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What is Corporate Governance? Alison Dillon Kibirige.

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1 What is Corporate Governance? Alison Dillon Kibirige

2 Corporate Governance Contemporary corporate governance started in 1992 with the Cadbury report in the UK Contemporary corporate governance started in 1992 with the Cadbury report in the UK Cadbury was the result of several high profile company collapses Cadbury was the result of several high profile company collapses is concerned primarily with protecting weak and widely dispersed shareholders against self-interested Directors and managers is concerned primarily with protecting weak and widely dispersed shareholders against self-interested Directors and managers

3 Corporate Governance Parties Shareholders – those that own the company Shareholders – those that own the company Directors – Guardians of the Company’s assets for the Shareholders Directors – Guardians of the Company’s assets for the Shareholders Managers who use the Company’s assets Managers who use the Company’s assets

4 Corporate Governance Primarily concerned with public listed companies i.e. those listed on a Stock Exchange Primarily concerned with public listed companies i.e. those listed on a Stock Exchange Focused on preventing corporate collapses such as Enron, Polly Peck and the Maxwell companies Focused on preventing corporate collapses such as Enron, Polly Peck and the Maxwell companies

5 Corporate Governance What relevance does it have to Africa where there are few public listed companies What relevance does it have to Africa where there are few public listed companies Most companies are non-listed, private family owned businesses where the shareholders and the managers are often the same people Most companies are non-listed, private family owned businesses where the shareholders and the managers are often the same people

6 Four Pillars of Corporate Governance Accountability Accountability Fairness Fairness Transparency Transparency Independence Independence

7 Accountability Ensure that management is accountable to the Board Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders Ensure that the Board is accountable to shareholders

8 Fairness Protect Shareholders rights Protect Shareholders rights Treat all shareholders including minorities, equitably Treat all shareholders including minorities, equitably Provide effective redress for violations Provide effective redress for violations

9 Transparency Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

10 Independence Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest Procedures and structures are in place so as to minimise, or avoid completely conflicts of interest Independent Directors and Advisers i.e. free from the influence of others Independent Directors and Advisers i.e. free from the influence of others

11 Corporate Governance in Africa In 1994, The King Report in South Africa also included within its Code of Corporate Governance requirements on sustainability and ethical standards In 1994, The King Report in South Africa also included within its Code of Corporate Governance requirements on sustainability and ethical standards This was due to the context of a developing country and business ethics in Africa This was due to the context of a developing country and business ethics in Africa

12 Sustainability No generally accepted definition No generally accepted definition Most commonly used is from the Brundtland Report for the World Commission on Environment and Development 1987 which defines it as: Most commonly used is from the Brundtland Report for the World Commission on Environment and Development 1987 which defines it as:

13 Sustainability ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’

14 Stakeholders Sustainability recognizes stakeholder rights i.e. the rights of interested parties e.g. employees, the community, suppliers, customers etc. Sustainability recognizes stakeholder rights i.e. the rights of interested parties e.g. employees, the community, suppliers, customers etc. Encourage co-operation between the company and its stakeholders in creating wealth, jobs and economic stability Encourage co-operation between the company and its stakeholders in creating wealth, jobs and economic stability

15 Business Ethics Established values and principles a company uses to inform and conduct its activities Established values and principles a company uses to inform and conduct its activities Should permeate a company’s culture and drive its strategy, business goals, policies and activities Should permeate a company’s culture and drive its strategy, business goals, policies and activities Usually found in a code of ethics Usually found in a code of ethics

16 Elements of Corporate Governance Good Board practices Good Board practices Control Environment Control Environment Transparent disclosure Transparent disclosure Well-defined shareholder rights Well-defined shareholder rights Board commitment Board commitment

17 Good Board Practices Clearly defined roles and authorities Clearly defined roles and authorities Duties and responsibilities of Directors understood Duties and responsibilities of Directors understood Board is well structured Board is well structured Appropriate composition and mix of skills Appropriate composition and mix of skills

18 Good Board procedures Appropriate Board procedures Appropriate Board procedures Director Remuneration in line with best practice Director Remuneration in line with best practice Board self-evaluation and training conducted Board self-evaluation and training conducted

