Guiding principles and concepts of corporate governance

Guiding principles and concepts of corporate governance

As boards develop corporate governance structures, practices and processes they need to be cognizant of some core guiding principles and concepts that they should consider. These can be tailored to the needs and circumstances of each organization.
The concepts of good corporate governance are discussed below.
The directors should be fair in all their deliberations by ensuring that they take into account every stakeholder, or everyone who has a legitimate interest in the organisation. The board should treat all stakeholders fairly and equitably. It should also respect their rights and views, for instance when dealing with minority shareholders, the board of directors should be even handed with the minority shareholders.
Directors should be independent, that is, they should not be unduly influenced by vested interests. There should be no conflict of interest that would prevent a director from making decisions that are not affected by self-interest. Independence is a state in which a director is able to stand apart from inappropriate influences by management or self-interest and be free from managerial influence. Independence is essential to ensure professionalism in the board exercising its oversight responsibility.

Directors should be honest in their dealings. The board of directors should be truthful and not mislead shareholders and other stakeholders by reporting information incorrectly with the aim to create a certain impression to the recipients of information. It’s important that the board of directors protect the shareholders’ interests by being honest.
The board of directors should be transparent in disclosing information by ensuring that all material information that is relevant to shareholders and other stakeholders is provided timely and in an accurate manner. All material information should not be concealed.
Directors control the business on behalf of shareholders and therefore should be accountable to the owners of the business. Directors exercise accountability through provision of quality information to shareholders which they can use for decision making.
The board of directors should act with integrity when making decisions relevant to the organisation. Integrity means adhering to strict moral or ethical principles no matter the external pressure to do otherwise.

Directors have to operate in accordance with the highest standards of professionalism. Failure to do so will impact adversely on trust which is a key tenet in relationships and underpins the concept of integrity.
Management should be held responsible for their decisions and should accept the credit or blame for governance decisions. On the other hand, the board of directors must act responsively to all stakeholders of the company. The board of directors should also ensure that the organisation complies with the relevant laws where it operates.
The concept of innovation in corporate governance recognises the fact that the needs of businesses and stakeholders can change over time. Organisations should then respond appropriately to these developments by improving on corporate governance practices and systems.
Non-executive directors are encouraged to adopt scepticism so that they can challenge management decisions in their role of scrutiny. Professional scepticism relates to an attitude that includes a questioning and enquiring mind, but this does not mean that directors should be suspicious of all management decisions.
The board of directors should have knowledge of the business so that they make decisions that enhance shareholder value. To be able to exercise good judgement the nomination committee should recruit directors with requisite skills and continuously train current directors.

On the issue of key principles, the first principle relates to the key responsibilities of the board. The board approves the corporate strategies that are intended to build sustainable long-term value for shareholders. The board selects a chief executive officer (CEO) and oversees the CEO and senior management in operating the company’s business, including allocating capital for long-term growth and assessing and managing risks and sets the tone for ethical conduct.
Management is responsible for developing and implementing corporate strategy and operates the company’s business under the board’s oversight, with the goal of producing sustainable long-term value creation.
Management, under the oversight of the board and the audit committee, produces financial statements that fairly present the company’s financial position and results of operations and makes the timely disclosures investors need to assess the financial and business soundness and risks of the company.
The audit committee of the board retains and manages the relationship with the external auditors, oversees the company’s annual financial statements, audit and internal controls over financial reporting, and oversees the company’s risk management and compliance programs.

The nominating and corporate governance committee of the board should play a leadership role in shaping the corporate governance of the company, by striving to build an engaged and diverse board whose composition is appropriate in light of the company’s needs and strategy, and actively conducts succession planning for the board.
The remuneration committee of the board should develop an executive compensation philosophy, adopt and oversee the implementation of compensation policies that fit within its philosophy, design compensation packages for the CEO and senior management to incentivize the creation of long-term value, and develop meaningful goals for performance-based compensation that support the company’s long-term value creation strategy.

The board and management should engage with long-term shareholders on issues and concerns that are of interest to them and that affect the company’s long-term value creation. Shareholders should recognise that the board must continually weigh both short-term and long-term uses of capital when determining how to allocate it in a way that is most beneficial to shareholders and to building long-term shareholder value.
In making decisions, the board should consider the interests of all of the company’s constituencies, including stakeholders such as employees, customers, suppliers and the community in which the company does business, when doing so contributes in a direct and meaningful way to building long-term shareholder value creation.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

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