CHAPTER 1

INTRODUCTION TO CORPORATE GOVERNANCE

WHAT IS GOVERNANCE?

Generally, governance refers to a process whereby elements in society wield

power, authority and influence and enact policies and. decisions concerning

public life and social upliftment.

It comprises all the processes of governing whether undertaken by the

government of a country, by a market or by a network - over a social system and

whether through the laws, norms, power or language of an organized society.

Governance therefore means the process of decision-making and the process by

which decisions are implemented (or not implemented) through the exercise of

power or authority by leaders of the country and/or organizations.

Governance can be used in several contexts such as corporate governance,

international governance, national governance and local governance.

The focus of this book is on Corporate Governance.

CHARACTERISTICS OF GOOD GOVERNANCE

Whatever context good governance is used, the following major characteristics

should be present:

These characteristics are briefly described as follows:

Participation by both men and women is a key cornerstone of good governance. Participation could be
either direct or through legitimate institutions or representatives. It is important to point out that
representative democracy does not necessarily mean that the concern of the most vulnerable in society
would not be taken into consideration in decision making. Participation needs to be informed and
organized. This means freedom of association and expression on one hand and an organized civil society
on the other hand.

Rule of Law Good governance requires fair legal frameworks that are enforced impartially. It also
requires full protection of human rights, particularly those of minorities. Impartial enforcement of laws
requires an independent judiciary and an impartial and incorruptible police force
Transparency means that decisions taken and their enforcement are done in a manner that follows
rules and regulations. It means that information is freely available and directly accessible to those who
will be affected by such decisions and their enforcement. It also means that enough information is
provided and that it is provided in easily understandable forms and media.

Responsiveness Good governance requires that institutions and processes try to serve the needs all
stakeholders within a reasonable timeframe.

Consensus Oriented Good governance requires mediation of the different interests in society to reach a
broad consensus on what is in the best interest of the whole community and how this can be achieved.
It also requires a broad and ,long-term perspective on what is needed for sustainable human
development and how to achieve the goals of such development. This can only result from an
understanding of the historical, cultural and social contexts of a given society or community.

Equity & Ensures that all its members feel that they have a stake in it

Inclusiveness and do not feel excluded from the mainstream of society.

This requires all groups, but particularly the most

Vulnerable, have opportunities to improve or maintain their

well being

Effectiveness Good governance means that processes and institutions

&Efficiency produce results that meet the needs of society while

making the best use of resources at their disposal. The

concept of efficiency in the context of good governance

also covers the sustainable use of natural resources and the

protection of the environment.

Accountability is a key requirement of good governance.

Not only governmental institutions but also the private

sector and civil society organizations must be accountable

to the public and to their institutional stakeholders. Who is

accountable to whom varies depending on whether

decisions or actions taken are internal or external to an

an institution is accountable to those who will be affected

by its decisions or actions. Accountability cannot be

enforced without transparency and the rule of law.

CORPORATE GOVERNANCE: AN OVERVIEW

Corporate governance is defined as the system of rules, practices and processes

by which business corporations are directed and controlled. It basically involves

balancing the interests of a company's many stakeholders, such as shareholders,

management, customers, suppliers, financiers, government and the community.

Corporate governance is a topic that has received growing attention in the public

in recent years as policy makers and others become more aware of the

contribution good corporate governance makes to financial market stability and

economic growth. Good corporate governance is all about controlling one's

business and so is relevant, and indeed vital, for all organizations, whatever size

or structure,

The corporate governance structure specifies the distribution of rights and

responsibilities among different participants in the corporation, such as the board,

managers, shareholders, and other stakeholders, and spells out the rules and

procedures for making decisions on corporate affairs. By doing this, it also

provides the structure through which the objectives are set and the means of

attaining those objectives and monitoring performance.

PURPOSE OF CORPORATE GOVERNANCE

The purpose of corporate governance is to facilitate effective, entrepreneurial and

prudent management that can deliver long-term success of the company. In

Simple terms, the fundamental aim of corporate governance is to enhance

shareholders' value and protect the interests of other stakeholders by improving

the corporate performance and accountability. It is also about what the board of
directors of a company does, how it sets the values of the business firm.

