Corporate Governance Revisited

17 Basic Principles of Corporate Governance

Leadership, ethics and corporate citizenship

1. The governing body should lead ethically and effectively.

2. The governing body should govern the ethics of the organisation in a way that supports the establishment of an ethical culture.

3. The governing body should ensure that the organisation is and is seen to be a responsible corporate citizen.

Strategy, performance and reporting

4. The governing body should appreciate that the organisation’s core purpose, its risks and opportunities, strategy, business model, performance and sustainable development are all inseparable elements of the value creation process.

5. The governing body should ensure that reports issued by the organisation enable stakeholders to make informed assessments of the organisation’s performance and its short, medium and long-term prospects.

Governing structures and delegation

6. The governing body should serve as the focal point and custodian of corporate governance in the organisation.

7.The governing body should comprise the appropriate balance of knowledge, skills, experience, diversity and independence for it to discharge its governance role and responsibilities objectively and effectively.

8. The governing body should ensure that its arrangements for delegation within its own structures promote independent judgement, and assist with the balance of power and the effective discharge of its duties.

9. The governing body should ensure that the evaluation of its own performance and that of its committees, its chair and individual members, support continued improvement in its performance and effectiveness.

10. The governing body should ensure the appointment of, and delegation to, management contribute to role clarity and effective exercise of authority and responsibilities.  

Governance functional areas

11. The governing body should govern risk in a way that supports the organisation in setting and achieving strategic objectives.

12. The governing body should govern technology and information in a way that supports the organisation setting and achieving strategic objectives.

13. The governing body should govern compliance with applicable laws and adopted non-binding rules, codes and standards in a way that supports the organisation being ethical and a good corporate citizen.

14. The governing body should ensure the organisation remunerates fairly, responsibly and transparently so as to promote the achievement of strategic objectives and positive outcomes in the short, medium and long-term.

15. The governing body should ensure that assurance services and functions enable an effective control environment, and that these support the integrity of information for internal decision-making and of the organisation’s external reports.

Stakeholder relationships

16. In the execution of its governance role and responsibilities, the governing body should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interest of the organisation over time.

17. The governing body of an institutional investor organisation should ensure that responsible investment is practiced by the organisation to promote good governance and the creation of value by the companies in which it invests.

The State-owned newspaper, the Guyana Chronicle, has dispensed with the services of two of its columnists, University Professor Dr. David Hinds, and Trade Unionist Lincoln Lewis. According to the Editor-in-Chief, the decision was taken “following discussions at the highest level of the company in keeping with policy directions. The Guyana Chronicle as it continues with its rebranding would like to focus on new areas which require specialist interventions at this time”. (Stabroek News 9 March 2018) These two columnists have always displayed a high degree of independence of thought, have the national interest at heart and are very much respected for their views. There were occasions when they considered it necessary, and quite justifiably so, to criticize some of the decisions that the Administration had taken, leaving one to speculate as to the real reason for their removal.

One would have also thought that when the full board met to discuss the matter, there would been a reconsideration of the decision and reinstatement of the two columnists. However, this was not to be, as the Board quite unfortunately considered that it could not interfere with Editor-in-Chief’s decision. The incident is indeed a regrettable one, especially when one considers that the previous Administration had not only displayed complete intolerance for the slightest criticism, regardless of how well-intentioned, but also used State resources to the fullest, including the use of paid bloggers and fictitious letter writers, to malign and discredit those who chose to do so.

The only rebranding one can think of is the removal of the shackles of political control that the Administration inherited, and therefore the dismissal of the two columnists goes against the grain of any attempt to do so. One is therefore left to wonder whether the board is not moving in the direction of merely going through the motions, rubber-stamping the decisions of the political directorate; and whether the newspaper is not once again becoming the medium for reporting news and reflecting views that are only pleasing to the ear of those responsible for managing the affairs of the State.

In August 2016, we carried two articles on corporate governance, focusing on the Cadbury Report of 1992 and the three reports (King I, King II and King III) issued by a committee chaired by Prof. Mervin King of South Africa. At that time, King IV was in the making. Now that the report has been issued, we revisit this important topic which has significant relevance to Guyana’s public sector with its multitude of State institutions, and their respective boards and executive management.

Corporate governance in perspective

The literature on corporate governance is vast. In essence, corporate governance is about effective and ethical leadership, and the way organisations are structured and operated to achieve their objectives and to ensure the highest possible standards of efficiency and effectiveness, with due regard to the welfare and well-being of all its stakeholders. The OECD Principles on Corporate Governance 2004 considers it “a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.”

