairs (except if the company is entitled to the 'small
private companies exemption' from this duty of disclosure). Such
disclosure would include any breaches of the duties listed above which had
a material effect on the company.
Declaration of an interest in a transaction
or arrangement with the company

• One of the statutory duties of a director is that if the

director is in any way, directly or indirectly, interested in
an actual or proposed transaction or arrangement with
the company, the director must declare the nature and
extent of that interest to the other directors before the
transaction occurs or otherwise as soon as reasonably
practicable.
The articles of association of the relevant
company should also be reviewed because:

• they may contain provisions that apply when a director has

an interest in such a transaction or arrangement (such
provisions may be wider in scope than the provisions in CO
relating to the declaration of a director's interests and may,
for example, put additional obligations of disclosure on the
director) and
• they will determine whether a director who has an
interest in such a transaction or arrangement may participate
in decisions of the board when it is the matter in hand
 Protecting a director from
liability
• A director may be exposed to certain liabilities in their capacity as a director. The Act may
void any provisions in a company’s articles or contract entered into by the company which
exempt or indemnify directors against any liability that would otherwise attach to the
directors in connection with any negligence, default, breach of duty or breach of trust.
However, there are statutory exceptions to this general prohibition which provide that:
• a company may acquire and maintain insurance for its directors, or those of an associated
company, against such liability and
• a company may provide an indemnity for its directors, and those of an associated company,
against certain liabilities, provided that such indemnity meets specific conditions and
does not cover criminal fines, regulatory penalties, defence costs of criminal
proceedings where the director is found guilty and defence costs of civil
proceedings brought on behalf of the company or an associated company in which
judgment is given against the director.
 Cont’d
• Directors can also be relieved from liability by the
disinterested members of the company ratifying conduct
that amounts to negligence, default, breach of duty or
breach of trust, subject to such conduct being capable of
ratification.
 Policy procedures relating to accounting