OBJECTIVES OF CORPORATE GOVERNANCE

The following are the basic objectives of corporate governance:

1. Fair and Equitable Treatment of Shareholders

A corporate governance structure ensures equitable and fair treatment of

all shareholders of the company. In some organizations, a group of high-

net-worth individual and institutions who have a substantial proportion

of their portfolios invested in the company, remain active through

occupation of top-level positions that enable them to guard their interest.

However, all shareholders deserve equitable treatment and this equity is

safeguarded by a good governance structure in any organization.

2. Self Assessment

Corporate governance enables firms to assess their behavior and actions

before they are scrutinized by regulatory agencies. Business

establishments with a strong corporate governance system are better able

to limit exposure to regulatory risks and fines. An active and independent

board can successfully point out deficiencies or loopholes in the

company operations and help solve issues internally on a timely basis.

3. Increase Shareholders' Wealth

Another corporate governance's main objective is to protect the long-

term interests of the shareholders. Firms with strong corporate

governance structure are seen to have higher valuation attached to their

Snares by businessmen. This only reflects the positive perception that

good corporate governance induces potential investors to decide to invest

in a company.

4. Transparency and Full Disclosure

transparency in an organization by encouraging full disclosure of

transactions in the company accounts.

BASIC PRINCIPLES OF EFFECTIVE CORPORATE GOVERNANCE

Effective corporate governance is transparent, protects the rights of shareholders

and includes both strategic and operational risk management. It is concerned in

both the long-term earning potential as well as actual short-term earnings and

holds directors accountable for their stewardship of the business.

The basic principles of effective corporate governance are threefold as presented

Below

Positive answers to the following questions indicate a firm's conformance and

compliance with the basic principles of good corporate governance

A. Transparency and Full Disclosure

Does the board meet the information needs of investment

communities?

Does it safeguard integrity in financial reporting?

Does the board have sound disclosure policies and practices?

Does it make timely and balanced disclosure?

Can an outsider meaningfully analyze the organization's actions

and performance?

B. Accountability

Does the board clarify its role and that of management?

Does it promote objective, ethical and responsible decision

making?

Does it lay solid foundations for management oversight?

appropriate range and mix of expertise, diversity, knowledge and

added value?

Is the organization's senior official committed to widely

accepted standards of correct and proper behavior?

C. Corporate Control

Has the board built long-term sustainable growth in shareholders

value for the corporation?

Does it create an environment to take risk?

Does it encourage enhanced performance?

Does it recognize and manage risk?

Does it remunerate fairly and responsibly?

Does it recognize the legitimate interests of stakeholders?

Are conflicts of interest avoided such that the organization's best

interests prevail at all times?

Illustrative Application of the basic principles of corporate governance and best practice
recommendations

Principles of Good Corporate

Governance

1. A company 'should lay solid foundation for

management and oversight. It should

recognize and publish the respective roles

and responsibilities of board and

management.

2. Structure the board to add value. Have a

commitment to adequately discharge its

responsibilities and duties.

3. Promote ethical and responsible decision-'

making. Actively promote ethical and

responsible decision-making.

4. Safeguard integrity in financial reporting.

Have a structure to independently verity

and safeguard the integrity of the

company's financial reporting.

5. Make timely and balanced disclosure.

Promote timely and balanced disclosure of

all material matters concerning the

company:

6. Respect the rights of shareholders and

facilitate the effective exercise of those

rights.

7. Recognize and manage risk. Establish a

sound system of risk oversight and

management and internal control.

8. Encourage enhanced performance. Fairly

review and actively encourage enhanced

board and management effectiveness.

that the level and composition of

remuneration is sufficient and reasonable

and that its relationship to corporate and

individual performance is defined.

10. Recognize the legitimate interests of

stakeholders. Recognize legal and other

obligations to all legitimate stakeholders.

