Governance

- is from the Greek words kybenan and kybernetes, meaning ‘to steer’ and ‘pilot’ or ‘helmsman’.
- It is the process whereby ‘an organization or a society steers itself, and the dynamics of communication and
control are central to the process’

three dimensions:

 authority
 decision-making
 accountability

World Bank defines governance as:

- a method through which power is exercised in the management of a country’s political, economic, and social
resources for development.

Worldwide Governance Indicators project of the World Bank defines governance as:
- the traditions and institutions by which authority in a country is exercised

According to the United Nations Development Programme's Regional Project on Local Governance for Latin America:
- Governance has been defined as the rules of the political system to solve conflicts between actors and adopt
decision (legality). It has also been used to describe the "proper functioning of institutions and their acceptance
by the public" (legitimacy).
- And it has been used to invoke the efficacy of government and the achievement of consensus by democratic
means (participation).
Good Governance
- In international development, good governance is a way of measuring how public institutions conduct public
affairs and manage public resources in a preferred way.
- Governance is "the process of decision-making and the process by which decisions are implemented" “Good
Governance is not simply about corporate excellence.
- It is the key to economic and social transformation. The corporation of today are no longer sheer economic
entities. These are the engines of economic and social transformation.”

Characteristics of Good Governance

Good governance has 8 major characteristics:
1. Rule of Law
- Good governance requires fair legal frameworks that are enforced by an impartial regulatory body, for the full
protection of stakeholders.
2. Transparency
- means that information should be provided in easily understandable forms and media; that it should be freely
available and directly accessible to those who will be affected by governance policies and practices, as well as
the outcomes resulting therefrom; and that any decisions taken and their enforcement are in compliance with
established rules and regulations.
3. Responsiveness
- Good governance requires that organizations and their processes are designed to serve the best interests of
stakeholders within a reasonable timeframe.
4. Consensus Oriented
- Good governance requires consultation to understand the different interests of stakeholders in order to reach
a broad consensus of what is in the best interest of the entire stakeholder group and how this can be achieved in
a sustainable and prudent manner.
 5. Equity and Inclusiveness
- The organization that provides the opportunity for its stakeholders to maintain, enhance, or generally improve
their well-being provides the most compelling message regarding its reason for existence and value to society.
6. Effectiveness and Efficiency
- Good governance means that the processes implemented by the organization to produce favorable results
meet the needs of its stakeholders, while making the best use of resources – human, technological, financial,
natural and environmental – at its disposal.
7. Accountability
- Accountability is a key tenet of good governance. Who is accountable for what should be documented in policy
statements? In general, an organization is accountable to those who will be affected by its decisions or actions
as well as the applicable rules of law.
8. Participation
- Participation by both men and women, either directly or through legitimate representatives, is a key
cornerstone of good governance.
- Participation needs to be informed and organized, including freedom of expression and assiduous concern for
the best interests of the organization and society in general.

Center of European Policy Studies (CEPS)

- defines corporate governance as the whole system of rights, processes and controls established internally and
externally over the management of the business entity with the objective of protecting the interests of the
stakeholders.
Anglo American

- defines it with an emphasis on creating the shareholder value.

Organization for Economic Corporation and Development (OECD)

- defines corporate governance as Corporate Governance is the system by which business corporations are
directed and controlled.

 The objective of the corporate governance is hence the prevention of such scams in the business which have a
huge bearing not only on the immediate shareholders but also on the morale of the larger stakeholder groups.

Suggested a control framework and was endorsed a refined in four subsequent UK reports:
 Cadbury
 Ruthman
 Hampel
 Turbull

Organization for Economic Co-operation and Development (OECD)

- was one of the earliest non-governmental organizations to work on and spell out principles and practices that
should govern corporate in their goal to attain long-term shareholder value.
The OECD principles in summary includes the following elements.
1. The rights of shareholders
2. Equitable treatment of shareholders
3. Role of stakeholders in corporate governance
4. Disclosure and Transparency
5. Responsibilities of the board
Sarbanes- Oxley Act, 2002
- is a sincere attempt to address all the issues associated with corporate failure to achieve quality governance and
to restore investor’s confidence
- The Act was formulated to protect investors by improving the
accuracy and reliability of corporate disclosures, made precious to the securities laws and for other purposes.
 -The act contains a number of provisions that dramatically change the reporting and corporate director’s
governance obligations of public companies, the directors and officers.
The important provisions in the SOX Act:

1. Establishment of Public Company Accounting Oversight Board (PCAOB):

SOX creates a new board consisting of five members of whom two will be certified public accountants.
All accounting firms have to get registered with the board. The board will make regular inspection of
firms. The board will report to SEC. The report will be ultimately forwarded to Congress.
2. Audit Committee:
The SOX provides for new improved audit committee. The committee is responsible for appointment,
fixing fees and oversight of the work of independent auditors. The registered public accounting firms
should report directly to audit committee on all critical accounting policies.
3. Conflict of Interest:
The public accounting firms should not perform any audit services for a publicly traded company.
4. Audit Partner Rotation:
The act provides for mandatory rotation of lead audit or coordinating partner and the partner reviewing
audit once every 5 years.
5. Improper influence on conduct of Audits:
According to act, it is unlawful for any executive or director of the firm to take any action to fraudulently
influence, coerce or manipulate an audit.
6. Prohibition of non-audit services:
Under SOX act, auditors are prohibited from providing non-audit services concurrently with audit
financial review services.
7. CEOs and CFOs are required to affirm the financials:
CEOs and CFOs are required to certify the reports filed with the Securities and Exchange Commission
(SEC).
8. Loans to Directors:
The act prohibits US and foreign companies with Securities traded within US from making or arranging
from third parties any type of personal loan to directors.
9. Attorneys:
The attorneys dealing with publicly traded companies are required to report evidence of material
violation of securities law or breach of fiduciary duty or similar violations by the company or any agent
of the company to Chief Counsel or CEO and if CEO does not respond then to the audit committee or the
Board of Directors.
10. Securities Analysts:
The SOX has provision under which brokers and dealers of securities should not retaliate or threaten to
retaliate an analyst employed by broker or dealer for any adverse, negative or unfavorable research
report on a public company. The act further provides for disclosure of conflict of interest by the
securities analysts and brokers or dealers.
11. Penalties:
The penalties are also prescribed under SOX act for any wrong doing. The penalties are very Stiff.

The Act also provides for studies to be conducted by Securities and Exchange Commission or the Government
Accounting Office in the following area:
1. Auditor’s Rotation
2. Off balance Sheet Transactions
3. Consolidation of Accounting firms & its impact on industry
4. Role of Credit Rating Industry
5. Role of Investment Bank and Financial Advisers.

 The most important aspect of SOX is that it makes it clear that company’s senior officers are accountable and
responsible for the corporate culture they create and must be faithful to the same rules they set out for other
 employees. The CEO for example, must be responsible for the company’s disclosure, controls and financial
reporting.
Purpose of Corporate Governance
- is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the
company.
- In simple terms, the fundamental aim of corporate governance is to enhance shareholders’ value and protect
the interest of other stakeholders by improving the corporate performance and accountability.
- It is also about what the board of directors of a company does, how it sets the values of the business firms.

Objectives of Corporate Governance

The following are the basic objectives of corporate governance:
a. Fair and equitable treatment of shareholders
A corporate governance structure ensures equitable and fair treatment of all shareholders of the company.
b. Self-Assessment
Corporate governance enables firms to assess their behavior and actions before they are scrutinized by regulatory
agencies.
c. Increase shareholders’ Wealth
Another corporate governance’s main objective is to protect the long-term interests of the shareholders. Firms with
strong corporate governance structure are seen to have higher valuation attached to their shares by businessmen.
d. Transparency and full disclosure
Good corporate governance aims at ensuring a higher degree of transparency in an organization by encouraging full
disclosure of transactions in the company accounts.

Basic principles of good corporate governance:

A. Transparency and full disclosure
- Does the board meet the information needs of investment communities?
- Does it safeguard integrity in financial reporting?
- Does the board have sound disclosure policies and practices?
- Does it make timely and balanced disclosure?
- Can an outsider meaningfully analyze the organization’s actions and performance?
B. Accountability
- Does the board clarify its role and that of management?
- Does it promote objective, ethical and responsible decision making?
- Does it lay solid foundation for management oversight?
- Does the composition mix of board membership ensure an appropriate an appropriate range and mix of
expertise, diversity, knowledge and add value?
- Is the organization’s senior official committed to widely accepted standards of correct and proper behavior?
C. Corporate control
- Has the board built long term sustainable growth in shareholders’ value for the corporation?
- Does it create an environment to take risk?
- Does it encourage enhanced performance?
- Does it recognize and manage risk?
- Does it remunerate fairly and responsibly?
- Does it recognize the legitimate interests of stakeholders?
- Are conflicts of interest avoid such that the organization’s best interests prevail at all times?

management’s responsibility to:

- Choose which accounting principles best portray the economic substance of company transactions.
- Implement a system of internal control that assures completeness and accuracy in financial reporting.
- Ensure that the financial statements contain accurate and complete disclosure.
Shareholders
- Broad role: Provide effective oversight through election of board members, approval of major initiatives such
as buying or selling of stock, annual reports or management compensation, from the board.
Board of directors
Broad role: The major representative of stockholders to ensure the organization is run according to the organization’s
charter and that there is proper accountability
Specific activities include among others:
1. Overall Operations
- Establishing the organization’s vision, mission, values and ethical standards.
- Delegating an appropriate level of authority to management.
- Demonstrating leadership.
- Assuming responsibility for the business relationship with CEO including his or her appointment, succession,
performance remuneration and dismissal.
- Overseeing aspects of the employment of the management team including management remuneration,
performance and succession planning.
- Recommending auditors and new directors to shareholders
- Ensuring effective communication with shareholders and other stakeholders.
- Crisis management.
- Appointment of the CFO and corporate secretary.
2. Performance
- Ensuring the organization’s long-term viability and enhancing the financial position.
- Formulating and overseeing implementation of corporate strategy.
- Approving the plan, budget and corporate policies
- Agreeing key performance indicators (KPIs)
- Monitoring/Assessing assessments, performance of the organization, the board itself, management and more
project.
- Overseeing the risk management framework and monitoring business risks.
- Monitoring developments in the industry and the operating environment.
- Oversight of the organization, including its control and accountability systems.
- Approving and monitoring the progress of major capital expenditure, capital management and acquisition and
divestitures.
3. Compliance/Legal Conformance
- Understanding and protecting the organization’s financial position
- Requiring and monitoring legal and regulatory compliance including compliance with accounting standards,
unfair trading legislations, occupational health and safety and environmental standards.
- Approving annual financial reports, annual reports and other public documents/sensitive reports.
- Ensuring and effective system of internal controls exists is operating as expected.

Non-Executive or Independent Directors

Broad role: The same as the broad role of the entire board of directors
Specific activities include among others:
- to understanding the organization, its business, its operating environment and its financial position
- to apply expertise and skills in the organization’s best interest
- to assist management to keep performance objectives at the top of its agenda.
- to understand that his/her role is not to acts as auditor, nor to act as a member of the management team,
- to respect the collective, cabinet nature of the board’s decisions
- to prepare for and attend board meetings
- to seek information on a timely basis to ensure that he/she is in a position to contribute to the discussion
when a matter comes before the board or alert the chairman in advance to the need for further information in
relation to a particular matter and
- to ask appropriate questions relative to operations
Management
Broad role: Operations and accountability. Manage the organization effectively; provide accurate and timely reports to
shareholders and other stakeholders.
Specific activities include among others:
- recommend the strategic direction and translate the strategic plan into operations of the business
- manage the company’s human, physical and financial resources to achieve the organization’s objectives – run
the business
- assume day to day responsibility for the organization’s conformance with relevant laws and regulations and its
compliance framework
- develop, implement and manage the organization’s risk management and internal control frameworks
- develop, implement and update policies and procedures
- be alert to relevant trends in the industry and the organization’s operating environment
- provide information to the board
- act as a conduct between the board and the organization
- developing financial and other reports that meet public stakeholder and regulatory requirements.

Audit committee of the Board of Directors

Broad role: Provide oversight of the internal and external audit function and the process of preparing the annual
financial statements as well as public reports on internal control.
Specific activities include among others:
- selecting the external audit firm
- approving any non-audit work performed by the audit firm
- selecting and/or approving the appointment of the Chief Audit Executive (Internal Auditor)
- reviewing and approving the scope and budget of the internal audit function
- discussing audit findings with internal auditor and external auditor and advising the board (and management)
on specific functions that should be taken

Regulators:
a. Board of Accountancy
Broad role: Set accounting and auditing standards dictating underlying financial reporting and auditing concepts;
set the expectations of audit quality and accounting quality
Specific activities include among others:
- Conducting CPA licensure examinations
- Approving accounting principles
- Approving auditing standards
- Interpreting previously issued standards implementing quality control processes to ensure audit quality
- Educating members on audit and accounting requirements.
b. Securities and Exchange Commission
Broad role: Ensure the accuracy, timeliness and fairness of public reporting of financial and other information for
public companies.
Specific activities include among others:
- Reviewing filings with the SEC
- Interacting with the Financial Reporting Standards Council in setting accounting standards
- Specifying independence standards required of auditors that report on public financial statements
- Identify corporate frauds, investigate causes, and suggest remedial actions.

External auditors
Broad role: Perform audits of company financial statements to ensure that the statements are free of material
misstatements including misstatements that may be due to fraud.
Specific activities include among others:
- Audit of public company financial statements
- Audit of nonpublic company financial statements
- Other services such as tax or consulting
Internal auditors
Broad role: Perform audits of companies for compliance with company policies and laws, audits to evaluate the
efficiency of operations, and periodic evaluation and tests of controls
Specific activities include among others:
- Reporting results and analyses to management (including operational management) and audit committees
- Evaluating internal controls