• Accounting policies are the specific principles and procedures implemented by a company's
management team and are used to prepare its financial statements. These include any
methods, measurement systems and procedures for presenting disclosures.
• authorisations – for example, which job roles are allowed to authorise various activities within
the business?
• bank accounts – when and how new bank accounts are opened
• new suppliers and how to choose them
• new customers and how to manage them
• buying and purchasing – for example, how to determine when stock, equipment and assets
need to be purchased
• debt collection
• insurance and risk management.
 Cont’d
• Policies provide an overview of certain rules that you
have in your business, and should.
• align with business goals and plans
• reflect the culture of the business
• be flexible
• be easily interpreted and understood by everybody in the
business.
 Sometimes a policy will need a
supporting procedure.
• Procedures are clear and concise instructions on how to abide by the policy
and detail the sequence of activities that are required to complete tasks.
• They should include the 'how to' guidelines to achieve the necessary results, and
be:
• factual, simple to understand and succinct
• written in a step-by-step style that shows people how to follow the procedure
through from beginning to end
• include references or links to any related documents and forms that need to be
completed when following the procedure
• in the best format for their purpose, for example a procedure could be presented as
written steps, a flow chart or a checklist.
 Governance of Family
Businesses
• Trust, traditions and expectations can only get a family business so far. Each generation wants
different things, so establishing the rules of engagement for everyone is essential for success.
Like any enterprise, a family business needs to have governance in place to ensure that its
family and business strategies are achieved. The governance must protect the business from the
normal and predictable challenges that family involvement brings.
• However, formalising ownership structures, power and processes can sometimes stir up
resistance, particularly from the founding generation as it transitions from a ‘dictatorship’ to
‘democracy’.
• The benefits of governance far outweigh the challenges of developing it. As more generations
become involved, and the demands of people in the business increase, the need for governance
structures become very vital.
• “When we talk about governance, we’re talking about education and pre-arranged rules about
how things are managed and how we will implement strategies,”. “These rules must apply to
everyone involved in the enterprise, from directors to shareholders, managers and staff.”
 Cont’d
• There typically needs to be two separate but related sets of rules (governance)
• One regarding how the family will behave and relate to the business – a Family
Constitution – and
• The other regarding how the family will behave and relate in the business – a
Shareholders’ Agreement and sometimes a Board Charter.
• Unlike a regular enterprise which has governance at the core and does not need to
consider the family dynamic, a family business is usually built on a level of trust and
informality by the Founder. However if a business is to grow, and employ more people,
including family, it will need a level of structure to help the business ‘scale up’.
• “Founders shouldn’t expect that following generations can or will run the business the way
they have. Governance structures can help ensure there are clear rules around the
different ways family can participate and be recognised as members of the family and
business.”
 Cont’d
• Conversations around governance can be challenging, and it can be hard to transfer
from a tradition of ‘trust, informality and implicit rules’ to a new tradition of
‘structure and explicit rules’.
• If someone wants to join or leave the business, how do they do so?” There is no point
waiting until a critical juncture to try and solve succession, ownership, management
structures, roles and responsibility issues.“It should be part of the normal business
operation to have this conversation, now,”
• To minimise distraction to the business and tension within the family when formalising
governance structures, it is important to recognise that these issues are
completely normal and predictable. It can be helpful to work with an independent
party, who can lead conversations, share proven frameworks and use their
experiences to navigate the process. “Invariably that will lead to a better outcome.
 Four pillars of governance in a
Family Business
• Governance should be broken into four categories – management, income, control and equity – with each family arriving at a unique
position on each area,
• Management
• A common trigger of problems is when the founder brings ill-prepared children into management roles. This not only creates tension, but
it can stunt the business’ performance. Pre-agreed rules must be implemented regarding how family members can join the business, and the
required experience, involvement, development and output – just like any other employee .
• “You could say it is encouraged that they work on school holidays when they’re younger, and you could make it a requirement that to go on to
management roles, they need a minimum level of experience. This ensures that they bring capability and experienced points of view,”
• The pre-agreed rules must consider reporting lines, and establish performance expectations and review processes, as well as how issues are
communicated and resolved.
• “Ideally, family members should report to someone outside the family, but if it is a family member, their performance review should
happen with an independent adviser as well. These rules help prevent disagreements later on.”
• Income
• There must be clarity around how family members, in and out of the business, will be recognised and rewarded, and how they can develop
and progress. These rules need to reflect the different roles family members can play in relation to the business as employees, directors
and/or owners.
• Employees need to be remunerated at market value, non-executive directors will require directors’ fees, and owners should receive dividends
in accordance with a pre-agreed dividend policy. Often, family businesses not only blur these roles, but they also blur the remuneration for
each. The business entity accounting concept must be respected in a Family Business.
 Cont’d
• Control
• There also must be pre-agreed rules in relation to the decisions that managers, directors and
owners make. These need to be clearly defined, communicated and respected.
• “Family members are ‘equals as members of a family’ but not ‘equals as managers,
directors or owners of a business’ setting structures, processes and strategy,”. Some of these
rules will reside in the Family Constitution, Business Policy and Shareholders’ Agreements.
• Equity
• Like any business relationship where there is more than one owner, there needs to be
agreement and communication of how people will behave as owners, “This includes defining
who can appoint directors, the payment of dividends, how decisions will be made, how and
when ownership interests can be sold or transferred, and how the business will be funded.”
• These rules need to be documented in the Shareholders’ Agreement or a Deed of Family
Arrangement.
 Respect the separation of
powers
• The creation of a governance structure is all about “clearly
defining and respecting the separation of powers”. Focusing on
the above four pillars ensures that each area has clear
governance, helping family business members to avoid arguments
and ensure the success of their strategy.
• “A lot of this comes down to ‘best fit’ rather than ‘best practice’.
Family businesses need to do what’s right for them in their
own context. Making sure a governance structure is in place will
mean they avoid arguments and problems down the road,”
 Family governance structure
• There are three components to family governance:
• Periodic (typically annual) assemblies of the family; all families in business can benefit from this
activity.
• Family council meetings for those families that benefit from a representative group of their members
doing planning, creating policies, and strengthening business-family communication and bond.
• A family constitution—the family's policies and guiding vision and values that regulate members'
relationship with the business. This written document can be short or long, detailed or simple, but every
family in business benefits from this kind of statement.
• The rare family in business may have a more elaborate family governance structure, with a separate
meeting for family-owner-managers or a separate council for family shareholders or periodic meetings
between shareholders, the board, and management.
• Properly composed and managed family assembly and family council could help:
• Develop clarity on roles, rights, and responsibilities for family members.
 Cont’d
• Encourage family members, family employees, and family owners to act
responsibly toward the business and the family.
• Regulate appropriate family and owner inclusion in business discussions.
• The family assembly typically meets annually, lasts one to two days, and
includes all adult family members (yes, including in-laws). Families need to
decide at what age children should attend these meetings. One family says
that children should attend when they are able to feed themselves; most
families start bringing the younger generation into meetings at around age 16.
For the young children, families should still consider organizing some group
activities where the children can begin to learn about the business and
develop relationships with their siblings and cousins.
 Family assembly activities
include
• learning about the business through presentations by family and non-family managers,
• discussing (not deciding) the direction of the company,
• being educated about what the company does or about important skills required in the
company..
• It is also a good forum to get updated on changes in the family such as important events
and accomplishments, and
• on changes in ownership. For example, have any shares changed hands since the last
meeting? Are there new tax laws shareholders need to be aware of?
• If your family has fifteen or fewer adults, you may be able to have in-depth discussions
and create plans and policies in the family assembly meeting. When the family grows
beyond this size certainly, families generally benefit from having a family council.
 Cont’d
• The family council can perform all of the following duties:
• Plan family assembly meetings, which otherwise the CEO usually has to arrange.
• Discusses current business, ownership, and family issues and direction and keep the
family informed about these.
• Help the family reach decisions and speak with one voice about its goals.
• Keep the board of directors informed about family views about the company and
maintain a dialogue with the board about key business policies and plans.
• Develop plans and policies, in conjunction with the board, that regulate family activity
with the business.
• Guard against family interference with the business while seeing that the family's key
goals are satisfied.
• Develop loyal, informed, contributing family shareholders.
 Cont’d
• Scout the family for business talent.
• Create educational events or otherwise encourage the