BEST PRACTICES RECOMMENDATIONS

Best Practice Recommendations

1-a. Formalize and disclose the functions

reserved to the board and those

delegated to management.

2-a. A board should have independent

directors.

2-b. The roles of chairperson and chief

executive officer should not be exercised

by the same individual

2-b. The board should establish a nomination

committee

3-a. Establish a code of conduct to guide the

directors, the chief executive officer (or

equivalent), the chief financial officer (or

equivalent) and any other key executives

as to:
The practices necessary to

maintain confidence in the

company's integrity; and

The responsibility and

accountability of individuals for

reporting and investigating

reports of unethical practices

3-b. Disclose the policy concerning trading

in company securities by directors,

officers and employees

4-a. Require the chief executive of (or

equivalent) and the chief financial

officer (or equivalent) to state in

writing to the board that the

company's financial reports present a

true and fair view, in all material

respects, of the company's financial

condition and operational results and

are in accordance with relevant

accounting standards.

4-b. The board should establish an audit

committee.

4-C. Structure the audit committee so that it

consists of:

Only non-executive or

independent directors;

An independent chairperson,

who is not chairperson of the

At least three (3) members

5-a. Establish written policies and

procedures designed to ensure

compliance with IFRS.

5-b. Listing Rule disclosure requirements

and to ensure accountability at a senior

management level for compliance.

6-a. Design and disclose a communications

strategy to promote effective

communication with shareholders and

encourage effective participation at

general meetings.

6-b. Request the external auditor to attend

the annual general meeting and be

available to answer shareholder

questions about the audit.

7-a. The board or appropriate board

committee should establish policies on

risk oversight and management.

2-a. The chief executive officer (or

equivalent) and the chief financial

officer (or equivalent) should state to

the board in writing that

The statement given in

accordance with best practice

recommendation 4-a (the

integrity of financial statements)

is founded on a sound system of

compliance and control which

implements the policies adopted

by the board; and

The company's risk management

and internal compliance and

control system is operating

efficiently in all material respects:

8-a. Disclose the process for performance

Evaluation of the board, its committees

and individual directors, and key

executives.

9-a. Provide disclosure in relation to the

Company's remuneration policies to

enable investors to understand:

The costs and benefits of those

policies, and

The link between remuneration

paid to directors and key

executives and corporate

performance.

9-b. The board should establish a

remuneration committee.

9-c. Clearly distinguish the structure of non-

executive director's remuneration from

that of executives.

9-d. Ensure that payment of equity-based

executive remuneration is made in

accordance with thresholds set in

10-a. Establish and disclose a code of

conduct to guide compliance with legal

and other obligations to legitimate

stakeholders.

CHAPTER 2

CORPORATE GOVERNANCE RESPONSIBILITIEs

AND Accountabilities

INTRODUCTION

Many of the characteristics of good governance described in Chapter 1 are

relevant to both SME's and large listed public companies. As an organization

grows in size and influence, these issues become increasingly important.

However, it is also important to recognize that good corporate governance is

based on principles underpinned by consensus and continually developing

notions of good practice. There are no absolute rules which must be adopted by

all organizations. "There is no simple universal formula for good governance".

Instead emphasis is many localities, has been to encourage organizations to give

appropriate attention to the principles and adopt approaches which are tailored to

the specific needs of an organization at a given point in time.

When corporate governance is discussed, it is often spoken of in terms of a

company's corporate governance framework. The key elements within an

effective governance framework, and the issues relating to each element, are set

out on the following pages and are relevant to organizations large and small, in

both the private and the public sectors. The table provides a useful structure for

arny company to consider its own approach to corporate governance and the

matters which may assist it to achieve its strategic objectives.

Many of the matters listed may not be directly relevant in all situations and some
may not, in particular circumstances, be within the board's control, but it provides

a useful context in which any organization can consider its governance needs so

that they might be most appropriately addressed.

The essence of any system of good corporate governance is to allow the board

and management the freedom to drive their organization forward and to exercise

that freedom within a framework of effective accountability.

