5.1 Definition of corporate governance
Corporate governance can be defined in various ways, for example:
The Private Sector Corporate Governance Trust (PSCGT) states that corporate governance, “Refers to the manner in which the power of the corporation is exercised in the stewardship of the corporation total portfolio of assets and resources with the objective of maintaining and increasing shareholders value through the context of its corporate vision” (PSCGT, 1999)
The Cadbury Report (1992) defines corporate governance as the system by which companies are directed and controlled.
The Capital Market Authority (CMA) in year 2000 defined corporate governance as the process and structures used to direct and manage business affairs of the company towards enhancing prosperity and corporate accounting with the ultimate objective of realizing shareholders long-term value while taking into account the interests of other stakeholders.
5.2 Rationale for corporate governance
The organization of the world economy (especially in current years) has seen corporate governance gain prominence mainly because:
Institutional investors, as they seek to invest funds in the global economy, insist on high standard of Corporate Governance in the companies they invest in.
Public attention attracted by corporate scandals and collapses has forced stakeholders to carefully consider corporate governance issues.
Corporate governance is therefore important as it is concerned with:
Profitability and efficiency of the firm.
Long-term competitiveness of firms in the global economy.
The relationship among firm’s stakeholders
5.3 Principles of corporate governance
There are 22 principles of Corporate Governance as given by the Common Wealth Association of Corporate Governance (CACG) in1999 and the Private Sector Corporate Governance Trust (PSCGT) in 1999 also. The first ten principles are summarized below.
1. The authority and duties of members (shareholders)
Members and shareholders shall jointly and severally protect, preserve and actively exercise the supreme authority of the corporation in general meeting (AGM). They have a duty to exercise that supreme authority to:
Ensure that only competent and reliable persons who can add value are elected or appointed to the board of directors (BOD).
Ensure that the BOD is constantly held accountable and responsible for the efficient and effective governance of the corporation so as to achieve corporate objective, prospering and sustainability.
Change the composition of the BOD that does not perform to expectation or in accordance with mandate of the corporation
Every corporation should be headed by an effective BOD, which should exercise leadership, enterprise, integrity and judgements in directing the corporation so as to achieve continuing prosperity and to act in the best interest of the enterprise in a manner based on transparency, accountability and responsibility.
3. Appointments to the BOD
It should be through a well managed and effective process to ensure that a balanced mix of proficient individuals is made and that each director appointed is able to add value and bring independent judgment on the decision making process.
4. Strategy and Values
The BOD should determine the purpose and values of the corporation, determine strategy to achieve that purpose and implement its values in order to ensure that the corporation survives and thrives and that procedures and values that protect the assets and reputation of the corporation are put in place.
5. Structure and organization
The BOD should ensure that a proper management structure is in place and make sure that the structure functions to maintain corporate integrity, reputation and responsibility.
6. Corporate Performance, Viability & Financial Sustainability
The BOD should monitor and evaluate the implementation of strategies, policies and management performance criteria and the plans of the organization. In addition, the BOD should constantly revise the viability and financial sustainability of the enterprise and must do so at least once in a year.
7. Corporate compliance
The BOD should ensure that corporation complies with all relevant laws, regulations, governance practices, accounting and auditing standards.
8. Corporate Communication
The BOD should ensure that corporation communicates with all its stakeholders effectively.
9. Accountability to Members
The BOD should serve legitimately all members and account to them fully.
10. Responsibility to stakeholders
The BOD should identify the firm’s internal and external stakeholders and agree on a policy (ies) determining how the firm should relate to and with them, increasing wealth, jobs and sustainability of a financially sound corporation while ensuring that the rights of the stakeholders are respected, recognized and protected.