education of family members about the business.
• Plan family social gatherings and rituals and help to create
healthy, harmonious family relationships.
• Any family council that accomplishes these tasks strengthens a
family's relationship with its business and its discipline and is a
valuable resource for management and the board.
 Cont’d
• The family council can be composed in several ways, the typical way being one member
elected per family branch. One should try to compose the family council so that it "looks"
like the family, having adequate representation of all generations, both genders, in-laws,
actives and passive owners, hometown and geographically distant relatives. The family
council typically meets a few times each year for one or two days each time. Most families
reimburse family council members for their expenses but do not offer any compensation for
their service. Other families feel at least a modest compensation is warranted and earned.
• Families in business need to nurture members' feelings of trust and pride concerning
the family and business as well as build a sense of teamwork to keep a family committed
and disciplined in its relationship to the business. It is wise, therefore, in the family council
and family assembly to emphasize consensus decisions around family goals and policies,
openness to various viewpoints, as well as significant transparency in company operations,
decision making, and ownership holdings.
 Cont’d
• If the family is reluctant to engage in the discussions it
needs to have in the family council or assembly—out of
concern about potential family conflict, not understanding
what these groups should do or just being shy in these
meetings—hire a facilitator to help organize the meetings.
Good structures that do not address the right topics are a
costly waste of time.
 Cont’d
• A family council or family assembly complements rather than replaces the
board of directors. The family council sets policy for the family and recommends
policy that concerns the family to the board, such as around family employment in
the business. The board of directors sets policy for the business and may also
make recommendations to the family council in matters that concern the business.
• The board and family council should coordinate their work and not overstep each
other's domains. Coordination may take the simple form of having the council and
board update each other periodically on their important objectives, having an
annual joint planning session, or having a board member sit on the council or vice
versa. The family constitution articulates a family's vision for itself and the
business, its core values and the policies and guidelines that maintain family
discipline
 Among the policies a family
council might create include:
• Employment standards for the next generation.
• Career development policies for family employees.
• Family compensation.
• Succession process, including retirement ages.
• Ownership, including buy-sell agreements.
• Dividends.
 Cont’d
• Because each of these topics, except ownership, are clearly business policy
areas, the family council would consult with the board and get the board's
endorsement of the policy before it becomes official. Typically, the family
council also gets the approval of the family assembly before issuing a policy
for the family.
• Treating the family in a more formal, organizational way can feel a bit
strange at first. It may take a year or two for the family to grow into this
more structured way of interacting. But the value of this process is
demonstrated in the strides so many families have made with these
structures. They have learned that in discussing issues that can be sensitive
and raise complicated feelings, a little structure is a family's best friend.
 Governance of NGOs
• Good governance is key to the growth and sustainability of non-
governmental organizations (NGOs).
• “Effective NGO Governance,” presents methods and techniques for planning
and implementing actions to improve an organization’s governance.
• An NGO’s sustainability—its ability to serve its clients over the long term
— depends largely on the quality of the organization’s governance. Your
ability to work successfully with NGO stakeholders to improve the
organization’s governance depends on several personal competencies:
• Your people, language, and cross-cultural skills;
• Your energy, motivation, and attitude.
 The basics of NGO
governance.
• A clear picture of effective governance makes it easier to
plan actions that move an NGO in the direction of better
governance.
• NGOs are directed and controlled by a governing body, or
a board of directors. You may also encounter names such
as board of governors or board of trustees. In most
countries, the board has a legal, moral, and fiduciary
responsibility for the organization.
 Board’s Major
Responsibilities
• • Acquire and protect the organization’s assets
• • Make certain the organization is working to fulfil its mission
• At their best, boards reflect the collective efforts of accomplished
individuals who advance the institution’s mission and long-term
welfare. The board’s contribution is meant to be strategic and the joint
product of talented people. People on a board are brought together to
apply their knowledge, experience, and expertise to the major
challenges facing the institution. Strategic thinking and oversight
characterize the board’s leadership role. An effective board organizes
itself to carry out its duties and responsibilities.
 Cont’d
• To manage the day-to-day operations of the NGO, the board of directors appoints an
executive director, sometimes called the chief of operations (CEO). Tensions and
inefficiencies result if responsibilities, authority, and working relationships of board and
staff are not clearly defined.
• The executive director, as you can imagine, has many duties. He/she administers and
manages all day-to-day operations of the organization, including:
• • hiring and supervising staff,
• • monitoring programs and finances,
• • providing on going leadership,
• • advising and reporting to the board on the NGO’s operations, and
• • speaking on behalf of the organization as delegated by the chairperson/president of the
board.
 Effective governance is broken
down into the following
• board structure,
• governing documents, and
• board functions.
• NGO BOARD STRUCTURE
• Boards tend to work effectively when they are structured to carry out each unique mission of the NGO and
maximize the individual talents of board members. Dividing the board into committees is a common
mechanism for:
• • Organizing the board’s work to accomplish the NGO’s mission.
• • Preparing board members for making informed decisions.
• • Using board members’ skills and expertise (i.e., a board member with financial experience serves on the finance
committee and one with a deep understanding of the clients’ needs serves on the program committee).
• • Providing opportunities to become involved and serve the organization.
• Below is an example of one board structure for a high-capacity NGO. Keep in mind that no one board structure is
a good fit for all NGOs.
 Cont’d
• Chairperson of the Board
• • Usually is elected by the board for a set term.
• • Presides over general board meetings.
• • Speaks on behalf of the organization to the public and
media.
• • Chairs the executive committee.
 Cont’d
• Vice Chairperson
• • Usually succeeds the chairperson at the end of his or her term in office.
• • Assists the chairperson and serves in his or her absence.
• • Often chairs the nominating committee.
• Standing Committees
• • Normally are described in the bylaws.
• • Usually include the: Executive Committee: Board chairperson/president, vice chairperson,
secretary, and treasurer.
• Executive committee has authority to make certain decisions between meetings.
• Finance Committee: The treasurer usually chairs this committee. It provides financial
oversight for the organization, advises the board on the budget and financial affairs.
 Nominating Committee:
• Often chaired by the NGO’s vice chairperson.
• Identifies new board members and nominates individuals to serve as NGO officers.
• On going Committees
• • Normally not prescribed in the bylaws, but necessary to achieve the organization’s mission.
• • Might include a program committee, marketing committee, research committee, education
committee, etc.
• • Allow the board more flexibility to conduct its business and tailor committees to fit the mission of the
organization.
• Ad Hoc Committees or Task Forces
• • Given assignments to be completed in a specified time (fundraising or a special event).
• • Disband after their task has been completed.
• • Often extremely productive because they have defined tasks to complete within a limited time frame.
 Cont’d
• Advisory Committees
• • Individuals with specific expertise selected as committee members.
They provide the board with information and advice to understand
difficult or complex issues such as a construction project, client
demographics, trends in government support, public policy debates,
etc.
• • Offer advantages to both the committee members and the board.
Committee members have an opportunity to learn more about the NGO
and its board—some may be recruited later as board members.
• • Can provide a greater division of labour and fresh new perspectives.
 GOVERNING DOCUMENTS
• Three documents form the basis for NGO governance:
• articles of incorporation,
• bylaws, and
• the mission statement.
• These documents, along with the minutes of board meetings, budgets, financial statements, and
policy statements, communicate how the organization is governed, individual responsibilities,
the organization’s past, and the organization’s future plans.
• The articles of incorporation is a legal document that is filed with the appropriate
government agency to register the organization as an NGO. Incorporating an NGO, according to
the statutory authority of the country, may protect the NGO and its members from unhappy
consequences, such as liability for the organization’s debts. Tax advantages are available to
registered NGOs in a few countries. Law prescribes the form and content of articles of
incorporation.
 Cont’d
• Although requirements vary from country to country, typical items required in articles of incorporation for an
NGO include:
• • Name of the organization.
• • Duration of the organization (usually perpetual).
• • Purpose for which the organization is formed.
• • Provision for conducting the internal affairs of the organization.
• • Names and address of the incorporators.
• • Address of the initial registered office and name of the initial registered agent of the organization.
• • Provision for distribution of the assets of the organization on dissolution.
• The stated purpose of the organization should be broad enough to enable the organization to evolve as
necessary to serve its constituency.
• Articles of incorporation outline the organization’s form. A set of bylaws, developed by the organization’s
constituents and approved by the board, supplements the articles by prescribing detailed rules for governing the
organization.
 Cont’d
• Bylaws often begin with a restatement of the name and purpose of the organization as written in the articles of
incorporation.
• Bylaws are internal documents, a set of rules that enables each organization to conduct its affairs.
• It is important they be written clearly and in language that is easily understood by all organization stakeholders.
• Typical items addressed in the bylaws are:

