What is Corporate What is Corporate Governance?Governance?

Alison Dillon KibirigeAlison Dillon Kibirige

Corporate GovernanceCorporate Governance

Contemporary corporate governance Contemporary corporate governance started in 1992 with the Cadbury report in started in 1992 with the Cadbury report in the UKthe UK

Cadbury was the result of several high Cadbury was the result of several high profile company collapsesprofile company collapses

is concerned primarily with protecting is concerned primarily with protecting weak and widely dispersed shareholders weak and widely dispersed shareholders against self-interested Directors and against self-interested Directors and managersmanagers

Corporate Governance PartiesCorporate Governance Parties

Shareholders – those that own the Shareholders – those that own the companycompany

Directors – Guardians of the Company’s Directors – Guardians of the Company’s assets for the Shareholdersassets for the Shareholders

Managers who use the Company’s assetsManagers who use the Company’s assets

Corporate GovernanceCorporate Governance

Primarily concerned with public listed Primarily concerned with public listed companies i.e. those listed on a Stock companies i.e. those listed on a Stock ExchangeExchange

Focused on preventing corporate collapses Focused on preventing corporate collapses such as Enron, Polly Peck and the Maxwell such as Enron, Polly Peck and the Maxwell companiescompanies

Corporate GovernanceCorporate Governance

What relevance does it have to Africa What relevance does it have to Africa where there are few public listed where there are few public listed companies companies

Most companies are non-listed, private Most companies are non-listed, private family owned businesses where the family owned businesses where the shareholders and the managers are often shareholders and the managers are often the same peoplethe same people

Four Pillars Four Pillars of Corporate Governanceof Corporate Governance

AccountabilityAccountability

FairnessFairness

TransparencyTransparency

IndependenceIndependence

Accountability Accountability

Ensure that management is Ensure that management is accountable to the Boardaccountable to the Board

Ensure that the Board is accountable Ensure that the Board is accountable to shareholdersto shareholders

FairnessFairness

Protect Shareholders rightsProtect Shareholders rights

Treat all shareholders including minorities, Treat all shareholders including minorities, equitablyequitably

Provide effective redress for violationsProvide effective redress for violations

TransparencyTransparency

Ensure timely, accurate disclosure on all Ensure timely, accurate disclosure on all material matters, including the financial material matters, including the financial situation, performance, ownership and situation, performance, ownership and

corporate governancecorporate governance

IndependenceIndependence

Procedures and structures are in place so Procedures and structures are in place so as to minimise, or avoid completely as to minimise, or avoid completely conflicts of interestconflicts of interest

Independent Directors and Advisers i.e. Independent Directors and Advisers i.e. free from the influence of othersfree from the influence of others

Corporate Governance in AfricaCorporate Governance in Africa

In 1994, The King Report in South Africa In 1994, The King Report in South Africa also included within its Code of Corporate also included within its Code of Corporate Governance requirements on sustainability Governance requirements on sustainability and ethical standards and ethical standards

This was due to the context of a This was due to the context of a developing country and business ethics in developing country and business ethics in AfricaAfrica

Sustainability Sustainability

No generally accepted definitionNo generally accepted definition

Most commonly used is from the Most commonly used is from the Brundtland Report for the World Brundtland Report for the World Commission on Environment and Commission on Environment and Development 1987 which defines it as:Development 1987 which defines it as:

Sustainability Sustainability

‘‘development that meets the needsdevelopment that meets the needs

of the present without compromising of the present without compromising

the ability of future generationsthe ability of future generations

to meet their own needs’to meet their own needs’

StakeholdersStakeholders

Sustainability recognizes stakeholder Sustainability recognizes stakeholder rights i.e. the rights of interested parties rights i.e. the rights of interested parties e.g. employees, the community, suppliers, e.g. employees, the community, suppliers, customers etc.customers etc.

Encourage co-operation between the Encourage co-operation between the company and its stakeholders in creating company and its stakeholders in creating wealth, jobs and economic stabilitywealth, jobs and economic stability

Business EthicsBusiness Ethics

Established values and principles a Established values and principles a company uses to inform and conduct its company uses to inform and conduct its activitiesactivities

Should permeate a company’s culture and Should permeate a company’s culture and drive its strategy, business goals, policies drive its strategy, business goals, policies and activitiesand activities

Usually found in a code of ethicsUsually found in a code of ethics

Elements of Corporate GovernanceElements of Corporate Governance

Good Board practicesGood Board practices

Control EnvironmentControl Environment

Transparent disclosureTransparent disclosure

Well-defined shareholder rightsWell-defined shareholder rights

Board commitmentBoard commitment

Good Board PracticesGood Board Practices

Clearly defined roles and authoritiesClearly defined roles and authorities

Duties and responsibilities of Directors Duties and responsibilities of Directors understoodunderstood

Board is well structuredBoard is well structured

Appropriate composition and mix of skills Appropriate composition and mix of skills

Good Board proceduresGood Board procedures

Appropriate Board proceduresAppropriate Board procedures

Director Remuneration in line with best Director Remuneration in line with best practicepractice

Board self-evaluation and training Board self-evaluation and training conductedconducted

