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Corporate Governance
Definition and Practice
Bolaji Okusaga
1. Principles
The Need for Corporate GovernanceIncreasing scale and
activity of corporations
• Trans-national Corporations like Apple, Exxon-Mobil, Chevron are becoming larger than Countries and have great impact on economies
The Sub-prime Mortgage Bust
• Deregulation of International financial markets
• The Financial Supermarket Model which created a situation where Retail Deposits are channeled to risky investment assets
Corporate Infractions and Reporting Errors
• Issues with Enron involving Arthur Anderson, the Worldcom Collapse and others
• These issues created a heightened recognition that governance matters for accountability and business performance.
As trust becomes a scare commodity, there is a general trend in society towards openness, transparency and disclosure
Defining Corporate GovernanceTHE FLOW OF
RESPONSIBILITY
Corporate Governance defines the relationship between the ownership as typified by the Shareholders, the
wielders of supervisory authority vested by ownership in the Board of
Directors, who in turn gives the mandate for the day to day running
of the organization in the management headed by the CEO.
THAT DEFINES BUSINESS OPERATIONS AND
REPORTINGCorporate Governance deals with to
the governing system of an organization
It is the method by which companies are directed and managed.
OECD Definitions•“Involves a set or relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” (OECD, Principles of Corporate Governance, 1999; 2004)
Corporate governance framework ensures the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
The Pillars of Corporate Governance
Accountability
Render Explanation on Business Stewardship – Board to Shareholders and Management to
Board
Fairness
Be equitable in business dealings
Protection of Shareholders Rights
Transparency
Be open in dealings and render full disclosure to regulators,
shareholders and other stakeholders
Independence
Expression of self-regulating thought and
action
Avoidance of conflicts of interest
Hierarchy and ExpectationsMarket Expectations Transparent and Timely Reports
Shareholders ExpectationsShare appreciation
Dividend
Board ExpectationsBusiness Performance
Profit
Management ExpectationsSound Business
Retention of Going Concern
Customers ExpectationBusiness Delivery
Sustainability
2. Practice
9
Board Composition
Balance of skills and experiences
Balanced composition of executive and non-executive
directors
Non-executive directors should
picked on the basis of skill and representation
List of directors updated and
their respective role and function
identified
Independent directors may be picked for better
scrutiny and governance
10
Appointment, re-election and removal of directors
Formal and transparent procedure for appointment• Specific term for non-executive
directors
Succession plan• Nomination committee formed
to make recommendation on appointment of directors and succession planning for directors, chairman and CEO
All directors subject to retirement by rotation at regular interval• Re-election at regular intervals • Proper explanation for
resignation/removal of directors
11
Chairman and CEO
Separation of Board from Management
Separation of the board from the day-to-
day management of the company’s
business
Balance of power at board level to avoid
concentration of power in a single
individual
Separation of Chairman and
CEO
Division of responsibilities
between Chairman and CEO clearly laid
down in writing
12
Role of the Chairman
THE LEADER
Heads the board and provides strategic
direction
Ensure the board works effectively and
discharges its responsibilities
THE SOUL
Ensure good corporate governance
practices and procedures are in
place
Ensure all directors participate at board
meeting
THE REPRESENTATIVE
Protects Shareholder’s interest
Responsible for ensuring appropriate information received
by Shareholders
13
Responsibilities of Directors
Represents the interest of
Shareholder Blocks
Attend Board Meetings to
share the views of shareholders
Exercise duties of care, skill, integrity and
diligence expected
Ensure proper understanding
of the operation,
business and the regulatory requirement
Contribute insights and
perspective to enrich
Management’s view of the
business
14
Non-executive directors
Active participation in board meetings
Bring in independent judgment
Take lead if conflict of interest arise
Serve on committees
Monitor the corporate’s
performance in achieving pre-set goals
15
Access to InformationACCESS TO INFORMATION
• Directors should be provided with accurate and appropriate information in order to make informed decision and to discharge their responsibilities
• Directors should have access to the senior management for information
• Information supplied should be of form and quality to facilitate informed decision
PROCESS
• Agenda and board papers should be sent in full in a timely manner to directors
• Information supplied must be complete and reliable
16
Remuneration of directors and senior management
PRINCIPLE
PRACTICE
• Transparency of directors’ remuneration policy• Remuneration should be sufficient but not excessive• Each director not to involve in deciding his/her own
remuneration
• Remuneration committee to be formed, mainly from non-executive directors
• Consult Chairman/CEO if needed• Access to professional advice, market comparable
information• Make recommendation on policy and structure of
remuneration• Determine specific remuneration packages of all
executive directors and senior management
3. Process
18
Remuneration Committee
Review and approve performance-based
remuneration
Review and approve compensation
arrangement in connection with loss or termination of office,
dismissal or removal of directors for misconduct
19
Audit Committee
PRINCIPLE
Have clear terms of reference
A formal and transparent arrangement to apply the financial
reporting and internal control principles and maintain appropriate relationship with external auditors
PRACTICE
Full minutes of audit committee to be kept
Provided with sufficient resources to discharge its duties
Independent from external auditors
PRIORITIESMake recommendation for
appointment and removal of external auditors
Monitor the effectiveness of the audit process, ensuring auditor’s
independence and objectivity
Monitor the integrity of the financial disclosures
Oversight of the financial reporting and internal control procedures
20
Financial ReportingManagement provide explanation and information to the board to enable them to make informed assessment of financial and other information
The board should present comprehensive assessment of the corporate’s performance, position and prospects in annual and interim reports, price-sensitive announcements and other financial disclosures
Ensure the maintenance of sound and effective internal controls to safeguard assets
Conduct regular reviews of the effectiveness of the internal control system, covering financial, operational, compliance and risk management control functions
Prevent fraud, corruption, and malpractices
21
Delegation by the Board
Formal schedule of matters specifically reserved to the
board for decision
Clear directions to management as to matters requiring board approval
before decision made
Clear directions to the delegation of the management and
administration functions as well as the powers of
management
Review the arrangement for segregation of duties between board and
management regularly
Board Committee to be formed, with specific terms
of reference, as needed
22
Communication with ShareholdersSTANDARD
• Maintain on-going dialogue with shareholders and make use of annual general meetings or other general meetings to communicate with shareholders
• Transparency in corporate governance practices and business performances through proper and adequate disclosures
• Encourage shareholders’ participation
SPECIAL
• Separate resolution for each separate issue
• Chairman of the board and chairman of each board committees be present in general meetings to answer questions at any general meeting
• Chairman of independent board committee be present to answer any questions in any general meeting to approve transaction requiring independent shareholders’ approval
STRATEGIC
• Inform shareholders about procedure for voting by poll
• Ensure proper compliance to regulatory requirement about voting by poll
Thank you.