• • The frequency, notice, and quorum requirements for organizational meetings.

• • Voting qualifications, proxies, and procedures for approval of board items.
• • The number and term for members of the board, scope of authority, method of nomination and election to the board,
and provision for filling vacancies.
• • List of board officers, method of nomination and election, terms of office, powers, duties, and succession.
• • Membership and authority of standing committees.
• • Title and scope of authority for the executive director/chief of staff.
• • Record-keeping and financial reporting responsibilities.
 Cont’d
• • Amendment procedures for the bylaws and provisions for dissolution of the
organization.
• It is wise to stop short of having too much detail in the bylaws to allow
flexibility and avoid the necessity of frequent amendments. For example: A new
environmental NGO wants to raise funds on behalf of the local wildlife and
decides on an annual banquet as a fundraiser. Over time, this event declines in
popularity and the organization decides to make posters and sell them instead
of holding the annual banquet. If the bylaws specifically mandate the existence
of the banquet committee, the organization would have to work through an
amendment to make the operational change. It is better for the board to have
the authority to abolish the old committee and establish a new one so that it
may proceed with the new project.
 Cont’d
• Writing and gaining approval for a set of bylaws takes
thought, time, and the involvement of the organization’s
constituents.
• Bylaws should be written with an emphasis on fair
treatment and transparent governance. Review the bylaws
of several NGOs before attempting to write a new set of
bylaws.
 The mission statement
• It guides the board and staff and explains the nature of the NGO to those outside
the organization. Therefore, it needs to be concise and memorable.
• The mission statement is generally more specific than the NGO’s purpose that
appears in the articles of incorporation. Some mission statements are a single
sentence, some a short paragraph, and some bulleted statements.
• The mission statement expresses the group’s vision and values. Writing a
mission statement forces NGO stakeholders to think through their priorities and
carefully align behaviour with beliefs.
• A mission statement should clearly and concisely answer all three questions
shown in the following formula. Who does the NGO serve? + How are they
served? + Where are they served? = a complete mission statement
Corporate Governance of state enterprises
and Parastatals including Local Authorities

• State owned enterprises (SOEs) deliver critical services

in key economic sectors, including utilities, finance, and
natural resources. In many countries, large
manufacturing and services enterprises remain in state
hands.
• Today, SOEs around the world face strong pressure on
multiple fronts to improve their performance. They are
being pushed to:
 Cont’d
• Enhance their competitiveness as a way to boost the economy as
a whole, particularly in nations where they play a dominant
role
• • Increase their operational efficiency and cost effectiveness in
the delivery of essential infrastructure, financial, and other
services to businesses and consumers
• • Reduce their fiscal risks and burdens
• • Demonstrate better transparency and accountability in the
use of scarce public funds/resources.
 Cont’d
• IFC’s corporate governance professionals intervene in
collaboration or coordination with World Bank-led teams to:
• • Develop corporate governance frameworks aimed at
strengthening the state’s monitoring of SOE governance
and performance
• • Train SOE board directors, including state nominee
and independent directors to empower SOE boards and
develop board practices in line with international standards
 Cont’d
• Train government officials of state ownership entities
and line ministries as well as SOE managers responsible
for preparing and implementing governance reforms on
issues such as exercising the rights of the state as
shareholder
• • Design and implement SOE director training and
certification, in partnership with key market
intermediaries, including institutes of directors, business
schools, and SOE-specific academies
 BUSINESS ETHICS
• Business Ethics studies how to deal with corporate
governance, whistleblowing, corporate culture, and corporate
social responsibility. It emphasizes standard principles
prescribed by governing bodies. Non-compliance with
business ethics leads to unnecessary legal actions.
• The discipline also emphasizes a code of conduct; a set of
unwritten rules which are not legally enforceable. Business
ethics, therefore, educates businesses and employees about
ethical procedures and penalties for non-compliance.
 Cont’d
• By definition, business ethics refers to the standards for morally right
and wrong conduct in business. Law partially defines the conduct, but
“legal” and “ethical” aren’t necessarily the same. Business ethics
enhances the law by outlining acceptable behaviours beyond government
control.
• Corporations establish business ethics to promote integrity among their
employees and gain trust from key stakeholders, such as investors and
consumers. While corporate ethics programs have become common, the
quality varies. According to the 2018 Global Business Ethics Survey
(GBES), less than one in four U.S. workers think their company has a
“well-implemented” ethics program.
 Cont’d
• Business ethics is the prescribed code of conduct for businesses. It is
a set of guidelines for dealing with various procedures ethically.
• The discipline comprises corporate responsibility, personal
responsibility, social responsibility, loyalty, fairness, respect,
trustworthiness, and technology ethics. It emphasizes sustainability,
customer loyalty, brand image, and employee retention.
• The motive is to prevent unethical business practices, both deliberate
and inadvertent. Some unethical practices circumvent law
enforcement. Even then, businesses risk paying a hidden cost—the
loss of reputation.
 Cont’d
• Businesses are expected to be fair and honest in all their
dealings. If businesses fail to do so, they face dire
consequences. The statutory laws govern ethics. But
ethics go beyond enforcement; they are to be self-imposed
and followed diligently. To uphold ethics, businesses must
conduct internal audits and quality control checks at
regular intervals. Also, ethics vary from company to
company.
 Factors Influencing Business
Ethics
• The application of ethics depends on the personal values
of the business owners. At the end of the day, what is right
and wrong within a firm boils down to individual ethics.
Therefore, when managements choose leaders, ethics play
a huge role. These individuals represent the firm. The
management is ultimately liable for any unethical practice
conducted by an executive or employee.
 Cont’d
• More importantly, there are industry-specific government
guidelines for working conditions, product safety,
statutory warning, and social responsibilities. The
guidelines need to be followed for the smooth functioning
of the firm. The social culture impacts ethics; businesses
are expected to adopt certain social and moral practices.
If businesses fail to comply with societal norms, they risk
ruining brand image, reputation, and credibility.
 Principles of Business Ethics