19 Control Environment Internal control procedures Internal control procedures Risk management framework present Risk management framework present Disaster recovery systems in place Disaster recovery systems in place Media management techniques in use Media management techniques in use

20 Control Environment Business continuity procedures in place Business continuity procedures in place Independent external auditor conducts audits Independent external auditor conducts audits Independent audit committee established Independent audit committee established

21 Control Environment Internal Audit Function Internal Audit Function Management Information systems established Management Information systems established Compliance Function established Compliance Function established

22 Transparent Disclosure Financial Information disclosed Financial Information disclosed Non-Financial Information disclosed Non-Financial Information disclosed Financials prepared according to International Financial Reporting Standards (IFRS) Financials prepared according to International Financial Reporting Standards (IFRS)

23 Transparent Disclosure Companies Registry filings up to date Companies Registry filings up to date High-Quality annual report published High-Quality annual report published Web-based disclosure Web-based disclosure

24 Well-Defined Shareholder Rights Minority shareholder rights formalised Minority shareholder rights formalised Well-organised shareholder meetings conducted Well-organised shareholder meetings conducted Policy on related party transactions Policy on related party transactions

25 Well-Defined Shareholder Rights Policy on extraordinary transactions Policy on extraordinary transactions Clearly defined and explicit dividend policy Clearly defined and explicit dividend policy

26 Board Commitment The Board discusses corporate governance issues and has created a corporate governance committee The Board discusses corporate governance issues and has created a corporate governance committee The company has a corporate governance champion The company has a corporate governance champion A corporate governance improvement plan has been created A corporate governance improvement plan has been created Appropriate resources are committed to corporate governance initiatives Appropriate resources are committed to corporate governance initiatives

27 Board Commitment Policies and procedures have been formalised and distributed to relevant staff Policies and procedures have been formalised and distributed to relevant staff A corporate governance code has been developed A corporate governance code has been developed A code of ethics has been developed A code of ethics has been developed The company is recognised as a corporate governance leader The company is recognised as a corporate governance leader

28 Other Entities Corporate Governance applies to all types of organisations not just companies in the private sector but also in the not for profit and public sectors Corporate Governance applies to all types of organisations not just companies in the private sector but also in the not for profit and public sectors Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises Examples are NGOs, schools, hospitals, pension funds, state-owned enterprises

29 Country Perspective Corporate Governance is by way of legislation or best practice Code Corporate Governance is by way of legislation or best practice Code US adopted legislation in Sarbanes Oxley Act US adopted legislation in Sarbanes Oxley Act Most other developed and emerging market countries have adopted best practice Codes e.g. Combined Code in the UK, Cromme Code in Germany and the King II Code in South Africa Most other developed and emerging market countries have adopted best practice Codes e.g. Combined Code in the UK, Cromme Code in Germany and the King II Code in South Africa

30 Country perspective - Codes These Codes are voluntary and are enforced by shareholders These Codes are voluntary and are enforced by shareholders Most of them operate on a ‘comply or explain’ approach Most of them operate on a ‘comply or explain’ approach The Media also play a part in highlighting good or bad practices The Media also play a part in highlighting good or bad practices

31 Country Perspective Countries in Africa have tended to adopt a hybrid approach whereby they have followed the ‘comply and explain’ approach but have enshrined some of the principles in law to assist in enforceability Countries in Africa have tended to adopt a hybrid approach whereby they have followed the ‘comply and explain’ approach but have enshrined some of the principles in law to assist in enforceability The reason is the weakness of the shareholder base and of the media The reason is the weakness of the shareholder base and of the media

32 Why Corporate Governance? Better access to external finance Better access to external finance Lower costs of capital – interest rates on loans Lower costs of capital – interest rates on loans Improved company performance – sustainability Improved company performance – sustainability Higher firm valuation and share performance Higher firm valuation and share performance Reduced risk of corporate crisis and scandals Reduced risk of corporate crisis and scandals

33 Why Corporate Governance? In 2002, L Klapper and I Love from the World Bank found evidence that improving a company’s corporate governance has proportionately greater impact in countries with weak legal environments. They have suggested that companies can partially compensate for ineffective laws and enforcement by establishing good corporate governance at the company level and providing credible investor protection

34 Convince your Editor


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