RELATIONSHIP BETWEEN SHAREHOLDERS/OWNER(S) AND

OTHER STAKEHOLDERS

The relationship between the shareholders owners, management and other

stakeholders in a corporation is shown below.

Governance starts with the shareholders/owners delegating responsibilities

through an elected board of directors to management and, in turn, to operating

units with oversight and assistance from internal auditors. The board of directors

and its audit committee oversee management and, in that role, are expected to

protect the shareholders' rights. However, it is important to recognize that

management is part of the governance framework; management can influence

who sits on the board and the audit committee as well as other governance

controls that might be put into place.

In return for thé responsibilities (and power) given to management and the board,

governance demands accountability back through the system to the shareholders

However, the accountabilities do not extend only to the shareholders. Companies

also have responsibilities to other stakeholders. Stakeholders can be anyone who

Management and the board have responsibilities to act within the laws of society

and to meet various requirements of creditors, employees and the stakeholders.

A broad group of stakeholders has an interest in the quality of

governance because it has a relationship to economic performance and

quality of financial reporting. For example, it is likely that many employees have

significant funds invested in pension plans. Those pension plans are designed We use the

have

protect the financial interests of those employees in their retirement. We fashion use the

designed to

word society in the diagram to indicate those broad interests. In a similar how fashion, it is

employees and creditors have a vested interest in the organization and how it is

governed. Regulators are a response to society's wishes o ensure that

wishes to ensure that

Organizations, in their pursuit of returns for their owners, act responsibly and

operate in compliance with relevant laws.

while shareholders/ owners delegate responsibilities to various parties within the

corporation, they also require accountability as to how well the resources that

have been entrusted to management and the board have been used. For example

the owners want accountability on such things as:

Financial performance

Financial transparency- financial statements that are clear with full

disclosure and that reflect the underlying economics of the company.

Stewardship, including how well the company protects and manages the

resources entrusted to it.

Quality of internal control

Composition of the board of directors and the nature of its activities,

including information on how well management incentive systems are

The owners want disclosures from management that are accurate and objectively

verifiable. For instance, management has responsibility to provide financial

reports, and in some cases, reports on internal control effectiveness. Management

has always had the primary responsibility for the accuracy and completeness of

an organization's financial statements. From a financial reporting perspective, it

is management's responsibility to:

Choose which accounting principles best portray the economic substance

of company transactions.

Implement a system of internal control that assures completeness and

accuracy in financial reporting

Ensure that the financial statements contain accurate and complete

disclosure.

PARTIES INVOLVED IN CORPORATE GOVERNANCE:

THEIR RESPECTIVE BROAD ROLE AND SPECIFIC

RESPONSIBILITIES

Corporate governance and financial reporting reliability are receiving

considerable attention from a number of parties including regulators, standard

setting bodies, the accounting profession, lawmakers and financial statement

users.

Broad Role: Overview of Responsibilities

SHAREHOLDERS

Provide effective oversight through election of board members,

approval of major initiatives such as buying or selling stock, annual

reports on management compensation, from the board.

BOARD OF DIRECTORS

Broad Role:
The major representative of stockholders to ensure that the

organization is run according to the organization's charter and that

there is proper accountability.

Specific activities include among others:

1. Overall Operations

Establishing the organization's vision, mission,

values and ethical standards.

Delegating an appropriate level of authority to

management.

Demonstrating leadership.

Assuming responsibility for the business

relationship with CEO including his or her

appointment, succession, performance

remuneration and dismissal.

Overseeing aspects of the employment of the

management team including management

remuneration, performance and succession.

planning.

Recommending auditors and new directors to

shareholders.

Ensuring effective communication with

shareholders other stakeholders.

Crisis management.

Appointment of the CFO and corporate secretary.

2. Performance

Ensuring the organization's long term viability and

enhancing the financial position.

corporate strategy.

Approving the plan, budget and corporate policies,

Agreeing key performance indicators (KPls)

Monitoring/assessing assessment, performance of

the organization, the board itself, management and

major projects.

