There is no universal approach to corporate governance and no prescription or support of any particular option, so boards, management, and shareholders are free to make their own decisions. As a result, each organisation should utilise these principles as a starting point for developing structures, procedures, and processes tailored to its requirements and circumstances.
The first step in establishing corporate governance is distinguishing governance from corporate or firm. The standard definition of governance is "the process of guiding and controlling an entity's actions and affairs". The Latin verb "gubanare," which means "to guide," is the source of the term "governance". Simply put, governance uses powers and actions to help an organisation accomplish its objectives.
Related: 4 Pillars of Corporate Governance
A legal fiction is a corporation or organisational entity, whether private or public or a statutory authority. It is a legal definition of a person. Once created, a corporation becomes a corporate citizen with its own life separate from its owners. Directors oversee and govern a company's operations. They are typically elected by the company's owners, shareholders in private and public corporations, or by the Government or line Minister in parastatal entities.
Organisational entities include schools, charities, athletic organisations, state-owned companies, trust groups of individuals, incorporated corporations like firms, and international organisations like the United Nations, World Bank, and International Monetary Fund.
What is Corporate Governance?
"An internal system comprising rules, procedures, and people that directs and controls management operations with excellent business sense, objectivity, responsibility, and integrity, to satisfy the demands of shareholders and other stakeholders. Gabrielle ODonovan says sound corporate governance is based on external marketplace commitment and law and strong board culture that preserves rules and practices.
The mechanism through which corporations are directed and managed is known as corporate governance. The shareholder's role in governance is to nominate the directors and auditors and elect the board of directors. Boards of directors are in charge of their companies' governance.
The board's tasks include establishing the firm's strategic goals, giving leadership to put them into action, overseeing the company's administration, and reporting to shareholders on their stewardship. Corporate governance, therefore, refers to what a business's board of directors performs and how it establishes the firm's values, as opposed to the day-to-day operational administration of the company by full-time executives.
Governance guarantees that everyone in a company follows proper and transparent decision-making procedures. All stakeholders (shareholders, managers, workers, suppliers, and consumers, among others) have their interests safeguarded.
Sources of Corporate Governance
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There are three sources of corporate governance. These are:
- Law – common and legislation
- Best Practice Codes
- Books
1. Law
The US adopted legislation in 2002 through the Sarbanes Oxley Act, and in Zimbabwe, for example, there are statutes creating parastatals; the Public Finance Management Act Cap 22:19. Corporate governance premised on the law operates on a "comply or else" basis.
2. Codes
Most established and emerging market nations have implemented best-practice codes, such as the UK's Combined Code, Germany's Cromme Code, and South Africas King 1, 2, and 3 Codes. Zimbabwe currently has its code, the ZIMCODE which organisations have widely adopted. These codes are voluntary and are enforced by the owners of the legal entities. Most of them operate on the "comply or explain" approach.
3. Books
Some books in the region have been written to help an in-depth understanding of corporate governance principles from a practical standpoint. Good examples are:
- The Corporate Citizen by M King
- Corporate Governance – Non-Executive Directors Independence – Fact or fiction by C F Dube
- The "Transient Caretakers" by Mervyn King & Another
Guiding Principles of corporate governance
Business Roundtable supports the following core guiding principles:
1. The board sets the precedence for ethical behaviour by determining corporate strategies to create long-term value, appointing a CEO, supervising the CEO and senior management in running the company's operations, allocating resources for long-term growth and assessing and managing risks.
2. Management within the direction of the board of directors develops and implements business strategy and oversees the company's operations to produce long-term value.
3. Management generates financial statements that accurately reflect the company under the supervision of the board of directors and its audit committee. The board's audit committee keeps and manages the outside auditor's relationship, supervises the yearly financial statement audit and internal controls over financial reporting for the firm, and keeps an eye on them, risk management and compliance programs.
4. The nominating committee of the board of directors takes the lead in establishing the company's corporate governance, aims to create an engaged and diverse board of directors whose setup is essential in light of the company's needs, and objectives, and action plans for the board's succession.
Related: How to Apply Corporate Governance to Organizations
5. The compensation committee develops an executive compensation philosophy and adopts and oversees the implementation of compensation policies. Consistent with that philosophy develops pay packages for the CEO and senior management to promote long-term value development and establishes meaningful performance-based compensation targets that support the company's objectives.
6. The board and management should consult long-term shareholders on issues that are of general interest to them and influence the company's long-term value development. Shareholders who contact the board of directors or management in a way that can influence business decision-making or strategy are urged to give appropriate identifying information and take responsibility.
7. Shareholders should be aware that the board of directors must evaluate both short- and long-term uses of capital when choosing how to best deploy money for shareholder benefit and long-term value development.
8. If doing so adds directly and significantly to long-term value creation, the board may consider the interests of all of the company's stakeholders, including workers, customers, suppliers, and the community in which the business works, when making decisions.
Positive Impacts of Corporate Governance on Companies
According to an article by Youmatter, the following are the benefits of good corporate governance:
- Ensures that a company's management considers everyone's best interests;
- Aids businesses achieve long-term prosperity and economic growth; Maintains investor trust, allowing businesses to raise cash more efficiently and effectively.
- Has a favourable influence on stock prices since it boosts market confidence;
- Controls management and information systems better (such as security or risk management)
- Provides direction to owners and management on the company aims and strategy;
- Reduces squandering, corruption, danger, and mismanagement;
- Helps in the development of a strong brand image.
Conclusion
Corporate governance aims to enable effective, entrepreneurial, and cautious management to ensure the company's long-term prosperity. The goal of corporate governance is to assist in the creation of a climate of trust, transparency, and accountability that will encourage long-term investment, financial stability, and company integrity, resulting in greater growth and more inclusive societies.
Milton Jack is a Business Consultant at Industrial Psychology Consultants (Pvt) Ltd, a business management and human resources consulting firm.
LinkedIn: linkedin.com/in/milton-jack-9798b966
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Email: milton@ipcconsultants.com
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