NOTES - GOVBUSMAN - Chapter 1

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Course Code: GOVBUSMAN Purpose of Corporate Governance

Course Title: Corporate Governance, Business  The purpose of corporate is to facilitate effective,
entrepreneurial and prudent management that can
Ethics, Risk Management, and Internal deliver long-term success of the company.
Control  In simple terms, the fundamental aim of corporate
governance is to enhance shareholders’ value and
Instructor: Mrs. Jennivib D. Diamzon protect the interests of other stakeholders by
improving the corporate performance and
Chapter 1: Introduction to Corporate accountability.
Governance Objectives of Corporate Governance
 Governance refers to a process whereby elements in 1. Fair and Equitable Treatment of Shareholders -
society wield power, authority and influence and ensures equitable and fair treatment of all
enact policies and decisions concerning public life shareholders of the company 
and social upliftment. 2. Self-Assessment - enables firms to assess their
 Governance means the process of decision-making behavior and actions before they are scrutinized by
and the process by which decisions are implemented regulatory agencies.
(or not) through the exercise of power or authority by 3. Increase Shareholders’ Wealth - Firms with strong
leaders of the country and/or organizations.  corporate governance structure are seen to have
higher valuation attached to their shares by
 Used in several contexts such as corporate
businessmen. 
governance, international governance, national
4. Transparency and Full Disclosure - aims at ensuring a
governance and local governance.
higher degree of transparency in an organization by
encouraging full disclosure of transactions in the
CHARACTERISTICS OF GOOD GOVERNANCE company accounts
 Participation - it could either be direct or through
legitimate institutions or representatives Basic Principles of Corporate Governance
 Rule of Law - requires fair legal frameworks that are
enforced impartially.
 Transparency – it means that decisions taken and
their enforcement are done in a manner that follows
rules and regulations.  
 Responsiveness – requires that institutions and
processes try to serve the needs of all on stakeholders
within a reasonable timeframe.
 Consensus Oriented - 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.
 Equity and Inclusiveness – ensures that all its
members feel that they have a stake in it and do not
feel excluded from the mainstream of society.
 Effectiveness and Efficiency – it means that
processes and institutions produce results that meet Illustrative Application of the Basic Principles of Corporate
the needs of society while making the best use of Governance and Best Practice Recommendations
resources at their disposal.
Principles of Good Best Practice
 Accountability - In general, an organization or an
Corporate Governance Recommendations
institution is accountable to those who will be
affected by its decisions or actions. Accountability 1.A company should lay 1-a. Formalize and disclose
cannot be enforced without transparency and the rule solid foundation for the functions reserved to
of law. management and oversight. the board and those
It should recognize and delegated to the
   publish the respective roles management.
and responsibilities of
board and management.
2. Structure the board to 2-a. A board should have
add value. Have a board of independent directors.
an effective composition,
size and commitment to 2-b. The roles of
adequately discharge its chairperson and chief
responsibilities and duties. executive officer should
not be exercised by the
same individual.
2-c. The board should
CORPORATE GOVERNANCE: Overview establish a nomination
committee.
 Corporate Governance is defined as the system of 3. Promote ethical and 3-a. Establish a code of
rules, practices and processes by which business responsible decision- conduct to guide the
corporations are directed and controlled.   making. Actively promote directors, the chief
 It involves balancing the interests of a company’s ethical and responsible executive officer (or
many stakeholders, such as shareholders, decision-making. equivalent), the chief
management, customers, suppliers, financiers, financial officer (or
government and the community. equivalent) and any other
key executives as to:
- The practices necessary system of risk oversight committee should establish
to maintain confidence in and management and policies on risk oversight
the company’s integrity; internal control. and management.
and 7-b. The chief executive
(or equivalent) and the
- The responsibility and chief financial officer (or
accountability of equivalent) should state to
individuals for reporting the board in writing that:
and investigating reports of
- The statement given in
unethical practices.
accordance with best
practice recommendation
3-b. Disclose the policy 4-a (the integrity of
concerning trading in financial statements) is
company securities by founded on a sound system
directors, officers and of risk management and
employees. internal compliance and
4. Safeguard integrity in 4-a. Require the chief control which implements
financial reporting. Have a executive of (or equivalent) the policies adopted by the
structure to independently and the chief financial board; and
verify and safeguard the officer (or equivalent) to
integrity of the company’s state in writing to the board - The company’s risk
financial reporting. that the company’s
management and internal
financial reports present a compliance and control
true and fair view, in all
system is operating
material respects, of the efficiently in all material
company’s financial
respects.
condition and operational
8. Encourage enhanced 8-a. Disclose the process
results and are in
performance. Fairly review for performance evaluation
accordance with relevant
and actively encourage of the board, its
accounting standards.
enhanced board and committees and individual
4-b. The board should
management effectiveness. directors, and key
establish an audit
executives.
committee.
9. Remunerate fairly and 9-a. Provide disclosure in
4-c. Structure the audit
responsibly. Ensure that relation to the company’s
committee so that it
the level and composition remuneration policies to
consists of :
of remuneration is enable investors to
- Only non-executive or
sufficient and reasonable understand:
independent directors;
- An independent and that its relationship to
chairperson, who is not corporate and individual 9-b. The board should
chairperson; and performance is defined, establish a remuneration
committee.
- At least three (3)
members.
9-c. Clearly distinguish the
5.Make timely and 5-a. Establish written structure of non-executive
balanced disclosure. policies and procedures director’s remuneration
Promote timely and designed to ensure from that of executives.
balanced disclosure of all compliance with IFRS.
material matters 9-d. Ensure that payment
concerning the company. 5-b. Listing Rule of equity-based executive
disclosure requirements remuneration is made in
and to ensure accordance with thresholds
accountability at a senior set in plans approved by
management level for shareholders.
compliance. 10-a. Establish and
10. Recognize the
6.Respect the rights of 6-a. Design and disclose a legitimate interests of disclose a code of conduct
shareholders and facilitate communications strategy to stakeholders. Recognize to guide compliance with
the effective exercise of promote effective legal and other obligations legal and other obligations
those rights. communication with to all legitimate to legitimate stakeholders.
shareholders and stakeholders.
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.Recognize and manage 7-a. The board or
risk. Establish a sound appropriate board

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