The King IV Report defines corporate governance as “the exercise of ethical and effective leadership by the governing body towards the achievement of following governance outcomes:

●Ethical culture

●Good performance

●Effective control

●Legitimacy.

Ethical and effective leadership should complement and reinforce each other.”

The Cadbury Report titled “Financial Aspects of Corporate Governance” was issued in 1992 following a series of corporate failures. It focused on the role of directors, external auditing arrangements, and the work of audit committees. The Report emphasized that boards of directors are required to provide effective oversight of the management of organizations as well as direction and leadership. Boards have the primary responsibility for the governance of their organisations, including: setting strategic objectives; providing the necessary leadership to implement the strategies; supervising the management of the organization; and periodic reporting on their stewardship to their stakeholders. All directors, whether or not they have executive responsibilities, are responsible for the stewardship of the organisation’s assets. They play a monitoring role and ensure that the necessary controls are in place and are working satisfactorily. Boards, however, do not get involved in the day-to-day management and operations which is the responsibility of executive management. The latter implements the policies set by the board and are accountable to the board for the performance of the organisation.

Audit Committees, on the other hand, assist directors in discharging of their stewardship and fiduciary responsibilities. They act as a go-between involving executive management and the external auditors. Audit Committees also oversee the work of internal auditors.

A key outcome of the Cadbury Report is the development of a Code of Best Practice. Although the Report was prepared in the context of companies operating in the private sector, it has equal applicability to public sector organisations.

King I, King II and King III

These three reports were issued by a committee headed by Prof. Mervin King who is considered the leading authority of corporate governance. The main outcome of King I, issued in 1994, was a set of recommended standards of conduct for boards and directors of listed companies, banks, and certain state-owned enterprises. Following the 2002 Earth Summit in Johannesburg, King I became King II and included new sections on sustainability, the role of the corporate board and risk management.

By 2009, Prof. King recognized the mistake of having a separate chapter on sustainability which resulted in companies reporting on it in isolation of other important factors. He felt that there was a need to integrate sustainability with governance and strategy. The result was that King II became King III which recommended that companies produce an integrated report in place of an annual financial report and a separate sustainability report. King III also advocated the integration of economic, social, and environmental reporting; and recording how the company’s business has impacted positively and negatively on the community and how it intends to enhance those positive aspects and eradicate or ameliorate the negative aspects in the year ahead.

The content of King III was enhanced by incorporating several global emerging governance trends, including: alternative dispute resolution; risk-based internal audit; shareholder approval of non-executive directors’ remuneration; evaluation of board and directors’ performance; directors’ responsibilities for IT governance; and business continuity and disaster recovery planning. The Code promulgated is principle-based and encourages the practice of “apply or explain”, not “comply or else”, or “comply or explain”.

King III views effective and ethical leadership as the essence of good governance and considers that responsible leaders should direct company strategies and operations with a view to achieving sustainable economic, social, and environmental performance. It also considers sustainability as the primary moral and economic imperative of this century; and corporate citizenship as flowing from a company’s standing as a juristic person (under the South African constitution) which should operate in a sustainable manner. Commenting on King III, Sir Adrian Cadbury asserted that “governance yesterday focused on raising standards of board effectiveness; governance today, on the role of business in society; and of course, governance of tomorrow is set by King III”.

King IV on corporate governance

King IV was issued in November 2016. It focuses on ethical leadership, the organisation in society, corporate citizenship, sustainable development, stakeholder inclusivity, integrated thinking and integrated reporting. The Report views ethical leadership as one that is exemplified by integrity, competence, responsibility, accountability, fairness and transparency. It involves anticipation and prevention, or otherwise amelioration, of negative consequences of the organisation’s activities and outputs on the economy, society and the environment and the capitals (financial, manufactured, human, intellectual, natural, and social and relationship capital) that it uses and affects. On the other hand, effective leadership is results-driven. It is about achieving strategic objectives and positive outcomes, and includes, but goes beyond, an internal focus and efficient execution.

Like the Cadbury Report, King IV emphasized that “The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.”  It outlines 17 basic principles that organisations should embrace to ensure effective and positive outcomes, as shown at the beginning of this article. It is worth the while for all organisations to have these principles prominently in their boardrooms as an important reminder of their governing bodies’ responsibility in relation to corporate governance as they embark on a continuous journey aimed at ensuring good corporate citizenship.

To be continued –

 

 

 

 

 

 

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