Corporate Governance

• Corporate governance


  The manner in which corporations are run and controlled
• Corporate governance


  Can be a legislation (SOX in the USA) or a code (South African King Reports) describing the relationship between managers (agents) and owners (principals) (separation of management and ownership)
• Corporate governance


  Represents the framework within which corporations operate
• Corporate governance


  At the centre is the need to protect different stakeholders that include shareholders, managers, customers, creditors, environment etc.
• Definitions of corporate governance

  • Procedures and processes according to which an organisation is directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organisation – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision-making (OECD, 2004)
  • The exercise of ethical and effective leadership by the governing body towards the achievement of the following governance outcomes: ethical culture, good performance, effective control and legitimacy (IoDSA, 2016:11)
  • The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives (IIA, 2017a: 13)
• Themes from definitions of corporate governance

  • Corporate governance is the responsibility of the board, other parties are also involved including managers, directors, employees etc.
  • Board responsibilities include: Strategic direction; Ensure objectives are achieved; Ensure risk is managed well; Verify resources are used responsibly
  • It can be a process, rule, or a procedure
  • It describes how an organisation should be run and controlled by allocating rights and responsibilities (how an organisation should be steered)
  • It is concerned with protecting stakeholders including employees, directors, owners etc.
  • It is also concerned with ensuring that organisations achieve their objectives
• Corporate


  Covers multiple aspects relating to theories and practices of the boards and its directors
• Governance


  Derived from the Latin verb gubernare, derived from the Greek word kubernaein, which means 'to steer'
• Cornerstones of corporate governance

  • Executive management: People who are responsible for the day to day running of the organisation. They represent the interests of the shareholders.
  • Audit committees and non-executive directors: Independent directors unbiased, independent varied and experienced perspective. Assist the board exercise oversight over financial reporting, internal controls, audit process, and compliance.
  • Internal auditors: Assess and make recommendations for improving governance processes.
  • External auditors: Fair presentation of financial statements.
• No definitive account of where corporate governance emerged
• When the East Indian Company was established


  1600s
• Corporate governance means different things to different people in different times
• The concept of corporate governance is very broad
• Berle and Means' work entitled "The Modern Corporation and Private Property" (discussed separation of ownership and management)


  1932
• Growing influence of Corporate Social Responsibility Movements and the Role of Corporations in political parties in the USA

  1970s
• Corporate governance in South Africa can be traced to

  1994
• The King I Report was issued in 1994
• The King I Report drew extensively from the British Cadbury Report
• The King I Report went a step further and developed guidelines on disclosures and advocated for transparency
• Many Johannesburg Stock Exchange listed companies developed compliance checklists and ticking off the relevant codes to guard against non-compliance with the King Report without necessarily buying into the corporate governance guidelines as contained therein
• It is argued that the purpose of King I was to protect the vested interests of corporations and prevent government from involvement in corporate governance matters
• The King I Report was flawed consequent upon its recommendations not being informed by consultations, debates, and not drawn from the possibly widely available knowledge at the time
• King II was released in March of 2002
• Triple bottom line reporting

  Organisation must report on its profit, planet and people influences
• King II advocated for sustainability reporting
• King II was criticised for self regulation and lack of enforcement through the law
• King II was criticised for leading companies to report on sustainability separate from other matters
• King III was applicable to all entities irrespective of size, manner of incorporation, sector etc.
• King IV


  Thursday
• Benefits of good corporate governance

  • Excellent management
  • High level of transparency
  • Stakeholder benefits
  • Reputation and recognition
  • Reduced wastage
  • Reduced risks, mismanagement and corruption
  • Economic benefit
• Disadvantages of corporate governance

  • Separation of management and ownership
  • Illegal insider trading
  • Publication of misleading reports
  • Regulatory costs
• Corporate governance models


  • Anglo-American Model
  • Continental Model
  • Japanese Model
• Anglo-American Model


  By design, the board of directors and the shareholders are in charge. Other stakeholders such as customers, lenders and supplies lack control over the organisation. They are nevertheless acknowledged. Management is tasked with the responsibility to run the organisation in such a way that they maximise shareholder value. Incentives must be put in place to align the interests of management and shareholders. The model is underpinned by the assumption that shareholders provide capital and may withdraw the capital at will. There is one board comprised of internal and external members. External / independent members must dominate. The role of the CEO and the board chair are separated. Important decisions are decided upon by the shareholders through a vote.
• Continental Model


  There are two boards namely, the management and supervisory board. Supervisory board consists of external members. Management board consists of management. This is widely known as the two-tiered system. The two boards remain completely separated. It is said the model considers stakeholder engagement as very important. For this reason, a variety of stakeholders can serve on the supervisory board including lenders and suppliers.
• Principles of good corporate governance

  • Legitimacy and Voice (Consultation)
  • Direction (Apartheid)
  • Performance (sustainability)
  • Accountability (answer for execution of responsibilities)
  • Fairness (Sustainability)
  • Independence (board dominance)
  • Discipline (commitment to do what is right)
  • Responsibility
  • Social responsibility