The fundamental of
corporate governance is to promote fairness, transparency, accountability as
well as guide corporate bodies in their action and deed. Good corporate
governance and not assets value determine the profitability of organizations.
Governance involves a strong
commitment of the management to protect the interest of its stakeholders.
Therefore, it provides broad parameters of accountability, control and
reporting system by the management and it encompasses the interactive
relationship among various constituents in determining direction, and
performance of the organization.
DEFINITION OF CORPORATE
Governance refers to the way a corporation is governed. It is the technique by
which companies are directed and managed. It means carrying the business as per
the stakeholders’ desires. It is conducted by the board of Directors and the
concerned committees for the company’s stakeholder’s benefit. It is all about
balancing individual and societal goals, as well as, economic and social goals.
to Milton Friedman “Corporate Governance is to conduct the business in
accordance with owner or shareholders’ desires, which generally will be to make
as much money as possible, while conforming to the basic rules of the society
embodied in law and local customs.”
governance could also be said to be the way a company policies itself. In summary,
it is a method of governing the company like a sovereign state, instating its
own customs, policies and laws to its employees at all levels. Corporate
governance is intended to increase the accountability of a corporate entity and
to avoid massive disasters before they occur.
ESTABLISHING THE NEED FOR
has been a considerable concern, especially in third world countries like
Nigeria, about the standards of corporate governance. According to the 2011
Code of Corporate Governance for Public Companies, elaborate provisions have
been made to address the myriad of issues encountered by corporate
organizations and align the corporate governance practices in Nigeria with
international best practices. The applicability of the Code is limited to
public companies in Nigeria. However, other companies not covered by the code
have been encouraged to use the principles set out in the Code where
appropriate to guide them in the conduct of their affairs. As such, the need
for Corporate Governance is important for the following reasons:
Creating a framework for
long-term trust between companies and the external providers of capital.
thinking at the top by inducting independent directors who bring a wealth of
experience, and a host of innovative ideas
Validation of management
and close continuous monitoring of risks that a firm faces
Taking preventive actions
to limit the liability of top management and directors, by carefully
articulating the decision-making process
OBJECTIVES OF CORPORATE
governance is integral to the very existence of a company. It inspires and
strengthens investor’s confidence by ensuring company’s commitment to higher
growth and profits.
seeks to achieve following objectives:
That a properly
structured Board capable of taking independent and objective decisions is in
place at the helm of affairs;
That the Board is
balanced with regards the representation of adequate number of non-executive
who will take care of the interests and well-being of the independent directors
and all the stakeholders;
That the Board adopts
transparent procedures and practices and arrives at decisions on the strength
of adequate information;
That the Board has an
effective machinery to sub serve the concerns of stakeholders;
That the Board keeps the
shareholders informed of relevant developments impacting the company;
That the Board
effectively and regularly monitors the functioning of the management team.
DEPENDENCIES FOR QUALITY
of governance primarily depends on following factors:
Integrity of the
Ability of the board;
Adequacy of the process;
Commitment level of
individual board members;
Quality of corporate
stakeholders in the management.
KEY ELEMENTS OF GOOD
most critical requirement of good governance is the clear identification of
powers, roles, responsibilities and accountability of the Board, CEO, and the
Chairman of the Board.
and unambiguous legislation and regulations are fundamental to effective
corporate governance. There is a need to abide by the stipulated the Code of
Corporate Governance for Public Companies in Nigeria defined by the SEC.
Management Environment- Management
environment includes setting-up of clear objectives and appropriate ethical
framework, establishing due processes, providing for transparency and clear
enunciation of responsibility and accountability, implementing sound business
planning, encouraging business risk assessment, having right people and right
skill for the jobs, establishing clear boundaries for acceptable behaviour,
establishing performance evaluation measures and evaluating performance and adequately
recognizing individuals and groups that contribution to achievement of
strategic set goals.
Independent Board – Independent
Board is essential for sound corporate governance. This goal may be achieved by
associating sufficient number of independent directors with the board.
Independence of directors would ensure that there are no actual or perceived
conflicts of interest. They will also ensure there is no prejudice in decisions
Code of conduct- It
is essential that the organization’s clearly articulates the norms of ethical
practices and code of conduct to all stakeholders, ensuring that they are
clearly understood and followed by each member of the organization. Systems
should be in place to periodically measure adherence to code of conduct and the
adherence should be periodically evaluated and if possible recognized.
The objectives of the company must be clearly documented in a long-term
corporate strategy and an annual business plan together with achievable and
measurable performance targets and milestones.
Business Consultation- Though
basic activity of a business entity is inherently commercial yet it must also
take care of community’s obligations. Commercial objectives and community
service obligations should be clearly documented after approval by the Board.
The stakeholders must be informed about the proposed and ongoing initiatives
taken to meet social responsibility obligations.
Financial Reporting- The
Board requires comprehensive, regular, reliable, timely, correct and relevant
information in a form and of a quality that is appropriate to discharge its
function of monitoring corporate performance.
Audit Committee- The
Audit Committee responsible for liaising with the management; internal and
statutory auditors, reviewing the adequacy of internal control and compliance
with significant policies and procedures, reporting to the Board on the key
issues. The quality of Audit Committee significantly contributes to the
governance of the company.
Risk is an essential element of corporate functioning and governance. There
should be a clearly established process of identifying, analysing and treating
risks, which could prevent the company from effectively achieving its objectives.
Governance has become a very integral and important aspect of any organization
that intends to be globally recognised. Almost every country has
institutionalized a set of Corporate Governance codes, spelt out best practices
and has sought to impose appropriate board structures. There however exists no
universal benchmark for effective levels of disclosure and transparency. There
are several corporate governance structures available in the developed world
but there is no one structure, which can be singled out as being better than
the others. The fundamental objective Corporate Governance is not the mere fulfilment
of the requirements of law but in ensuring commitment of the board in managing
the company in a transparent manner for maximizing long term shareholder value.
a report presented to the Global Corporate Governance Forum in 2003, Stijn
Claessens, Professor of International Finance at the University of Amsterdam,
identified several channels through which corporate governance affects the
growth and development of organizations and nations. According to him
access to external ?nancing by ?rms. This in turn can lead to larger
investment, higher growth, and greater employment creation.
of the cost of capital and associated higher ?rm valuation. This makes more
investments attractive to investors, also leading to growth and more
operational performance through better allocation of resources and better
management. This creates wealth more generally.
risk of ?nancial crises. This is particularly important, as ?nancial crises can
have large economic and social costs.
corporate governance can generally better relationships with all stakeholders.
This helps improve social and labour relationships and aspects such as environmental
these channels matter for growth, employment, poverty, and well-being more
or organizations that have strong corporate governance in place it will attract
the interest of investors both locally and globally. More investment directly
such, it can be concluded that corporate governance has a direct impact and correlation
with the profitability of companies.