Control EnvironmentControl Environment

Internal control proceduresInternal control procedures

Risk management framework presentRisk management framework present

Disaster recovery systems in placeDisaster recovery systems in place

Media management techniques in useMedia management techniques in use

Control EnvironmentControl Environment

Business continuity procedures in placeBusiness continuity procedures in place

Independent external auditor conducts Independent external auditor conducts auditsaudits

Independent audit committee establishedIndependent audit committee established

Control EnvironmentControl Environment

Internal Audit FunctionInternal Audit Function

Management Information systems Management Information systems establishedestablished

Compliance Function establishedCompliance Function established

Transparent DisclosureTransparent Disclosure

Financial Information disclosedFinancial Information disclosed

Non-Financial Information disclosedNon-Financial Information disclosed

Financials prepared according to Financials prepared according to International Financial Reporting International Financial Reporting Standards (IFRS)Standards (IFRS)

Transparent DisclosureTransparent Disclosure

Companies Registry filings up to dateCompanies Registry filings up to date

High-Quality annual report publishedHigh-Quality annual report published

Web-based disclosureWeb-based disclosure

Well-Defined Shareholder RightsWell-Defined Shareholder Rights

Minority shareholder rights formalisedMinority shareholder rights formalised

Well-organised shareholder meetings Well-organised shareholder meetings conductedconducted

Policy on related party transactionsPolicy on related party transactions

Well-Defined Shareholder RightsWell-Defined Shareholder Rights

Policy on extraordinary transactionsPolicy on extraordinary transactions

Clearly defined and explicit dividend policyClearly defined and explicit dividend policy

Board CommitmentBoard Commitment

The Board discusses corporate governance The Board discusses corporate governance issues and has created a corporate issues and has created a corporate governance committeegovernance committee

The company has a corporate governance The company has a corporate governance championchampion

A corporate governance improvement plan A corporate governance improvement plan has been createdhas been created

Appropriate resources are committed to Appropriate resources are committed to corporate governance initiativescorporate governance initiatives

Board CommitmentBoard Commitment

Policies and procedures have been Policies and procedures have been formalised and distributed to relevant staffformalised and distributed to relevant staff

A corporate governance code has been A corporate governance code has been developeddeveloped

A code of ethics has been developedA code of ethics has been developed The company is recognised as a corporate The company is recognised as a corporate

governance leadergovernance leader

Other EntitiesOther Entities

Corporate Governance applies to all types Corporate Governance applies to all types of organisations not just companies in the of organisations not just companies in the private sector but also in the not for profit private sector but also in the not for profit and public sectorsand public sectors

Examples are NGOs, schools, hospitals, Examples are NGOs, schools, hospitals, pension funds, state-owned enterprisespension funds, state-owned enterprises

Country PerspectiveCountry Perspective

Corporate Governance is by way of Corporate Governance is by way of legislation or best practice Codelegislation or best practice Code

US adopted legislation in 2002 - Sarbanes US adopted legislation in 2002 - Sarbanes Oxley ActOxley Act

Most other developed and emerging Most other developed and emerging market countries have adopted best market countries have adopted best practice Codes e.g. Combined Code in the practice Codes e.g. Combined Code in the UK, Cromme Code in Germany and the UK, Cromme Code in Germany and the King II Code in South AfricaKing II Code in South Africa

Country perspective - CodesCountry perspective - Codes

These Codes are voluntary and are These Codes are voluntary and are enforced by shareholdersenforced by shareholders

Most of them operate on a ‘comply or Most of them operate on a ‘comply or explain’ approachexplain’ approach

The Media also play a part in highlighting The Media also play a part in highlighting good or bad practicesgood or bad practices

Country PerspectiveCountry Perspective

Countries in Africa have tended to adopt a Countries in Africa have tended to adopt a hybrid approach whereby they have hybrid approach whereby they have followed the ‘comply and explain’ followed the ‘comply and explain’ approach but have enshrined some of the approach but have enshrined some of the principles in law to assist in enforceabilityprinciples in law to assist in enforceability

The reason is the weakness of the The reason is the weakness of the shareholder base and of the mediashareholder base and of the media

Why Corporate Governance?Why Corporate Governance?

Better access to external financeBetter access to external finance Lower costs of capital – interest rates on Lower costs of capital – interest rates on

loansloans Improved company performance – Improved company performance –

sustainabilitysustainability Higher firm valuation and share Higher firm valuation and share

performance performance Reduced risk of corporate crisis and Reduced risk of corporate crisis and

scandalsscandals

Why Corporate Governance?Why Corporate Governance?

In 2002, L Klapper and I Love from the World In 2002, L Klapper and I Love from the World Bank found evidence that improving a company’s Bank found evidence that improving a company’s corporate governance has proportionately greater corporate governance has proportionately greater impact in countries with weak legal impact in countries with weak legal environments. environments.

They have suggested that companies can They have suggested that companies can partially compensate for ineffective laws and partially compensate for ineffective laws and enforcement by establishing good corporate enforcement by establishing good corporate governance at the company level and providing governance at the company level and providing credible investor protectioncredible investor protection

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