Corporate governance

March 18, 2012

Corporate governance

Corporate governance is "the system by which companies are directed and controlled". Governance is applied to relationships between a company’s management, its shareholders and the stakeholders. The idea is to future conflicts with stakeholders and the board. There are differences around the world as to how corporate governance is applied each with its own set of rules and management styles. Corporate governance is critical as to no one person has the ultimate decision making power for the company. (1,2).

Over the years there have been many CEO who have overlooked and even made decisions which had critical impact on its board of governors, stakeholders and most importantly, its employees. In the past twenty years the decisions made by CEO’s or even the board of directors of large companies have affected stock prices and the loss of confidence by the stakeholders and the public. Major companies which have placed themselves in the local and international news, here are a few examples; Hewlett Packard, British Petroleum, Disney and Yahoo to name a few. All have made critical decision, mismanaging the future of companies with lack of control, showing only panic when something goes wrong. This begs the question, how are all of these companies going to get their acts together and decide which is the best course of action for the sustainability of the company. (2,3)

Here are some basic requirements for corporate governance for global market utilization. A company should to be transparent, meaning total open and exceeding the expected requirements. A company should be responsible by acting in the broader and longer term interest of all. A company should be committed to the highest moral positions. A company should not make wild decisions but take care to avoid major risks. (4)

There are simple rules for companies to live by and best practices, this simple but a reminder of the following should not strike as surprising! Here are some of the agendas for the board of directors, their mission and their responsibilities.

The mission of the Board of Directors is to protect the equity and to add value to the company and to maximize the return on the investment of the owners. The Board of Directors should uphold the company’s values and the owners’ principles and purposes in the company’s activities. These matters should be discussed, reviewed and approved in meetings of the Board of Directors. The board should be responsible for defining strategies, electing and removing the CEO, supervising management and naming and removing independent auditors. The activities of the Board of Directors should be further specified in an internal instruction clarifying its roles and responsibilities. (4,5)

The Board of Directors should approve the company’s code of ethics. Several activities of the Board of Directors need more thorough analyses, which may exceed the meeting time available. Different committees, each made up of a few members of the board, must be set up. For example: nomination committees, audit committees, remuneration committees, etc. The committees study issues in their specific areas and submit the proposals accordingly. Boards of Directors should be as small as possible and may vary in size between 5 and 9 members, according to the needs of the company. There are three kinds of board members:

– Independent

– External (Board members who do not work at the company, but are not independent)

– Internal (Board members that are company Directors or employees).

The Board of Directors should supervise management. Supervising yourself is a typical conflict of interest situation. Therefore, the owners should avoid electing the CEO and other management personnel to the Board of Directors. The Board of Directors evaluates continuously the CEO and top management. In order to do this without constraints, the independent and external board members should meet regularly in the absence of these people. The Chairman of the Board of Directors should subsequently give a feedback to the CEO and the top management (3,4,5,6)

Corporate governance from a five hundred foot view seems simple and should not be difficult to implement, the weakest link in the entire scheme of no governance is the human factor and a lack of discipline.

Dan Prabhu

Reference:

1. http://www.economist.com/node/21529101

2. http://en.wikipedia.org/wiki/Corporate_governance

3. http://www.globalchange.com/corporategovernance.htm

4. http://www.applied-corporate-governance.com/best-corporate-governance-practice.html

5. http://www.oecd.org/dataoecd/4/48/1824495.pdf

6.http://www.asxgroup.com.au/media/PDFs/cg_principles_recommendations_with_2010_amendments.pdf

7. http://www.kantakji.com/fiqh/Files/Companies

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