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Column: Code of Good Governance (15)

Hubert Rampersad

Following up on my previous article:

Corporate governance

There are many definitions of corporate governance. According to the OECD: “It is a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and shareholders and should facilitate effective monitoring, thereby encouraging firms to use resources more efficiently.

According to Prof. Kenneth Scott of Stanford Law School: “Corporate governance includes every force that bears on the decision making of the firm that would encompass not only the control rights of stockholders, but also the contractual covenants and insolvency powers of debt holders, the commitments towards employees, customers and suppliers, the regulations and the statutes. In addition, the firm’s decisions are powerfully affected by competitive conditions in the various markets in which it operates”. The Cadbury Committee has defined corporate governance as follows: “It is a system by which companies are directed and controlled.” We have defined corporate governance in holistic and authentic terms, namely: The systematic process of continuous, gradual and routine corporate improvement, steering, and learning, that lead to sustainable high corporate performance and ethical corporate excellence.

The main reasons why this subject has gained so much importance in modern times are:

· To educate the public and to promote better understanding of essential corporate governance principles.

· To provide the board of directors and the management with adequate powers to be exercised in clearly defined line of responsibilities so that they stand accountable to the shareholders in the pursuit of maximization of value for the company.

· To promote induction of independent, non-executive company directors with diverse background and experience.

· To recognize issues of maintaining continuity of management through succession planning, identifying opportunities, facing challenges and managing change with the business and appropriate allocation of resources.

· To encourage corporations to adopt internationally-accepted accounting principles, standards of financial disclosure, conflict of interest disclosure, antitrust laws, and bankruptcy laws.

· To optimize a matrix of incentives, checks and balances, communication, fairness, disclosure, transparency, business ethics and social responsibility. It intends to balance economic and social goals and individual and shared objectives.

· To make corporations feel the need for good corporate governance in a globalized world where the perception of both international and local investor is driven by management structures and the credibility of business. In such an environment, corporations must proactively design their culture-specific codes and actively implement these codes, instead of sitting and waiting for rules to be imposed from external constituents.

The board is responsible for ensuring that an effective corporate governance process has been put in place. Some of the key responsibilities of boards towards corporate governance include the following:

· Appointment of key personnel after ensuring that they are fit and proper for their jobs.

· Promotion of corporate values, ethics, code of conduct for appropriate behavior and institution of a system to ensure compliance with them.

· Articulation of the corporate strategy and the contribution to the board of directors.

· Institution of a forum interfacing the board of directors, senior management and the auditors.

· Putting in place sound internal control system, including internal and external audit functions, risk management functions, independent of business lines.

· Special monitoring of situations where conflict of interest arises, including business relationships with borrowers affiliated with the bank, large shareholders, senior management, or key decision makers within the bank.

· Offer of incentives (monetary and otherwise) to management (senior, business line) and employees in the form of compensation, promotion and other recognition.

· Channeling flow of information both within and outside the organization (the public).

In order to effectively perform the responsibilities relating to corporate governance, companies must establish a Corporate Governance Committee consisting of at least three independent members from the board of directors. This committee is responsible for developing and recommending changes from time to time in the company’s corporate governance policy framework. At each shareholders’ meeting, the board shall report on the company’s compliance with its guidelines and the corporate governance code; and explain the extent if any to which it has varied them or believes that any variance or noncompliance was justified. In addition to above, it is advisable that companies should publish their corporate governance reports on their websites.

Boards should ensure, through their committees, that an annual statement on compliance with the code of corporate governance is submitted for the board’s review. The statement should also be submitted in annual general meetings. Corporate Governance should also be on the agenda of each board meeting where the board should be updated on any significant issue with regards to governance. Furthermore, the best practices and emerging trends in corporate governance encourage companies to either fully comply with all provisions of the Code or explain the reasons for non-compliance. This is termed ‘The Comply or Explain Principle.’

This article will be continued in the next part of this column.

Hubert Rampersad

Hubert Rampersad is president at Business School of the Americas. This column is drawn from his new book “Authentic Governance; Aligning Personal Governance with Corporate Governance” (Hubert Rampersad & Saleh Hussain, Springer USA, New York, 2013). He can be reached at h.rampersad@tps-international.com ; www.tps-international.com | His other books http://bit.ly/TZhAxq | His interviews in BusinessWeek & Fortune Magazine http://bit.ly/V8EcSW | His You Tube Video http://youtu.be/tLeY5SWxqj8


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