Steps to enhancing Corporate Governance

15 August, 2018 / Blogs

According to the Organisation for Economic Co-Operation and Development (OECD), Corporate Governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. It is important to note that Corporate Governance has an even bigger role to play and is essential to well-functioning and vibrant financial markets. The Cytonn Corporate Governance Ranking (CGR) Report 2017, highlighted the strong correlation between Corporate Governance and returns on stocks of the listed entities. The top 25 companies as rated in the Cytonn CGR Report delivered an absolute return of approximately 37.8% over the last 5-years compared to the bottom 25 companies, which delivered an absolute return of (5.1%) per annum over the last 5-years.

In order to ensure that corporate power is exercised in the best interest of the company and its stakeholders, a company can use a myriad of best practice codes and regulations. In Kenya, one of those regulations is the Capital Markets- Code of Corporate Governance Practices for the Issuers of Securities to the Public 2015, which can serve as a guideline to any company that wants to enhance its governance to local best practice standards. The Code sets out the principles and specific recommendations on structures and processes, which companies can adopt in making good Corporate Governance an integral part of their business dealings and culture.

In light of the above, here are eight steps that a company can take to enhance Corporate Governance:

  1. The Structure and Composition of the Board of Directors

In order for a company to have effective Corporate Governance, the first thing to consider is to have a properly constituted Board. The company will have to look into the following matters:

  • The members of the board need to have the right qualifications as per the needs of the company as well as the competence required to exercise that mandate. This will be required especially for the key figures like the Chairman, the Chief Executive Officer, and the Company Secretary.
  • The Board and its respective Committees need to exercise independent judgment.
  • Introduce independent members and a lead independent director. Independent non-executive directors are recommended to be at least one-third of the total number of Board members.
  • Ensure that the Board encompasses diversity in its composition. Specific criteria include gender, nationality, regional balance, and age.
  • The Board and its respective Committees need to disclose conflicts of interest.
  • Ensure continuous skills development and board evaluation annually.
  • Have the Board well informed with Board papers and further, ensure adequate time for the Board members to review the board papers presented to them.

The Board should focus on not only guiding the strategic development of the company but fully understand their role with regard to their fiduciary duty towards the shareholders and external stakeholders.

  1. Understanding the Rights of Shareholders

Investor protection and shareholder rights are imperative to ensuring that a company is not only able to innovate and raise the capital needed to grow but is able to compete effectively in the market. Companies, therefore, need to provide a framework for their protection which includes equitable treatment of all shareholders, including the minority shareholders. In order to do this effectively, information needs to flow to the shareholders especially with regard to access to annual reports and accounts as well as notices for attendance of annual general meetings. Companies may consider doing this by way of website updates, regular shareholder information releases through emails or pamphlets. As well, a company, should it have the opportunity to, may consider holding regular shareholder forums to connect with its shareholders.

  1. Manage your Stakeholder Relations

Stakeholders include any group of persons who can either affect or be affected by the decisions of a company or the company’s reputation. To this end, the Board is encouraged to take a stakeholder-inclusive approach when executing its strategy. For this to be effective, the first step is to identify who those stakeholders are. For instance, for a marketing company, the stakeholders would include their suppliers, media channels, and clients. The second step is to develop policies on how to manage the relations with the identified stakeholder group. Finally, the board needs to ensure that all stakeholders receive relevant information about the company and create a feedback mechanism back to the board, even if the same is in electronic form and an internal team dedicated to responding to stakeholder requests.

  1. Maintain Ethical Standards

Over and above the general responsibilities of the Board, there is one specific aspect that should underpin the conduct of all the persons working for the company, and that is ethics. The Board is responsible for setting the standard of ethical behavior that is expected of Board members, managers and employees. In order to do this, it is important to have the Code of Conduct in place. This way, decisions will comply with the legal requirements, the company’s core values and the legitimate expectations of the stakeholders.

  1. Good Corporate Citizenship through Corporate Social Responsibility (CSR)

The company does not exist in a vacuum. In as much as the company is an economic institution interested in its reputation, its returns, and its clients, it has to maintain a balance between economic, social and environmental value. The Company exists in a social environment and it has the responsibility to act as a good corporate citizen of the community in which it conducts its day to day business. So how does the company achieve good corporate citizenship? This can be done by having programs that address social and environmental issues that impact the community for the long term. There is really no good measure of what an effective program is as long as the leadership is committed to ensuring good corporate citizenship and not just serving the public relations aspect of making the company look good. Some of the ways companies do this is by having CSR programmes that are aligned to an aspect of the business, in which the staff would be able to seamlessly support or have a flagship cause that the company would be willing to be identified with.

  1. Prioritize Risk Management

Risk management is essentially identifying and analyzing any risks that are associated with the company and then taking the requisite steps to manage those risks. The Board is charged with the mandate of ensuring that the proper systems are in place to enhance accountability, promote risk management, and internal controls. One of the ways to get this done is by having a competent Audit and Risk committee that reviews the processes. For instance, the committee will ensure that not only are financials done on time but also are reliable and comply with financial reporting standards. In addition, the committee may require the management to develop appropriate risk frameworks, which would be used to measure the compliance of culture of the firm and as well temper the company’s approach towards risk.

  1. Transparency is Key

Disclosure is a very powerful tool. It can attract investors to invest in the company, it can help maintain the confidence of the company in the markets as well as enhance shareholder protection. However, if the company’s disclosure is weak, then this can encourage unethical practices by the Board or the company’s employees and even loss of investor confidence. For this reason, companies are encouraged to issue its annual reports detailing its activities, the members of its board, how they are evaluated and even how they are remunerated. Without proper disclosure, it would be difficult for stakeholders to understand the activities of the company, its performance in the market, its values and its policies.

Understand that good governance is not limited to compliance conformity (i.e. compliance with legislation, regulation, and codes of practice), it has to balance itself with performance. This is the job of the Board. One can achieve this by ensuring management puts in place robust strategy and policies. The Board needs to elaborate its position and understanding of the major functions it performs as opposed to those performed by management.

  1. Develop and mature through a Corporate Governance framework

The final step is to ensure that the company has a framework, which it uses to gauge the Corporate Governance level at a particular point in time. All the above steps are elements of a Corporate Governance framework. When effected, the framework could be reviewed annually and can also be used to analyze the company’s level of Corporate Governance and forge a way to improve. In addition, the framework should strive to transition the company from the baseline practice of Corporate Governance to a leading practitioner in Corporate Governance An example of best practice framework is the OECD Principles of Corporate Governance Framework. Locally a tool that can assist in evaluating a company’s level of Corporate Governance framework is the Cytonn Corporate Governance Index (CGI). It is a diffusion index consisting of 24 metrics used to rank listed companies on their Corporate Governance structure by basing it on five main areas (i) board composition, (ii) audit functions, (iii) CEO tenure and evaluation, (iv) remuneration, and (v) transparency. Once a company comes up with the best framework to assess these metrics, then it can use it to ensure it remains within the recommended standards.

Whatever the stage a company is at and if the company concurs that a Corporate Governance Framework is vital to its prosperity, the best advice would be to get started and mature steadily.

Conclusion

The steps to get to good Corporate Governance can be quite elusive. Corporate Governance is not just about posting a plethora of information about the company on its website. In order to improve on Corporate Governance companies, need to take active steps in ensuring the long-term sustainability of the firm. The above eight steps are a good way to start.

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