• The fundamental principles of business ethics are as follows:

• Accountability: Ethics is all about taking individual
responsibility. It goes both ways. Individuals are responsible for
unethical practices of the firm because they did not come
forward to become whistle-blowers. Similarly, when an employee
indulges in unethical business practices, the firm is responsible.
• Care and Respect: Professional interactions between co-
workers should be responsible and respectful. Firms should
make sure that the workplace is safe and harmonious.
 Cont’d
• Honesty: The best way to gain the trust of the employees is to have transparent
communication with them.
• Avoid Conflicts: Firms need to minimize conflicts of interest in the workplace.
Excessive competition within the workforce can end disastrously.
• Compliance: Firms need to comply with all the rules and regulations.
• Loyalty: The employees should be faithful to the organization and uphold the
brand image. Grievances, if any, should be dealt internally.
• Relevant Information: It is necessary to provide information that is
comprehensible. All the relevant facts, whether positive or negative, must be
disclosed. It is unethical to hide unreasonable terms and conditions in the fine
print.
 Cont’d
• Law Abiding: Corporate laws protect the rights of every
section of society. Any kind of discrimination is unethical.
Personal biases of individuals should not affect the
decision-making of leaders.
• Fulfilling Commitments: It is unethical to justify non-
compliance by interpreting agreements unreasonably.
 Types of Business Ethics

• Given below are the standard ethical practices that a business should
adopt:
• Corporate Responsibility: The organization works as a separate legal
entity with certain moral and ethical obligations. Such ethics safeguard
the interest of all the internal and external parties associated with the
firm. This includes the employees, customers, and shareholders.
• Social Responsibility: Making profits should not be at the cost of
society. Therefore, corporate social responsibilities (CSR) have been a
common practice where businesses work towards environmental
protection, social causes, and spreading awareness.
 Cont’d
• Personal Responsibility: Employees are expected to act responsibly
with honesty, diligence, punctuality, and willingness to perform excepted
duties. Individuals should settle dues in time and avoid criminal acts.
• Technology Ethics: In the 21st century, companies have adopted e-
commerce practices. Technology ethics includes customer-privacy,
personal information, and intellectual property fair practices.
• Fairness: Favouritism is highly unethical. Every individual possesses
certain personal bias. But at the workplace, personal beliefs and biases
should not affect decision-making. The firm has to ensure fair chances of
growth and promotion for all.
 Cont’d
• Trustworthiness and Transparency: Businesses should maintain
transparency in business practices and financial reports.
• Challenges
• Educating employees on their ethical code of conduct is a huge challenge.
Unlike personal ethics, corporate rules and regulations are complex. Non-
compliance may not affect an employee much, but the firm could suffer
huge losses. In large firms, it is a tedious task; there is less direct
communication. Emails do not succeed in conveying the intended message
accurately. If the corporate ideology is not well-communicated to the
workers, there are chances of non-compliance. One simple mistake by one
employee could tarnish the brand image of a huge entity.
 Cont’d
• Moral compliance, bribes, sexual harassment, and a toxic
atmosphere are the common challenges faced by firms.
But, there is the other extreme too. Stringent rules
drafted in the name of ethics interfere with the growth
and profitability of businesses. On top of all the
philanthropy and welfare, firms need to turn a profit.
Without profits, businesses can’t pay their employees.
 Business ethics is an essential skill.

• Almost every company now has a business ethics program. In part, that’s
because technology and digital communication have made it easier to
identify and publicize ethical missteps. To avoid the negative
implications, companies are devoting more resources to business ethics.
In one survey of accountants, for example, 55 percent said they believe
the importance of business ethics will continue to grow in the next three
years. In addition to establishing formal programs, companies are
creating ethical workplaces by hiring the right talent. “High integrity and
honesty” is the second-most important skill for business leaders,
according to a recent survey. Today’s business professionals must
understand the link between business ethics and business success.
 Business ethics drives employee behaviour.