.Overseeing the risk management framework and

monitoring business risks.

Monitoring developments in the industry and the

operating environment.

Oversight of the and organization, including its

control and accountability systems.

. Approving and monitoring the progress of major

capital expenditure, capital management and

acquisitions and divestitures.

3. Compliance/ Legal Conformance

Understanding and protecting the organization's

financial position.

Requiring and monitoring legal and regulatory

compliance including compliance with accounting

standards, unfair trading legislations, Occupational

health and safety and environmental standards.

Approving annual financial reports, annual reports

and other public documents/ sensitive reports.

Ensuring an effective system of internal controls

exists and is operating as expected.

NON-EXECUTIVE OR INDEPENDENT DIRECTORS

Broad Role
The same as the broad role of the entire board of directors

Specific activities include among others:

to understand the organization, its business,

operating environment and its financial position,

to apply expertise and skills in the organization's

best interests,

to assist management to keep performance

objectives at the top of its agenda,

to understand that his/her role is not to act as

auditor, nor to act as a member of the management

team,

to respect the collective, cabinet nature of the

board's decisions,

to prepare for and attend board meetings,

to seek information on a timely basis to ensure that

he/she is in a position to contribute to the

discussion when a matter comes before the board,

or alert the chairman in advance to the need for

further information in relation to a particular matter,

and

to ask appropriate questions relative to operations.

MANAGEMENT

Broad Role

Operations and accountability. Manage the organization

effectively, provide accurate and timely reports to shareholders

and other stakeholders.

Specific activities include among others:

strategic plan into the operations of the business

manage the company's human, physical and financial

resources to achieve the organization's objectives- run

the business

assume day to day responsibility for the organization's

conformance with relevant laws and regulations and its

compliance framework

develop, implement and manage the organization's risk

management and internal control frameworks

develop, implement and update policies and procedures

be alert to relevant trends in the industry and the

organization's operating environment

provide information to the board

act as conduit between the board and the organization

developing financial and other reports that meet public,

stakeholder and regulatory requirements.

AUDIT COMMITTEES OF THE BOARD OF DIRECTORS

Broad Role:

Provide oversight of the internal and external audit function and

the process of preparing the annual financial statements as well as

public reports on internal control.

Specific activities include among others:

Selecting the external audit firm

Approving any non-audit work performed by the audit

firm

Selecting and/or approving the appointment of the

Chief Audit Executive (Internal Auditor)

Reviewing and approving the scope and budget of the

Discussing audit findings with internal auditor and

external auditor and advising the board (and

management) on specific actions that should be taken

REGULATORS

a. BOARD OF ACCOUNTANCY

Broad Role:

Set accounting and auditing standards dictating underlying

financial reporting and auditing concepts; set the expectations of

audit quality and accounting quality.

Specific activities include among others:

.Conducting CPA Licensure Board Examinations

Approving accounting principles

Approving auditing standards

Interpreting previously issued standards implementing

quality control processes to ensure audit quality

Educating members on audit and accounting

Requirements

b. SECURITIES AND EXCHANGE COMMISSION

Broad Role:

Ensure the accuracy, timeliness and fairness of public reporting of

financial and other information for public companies.

Specific activities include among others:

Reviewing filings with the SEC

Interacting with the Financial Reporting Standards

Council in setting accounting standards

Specifying independence standards required of auditors

that report on public financial statements

Suggest remedial actions

EXTERNAL AUDITORS

Broad Role:

Perform audits of company financial statements to ensure that the

statements are free of material misstatements including

misstatements that may be due to fraud.

Specific activities include among others:

Audit of public company financial statements

Audits of nonpublic company financial statements

Other services such as tax or consulting

INTERNAL AUDITORS

Broad Role:

Perform audits of companies for compliance with company policies

and laws, audits to evaluate the efficiency of operations, and

periodic evaluation and tests of controls.

Specific activities include among others:

Reporting results and analyses to management

(including operational management) and audit

Committees

Evaluating internal controls