• According to the 2018 Global Business Ethics survey, employees are more likely
to apply ethical reasoning when their company clearly demonstrates why
business ethics is important. Ninety-nine percent of U.S. employees who
experience a strong ethics culture said they’re prepared to handle ethical
issues. Companies that advocate for business ethics motivate their employees to
perform their roles with integrity.
• The first step in building this kind of ethical culture is to create an ethics
program. According to the U.S. Department of Commerce, a complete ethics
program should touch on all of the business functions. That includes operations,
human resources, and marketing, to name a few. The global research company
Gartner advises companies to integrate their ethics program with business
operations.
 Cont’d
• Doing so can maximize the program’s impact by making ethical processes
part of employees’ workflow. According to Gartner, an ethics program should:
• Define the program mandate
• Mitigate and monitor risk
• Establish policies and procedures
• Oversee allegations of misconduct
• Provide training and communication
• Reinforce behavioural expectations
• Manage the function of behaviour ethics
 Cont’d
• Corporations have a critical role in developing good ethics in business.
But educational institutions also play a fundamental part in shaping
ethical leaders.
• Business ethics benefits the bottom line.
• Another reason why business ethics is important is that it can improve
profitability. Honorees on this year’s list of the World’s Most Ethical
Companies outperformed the Large Cap Index by 10.5 percent over three
years. A well-implemented ethics program can also reduce losses. Twenty-
two percent of cases examined in the 2018 Global Study on Occupational
Fraud and Abuse cost the victim organization $1 million or more.
 Cont’d
• Companies that practice questionable ethics may also
experience a decrease in stock price and severed business
partnerships, which can affect profitability. In addition,
business ethics is linked to customer loyalty. Over half of
U.S. consumers said they no longer buy from companies
they perceive as unethical. On the flip side, three in 10
consumers will express support for ethical companies on
social media. Business ethics cultivates trust, which
strengthens branding and sales.
 WHISTLE BLOWING
• Whistleblowing is the term used when a worker passes on
information concerning wrongdoing - we call that “making
a disclosure” or “blowing the whistle”. The wrongdoing
will typically (although not necessarily) be something they
have witnessed at work. To be covered by whistleblowing
law, a worker who makes a disclosure must reasonably
believe two things.
 Cont’d
• The first is that they are acting in the public interest. This
means in particular that personal grievances and
complaints are not usually covered by whistleblowing law.
• The second thing that a worker must reasonably believe is
that the disclosure tends to show past, present or likely
future wrongdoing falling into one or more of the
following categories:
 Cont’d
• criminal offences (this may include, for example, types of financial
impropriety such as fraud)
• failure to comply with an obligation set out in law
• miscarriages of justice
• endangering of someone’s health and safety
• damage to the environment
• covering up wrongdoing in the above categories
 Cont’d
• Whistleblowing law provides the right for a worker to take
a case to an employment tribunal if they have been
victimised at work or they have lost their job because they
have ‘blown the whistle’.
 What are an employer’s responsibilities in
regards to whistleblowing?

• As an employer it is good practice to create an open,

transparent and safe working environment where workers
feel able to speak up. Although the law does not require
employers to have a whistleblowing policy in place, the
existence of a whistleblowing policy shows an employer’s
commitment to listen to the concerns of workers. By
having clear policies and procedures for dealing with
whistleblowing, an organisation demonstrates that it
welcomes information being brought to the attention of
management.
 Cont’d
• This is also demonstrated by the following:
• Recognising workers are valuable ears and eyes:
• Workers are often the first people to witness any type of
wrongdoing within an organisation. The information that
workers may uncover could prevent wrongdoing, which
may damage an organisation’s reputation and/or
performance, and could even save people from harm or
death.
 Getting the right culture:

• If an organisation hasn’t created an open and supportive culture,

the worker may not feel comfortable making a disclosure, for fear
of the consequences. The two main barriers whistleblowers face
are a fear of reprisal as a result of making a disclosure and that no
action will be taken if they do make the decision to ‘blow the
whistle’. Making sure your staff can approach management with
important concerns is the most important step in creating an open
culture. Employers should demonstrate, through visible leadership
at all levels of the organisation, that they welcome and encourage
workers to make disclosures.
 Training and support:
• An organisation should implement training, mentoring,
advice and other support systems to ensure workers can
easily approach a range of people in the organisation.
 Being able to respond:
• It is in the organisation’s best interests to deal with a
whistleblowing disclosure when it is first raised by a
worker. This allows the organisation to investigate
promptly, ask further questions of a worker and where
applicable provide feedback. A policy should help explain
the benefits of making a disclosure.
 Better control:

• Organisations that embrace whistleblowing as an

important source of information find that managers have
better information to make decisions and control risk.
Whistleblowers respond more positively when they feel
that they are listened to.
 Resolving the wrongdoing
quickly:
• There are benefits for the organisation if a worker can
make a disclosure internally rather than going to a third
party. This way there is an opportunity to act promptly on
the information and put right whatever wrongdoing is
found.
Communicate policy and procedure

• Having a policy is a good first step to encourage workers to blow the

whistle but each organisation needs to let its workers know about the
policy and make sure they know how to make a disclosure. Some
organisations choose to publicise their policy via their intranet or
through a staff newsletter. If an organisation recognises a trade union
it might develop a policy in consultation with them. It is a good idea for
organisations to share the information with all staff regularly to make
sure they are all reminded of the policy and procedures and to inform
any newcomers. Providing training at all levels of an organisation on
the effective implementation of whistleblowing arrangements will help
to develop a supportive and open culture.
 How?
• When someone blows the whistle an organisation should
explain its procedures for making a disclosure and
whether the whistleblower can expect to receive any
feedback. Often a whistleblower expects to influence the
action the organisation might take, or expects to make a
judgement on whether an issue has been resolved – such
expectations need to be managed.
 Has the issue been resolved?

• It is for the organisation to be satisfied that the disclosure has been

acted upon appropriately and that the issue has been resolved. There
should be clear and prompt communications between the
whistleblower and the organisation. It is best practice for
organisations to provide feedback to whistleblowers, within the
confines of their internal policies and procedures. Feedback is vital so
that whistleblowers understand how their disclosure has been handled
and dealt with. If a whistleblower is unhappy with the process or the
outcome it will make them more likely to approach other individuals
and organisations to ‘blow the whistle’, such as a “prescribed person”.
 Disclosure or grievance?
• Sometimes an employee believes they are blowing the whistle
when, in fact, their complaint is a personal grievance. Workers
who make a disclosure under an organisation’s whistleblowing
policy should believe that they are acting in the public interest.
This means in particular that personal grievances and complaints
are not usually covered by whistleblowing law. It is important that
any policy, procedures and other communications make this clear.
An organisation may want to direct workers to the Government’s
guidance for whistleblowers to verify the position that a personal
grievance is not generally regarded as a protected disclosure.
 Is there a standard whistleblowing policy?

• There is no one-size-fits-all whistleblowing policy as policies will

vary depending on the size and nature of the organisation. Some
organisations may choose to have a standalone policy whereas
others may look to implement their policy into a code of ethics or
may have ‘local’ whistleblowing procedures relevant to their
specific business units. A large organisation may have a policy
where employees can contact their immediate manager or a
specific team of individuals who are trained to handle
whistleblowing disclosures. Smaller organisations may not have
sufficient resources to do this.
 Cont’d
• Any whistleblowing policies or procedures should be clear, simple and easily understood.
Here are some tips about what a policy should include:
• An explanation of what whistleblowing is, particularly in relation to the organisation
• A clear explanation of the organisation’s procedures for handling whistleblowing, which can
be communicated through training
• A commitment to training workers at all levels of the organisation in relation to
whistleblowing law and the organisation’s policy
• A commitment to treat all disclosures consistently and fairly
• A commitment to take all reasonable steps to maintain the confidentiality of the
whistleblower where it is requested (unless required by law to break that confidentiality)
• Clarification that any so-called ‘gagging clauses’ in settlement agreements do not prevent
workers from making disclosures in the public interest
 Cont’d
• An idea about what feedback a whistleblower might receive
• An explanation that anonymous whistleblowers will not ordinarily be able to receive feedback
and that any action taken to look into a disclosure could be limited – anonymous whistleblowers
may seek feedback through a telephone appointment or by using an anonymised email address
• A commitment to emphasise in a whistleblowing policy that victimisation of a whistleblower is
not acceptable. Any instances of victimisation will be taken seriously and managed appropriately
• An idea of the time frame for handling any disclosures raised
• Clarification that the whistleblower does not need to provide evidence for the employer to look
into the concerns raised
• Signpost to information and advice to those thinking of blowing the whistle, for example the
guidance from the Government, Acas, Public Concern at Work or Trade Unions
• Information about blowing the whistle to the relevant prescribed person(s)
 Promoting a policy and making
sure it is easily accessible
• It’s no good having a policy in place if no one knows about it. Actively promoting a policy
shows the organisation is genuinely open to hearing concerns from its staff. Managers and
leaders in the organisation can also promote a policy in the way they behave at work.
Conduct and written policies will help to create an open culture, which will increase the
likelihood of a worker speaking up about any wrongdoing they come across. Written
policies are not enough. Training should be provided to all staff on the key arrangements
of the policy. Additional training should be provided to those with whistleblowing
responsibilities, such as managers or designated contacts, so they are able to provide
guidance confidently to workers. Managers should also lead by example and ensure they
are committed to creating an open culture where disclosures are welcome. It is also a
good idea to include handling whistleblowing disclosures as part of discipline and
grievance training for managers and staff. Training should be offered at regular points to
make sure it stays fresh in managers’ minds and to capture any newcomers to the
organisation.
 Cont’d
• Here are some ideas about how to promote a policy:
• Hold a staff session or in larger organisations require managers to hold
smaller, consistent team meetings
• Make the policy accessible on the staff intranet
• Appoint a whistleblowers’ champion to drive the commitment to valuing
whistleblowing and protecting whistleblowers within the organisation
• Use promotional posters around the building
• Include the policy within induction packs for newcomers
• Set the policy out in staff handbooks and contracts
 Deciding how to deal with the
whistleblowing disclosure
• Where a worker feels able to do so they may make a disclosure to their
immediate manager who will be able to decide whether they can take forward the
disclosure or whether it will require escalation. An organisation will need to
equip managers with the knowledge and confidence to make these judgements. A
whistleblowing policy and training can help with this. Larger organisations may
have a designated team who can be approached when workers make a disclosure.
Although this may not be possible for smaller organisations, it is considered best
practice that there is at least one senior member of staff as a point of contact for
individuals who wish to blow the whistle. This is particularly helpful in cases
where the immediate line management relationship is damaged or where the
disclosure involves the manager. Alternatively, there are commercial providers
who will manage a whistleblowing process on the employer’s behalf.
 Dealing with disclosures

• Once a disclosure has been made it is good practice to hold a

meeting with the whistleblower to gather all the information
needed to understand the situation. In some cases a suitable
conclusion may be reached through an initial conversation with
a manager. In more serious cases there may be a need for a
formal investigation. It is for the organisation to decide what the
most appropriate action to take is. It is important to note that if
an investigation concludes that the disclosure was untrue it
does not automatically mean that it was raised maliciously by a
worker.
 Cont’d
• When dealing with disclosures, it is good practice for managers to:
• Have a facility for anonymous reporting
• Treat all disclosures made seriously and consistently
• Provide support to the worker during what can be a difficult or
anxious time with access to mentoring, advice and counselling
• Reassure the whistleblower that their disclosure will not affect
their position at work
• Document whether the whistleblower has requested confidentiality
 Cont’d
• Manage the expectations of the whistleblower in terms of what action and/or
feedback they can expect as well clear timescales for providing updates
• Produce a summary of the meeting for record keeping purposes and provide
a copy to the whistleblower
• Allow the worker to be accompanied by a trade union representative or
colleague at any meeting about the disclosure, if they wish to do so
• Provide support services after a disclosure has been made such as mediation
and dispute resolution, to help rebuild trust and relationships in the
workplace It will be useful to document any decisions or action taken
following the making of a disclosure by a worker.
 Cont’d
• It is also good practice for organisations to:
• Record the number of whistleblowing disclosures they
receive and their nature
• Maintain records of the date and content of feedback
provided to whistleblowers
• Conduct regular surveys to ascertain the satisfaction of
whistleblowers.
 What happens when a worker blows the
whistle to someone other than their employer?

• Ideally workers will feel able to make a disclosure to their

organisation. Good policies and procedures for handling
whistleblowing will help encourage this. However, there
may be circumstances where they feel unable to. There
are other ways, some of which are set out in law, that a
worker may make a disclosure without losing their rights
under whistleblowing law.
 Cont’d
• If a whistleblower believes that they have been unfairly
treated because they have blown the whistle they may
decide to take their case to an employment tribunal. The
process for this would involve attempted resolution
through the Advisory, Conciliation and Arbitration Service
(Acas) early conciliation service.
 Confidentiality

• There may be good reasons why a worker wishes their identity to

remain confidential. The law does not compel an organisation to
protect the confidentiality of a whistleblower. However, it is
considered best practice to maintain that confidentiality, unless
required by law to disclose it. Managers dealing with whistleblowing
concerns should be briefed to ensure they understand how to handle
the disclosure and protect personal information. It will help to manage
the expectations of whistleblowers if the risk that some colleagues
may still speculate about who has raised the concern is explained to
them. Anonymous information will be just as important for
organisations to act upon.
 Cont’d
• Workers should be made aware that the ability of an
organisation to ask follow up questions or provide
feedback will be limited if the whistleblower cannot be
contacted. It may be possible to overcome these
challenges by using telephone appointments or through
an anonymised email address. Workers should be made
aware that making a disclosure anonymously means it can
be more difficult for them to qualify for protections as a
whistleblower. This is because there would be no
documentary evidence linking the worker to the
disclosure for the employment tribunal to consider.
 Whistleblowing Code of
Practice
• It is important that employers encourage whistleblowing
as a way to report wrongdoing and manage risks to the
organisation. Employers also need to be well equipped for
handling any such concerns raised by workers. It is
considered best practice for an employer to:
 Cont’d
• Have a whistleblowing policy or appropriate written
procedures in place
• Ensure the whistleblowing policy or procedures are easily
accessible to all workers
• Raise awareness of the policy or procedures through all
available means such as staff engagement, intranet sites,
and other marketing communications
 Cont’d
• Provide training to all workers on how disclosures should
be raised and how they will be acted upon
• Provide training to managers on how to deal with
disclosures
• Create an understanding that all staff at all levels of the
organisation should demonstrate that they support and
encourage whistleblowing
• Confirm that any clauses in settlement agreements do not
prevent workers from making disclosures in the public
interest
 Cont’d
• Ensure the organisation’s whistleblowing policy or
procedures clearly identify who can be approached by
workers that want to raise a disclosure. Organisations
should ensure a range of alternative persons who a
whistleblower can approach in the event a worker feels
unable to approach their manager. If your organisation
works with a recognised union, a representative from that
union could be an appropriate contact for a worker to
approach
 Cont’d
• Create an organisational culture where workers feel safe to raise a
disclosure in the knowledge that they will not face any detriment from the
organisation as a result of speaking up.
• Undertake that any detriment towards an individual who raises a
disclosure is not acceptable
• Make a commitment that all disclosures raised will be dealt with
appropriately, consistently, fairly and professionally
• Undertake to protect the identity of the worker raising a disclosure,
unless required by law to reveal it and to offer support throughout with
access to mentoring, advice and counselling
 Cont’d
• Provide feedback to the worker who raised the disclosure
where possible and appropriate subject to other legal
requirements. Feedback should include an indication of
timings for any actions or next steps
The future of corporate governance

• Corporate governance in the future will, according to Devdip Ganguli, reflect an

increasing emphasis on customer satisfaction as a way of measuring the
adaptability of the organization over time. As he put it, "By focusing too strongly
on financial records (and audit committee work), we lose sight of the fact that
departments like operations and human resources are very important
components in forecasting future success.
• Shann Turnbull suggests that the world of corporate governance will benefit
from the establishment of "a new type of corporate information and control
architecture." In fact, he goes beyond this to propose that a network of more
specialized board groups and "advisory stakeholder councils" comprising
employees, lead customers, suppliers, and others offers a useful solution to the
governance vacuum that exists in many large corporations today.
 Cont’d
• While agreeing that "customer and employee satisfaction
and loyalty are indeed good predictors for future success
of a company," he suggests that these measures have to be
viewed with a long-term lens, one that accommodates the
fact in the short-run, managements may take actions to
reduce costs and the size of the labour force to achieve
long-term success—actions that could adversely affect
non-financial indicators used as inputs for corporate
governance.
 Cont’d
• There is mounting evidence that customer and employee satisfaction
and loyalty are far better predictors of future financial success than are
measures of past financial success. They would be strong candidates for
inclusion in any organization's balanced scorecard.
• Among board committees, the audit committee has historically received
the most attention. Not only are boards expected—and in case of publicly
financed organizations required—to have one, independent, so-called
"outsider," director membership on the audit committee has been strongly
prescribed. Increasingly, audit committees are called to task for their
responsibilities and required to co-sign important communications to
shareholders.
 Cont’d
• While all of this is going on, of course, governance continues to go astray. An
organization's books may be in order, but its performance may be going down the
drain. It is recommended that
• Companies establish governance committees to work on measures to disclose trends in
customer and employee satisfaction and loyalty—that help predict future performance
• Governance Committees should be responsible for the regular auditing of such
measures/trends in customer and employee satisfaction.
• These measures/trends must be made available to investors on a regular basis.
• The Stock Exchange should require the disclosure of such information/trends to
existing and potential investors and regulatory authorities and even to the stakeholders
generally.
Cont’d
The end
I thank you