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Corporate Governance-An emerging economy perspective

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Corporate Governance (The Book)- Synopsis

The thought of writing this book crystallized in late 2011, with the desire to take a practical approach, based on interviewing respected practitioners and completion of a questionnaire by some of such persons. This book responds to the growing dynamism of corporate governance, with a focus on emerging economies and in particular practices in Nigeria.

Among others, it discusses the development of corporate governance practice in the Nigerian business environment and situates this within the broad perspective of emerging economies.Using recent codes, it demonstrates the depth of theory but draws attention to the yearning gap in practice.

Discussion of the roles of boards, board committees, Shareholders and key governance personnel is stimulating. With copious illustrations from the Oil and Gas industry, dimensions such as risk management, ethics and the place of leadership in good corporate governance practice are discussed. It examines and depreciates the un-abating corruption in corporate and national life in this clime and proffers suggestions on how to stem impunity, the bane of good corporate governance. It also provides good reading for advanced management and Business studies students reading for the MBA and other postgraduate courses; it is a reference material for directors, practitioners and others involved with governance roles.

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1 Corporate Governance: Definition and Conceptual Clarification

 

  1. Introduction

Governance in general terms could mean so much and different things to different people. Some say governance is a process that offers public  service for the common good to the generality or at least majority of the people. Others say it is a contract between a government, public or private enterprise and the governed for the provision of social service. To bring it closer to relevance in the context of this writing, what then is corporate governance?

Governance and in particular corporate governance has assumed a frontier role globally, since the 1990s as a discipline. Its emerging importance has coincided with, if not triggered by the phenomenon of failed companies in both developed and developing economies. Scholars have commonly spoken about rules, procedures, practices which together assist in ordering a business or company as constituting governance.

Others argue that principles and values should constitute the central piece of corporate governance.

1.1 What Exactly is Corporate Governance

Corporate governance is the system by which companies are directed and controlled (Cadbury Report, 1992, P. 15).1 Heyden (2010)2 in a seminar note to an advanced international programme held at INSEAD defines governance as the “thinking, discussing and decision-making about the future of a business.” The thinking and discussion is about how the power and resources of the organization are harnessed and deployed in the process of value creation for stakeholders, while respecting the legal obligations of the nation or broadly the environment where the business operates. There are various factors that drive corporate leadership – boards or management teams – to employ resources efficiently but at the root of that is the need for value optimization for the organization. Reflecting further on definition, one would add that governance is a system of principles, procedures, practices,

rules and structures by which an organization is managed to give value to its various stakeholders, while complying with relevant laws. In this definition, governance entails a set of systems and structures used to drive value creation in any type of organization – be it a business for profit, non-profit civil organization or public service. Achieving and delivering on the objectives for which the founders established the organization is all that value creation is about.

Corporate governance thrives on a number of pillars, some of which includes:

(i) Transparency

This is the requirement for all actors to be open, straight-forward and for third parties to be able to attest to same concerning the processes of the company; such as in contracting, employment, payment of suppliers, execution of community development projects within its corporate social responsibility objectives, etc.

(ii) Accountability

This is the readiness to submit to the scrutiny of others and willingly offering details to establish that what is done is above board. It is holding and operating with the understanding that the organization is a separate entity for which individuals only play roles as trustees, for which an individual must give account periodically.

(iii) Responsibility

This entails acting responsibly towards customers, employees, environment and various stakeholders. This requirement complements accountability.

(iv) Discipline

This covers setting and keeping by standards, rules for the effective working of the organization. It involves keeping good records, being punctual and thorough in rendering agreed reports and working the rules of the organization by all levels of actors.

(v) Independence

This demands defining, agreeing and upholding the interests of the company and giving them priority over other interests, such as personal interest, or of your supervisor or your sponsoring company for those seconded to the company, or nominee directors sitting on the board as a representative of their employers in a joint venture company arrangement.

(vi) Fairness

This is playing to balance several interests and being equitable in the treatment of actors, be they suppliers, directors, regulators or community. The focus here should be to ensure that the rights and privileges as well as the obligations of all stakeholders are respected.

1.1.1

Why do organizations need effective corporate governance

         and what is this about

Organizations are set up as enduring entities or going concerns. If the rules and regulations of an organization are duly complied with, such an organization will deliver much more consistently over a long tenure on the

goals for which it was conceived and established.

Effective governance makes a company and indeed every organization more focused and competitive. As a hallmark of effectiveness, every effort is often directed at the attainment of the goals and objectives of the

organization at any point in time.

This in turn positions a company to drive itself for superior performance, standing out amongst its peers in its industry and beyond. This is the bedrock of economic prosperity. Achieving this demands being accountable and transparent in dealing with all stakeholders. Fairness and a responsible approach to a company’s business form the platform for earning the trust of business partners. The desire to be effective demands continuous improvement in the quality of a company’s productive process, product or service, marketing activities, management employees’ selection, grooming and engagement.

Attaining this provides a pool of knowledge and expertise at the table by directors to support top management.

It is important that a company’s governance processes should meet global best practice standards, as this could help to secure capital more easily; leading to financial sustainability. Of course financial sustainability and prosperity rides on the back of effective risk management of corporate resources – finances, human capital, technology, markets and methods.

Management must work to minimize company risks exposure and enhance company’s profile, serving to position it to outpace competition.

The board and management should have the freedom to act but do so responsibly and objectively to meet the expectations of various stakeholders.

The key actors of a company must be fair and equitable and be seen to be so by the many publics they serve in the complex contemporary business environment.

For any company pursuing excellence, its board and management would need to be in full compliance with required national and international regulations and laws.

Governance as a concept should have a long range focus, protecting the future of the organization. It should be independent from management and be able to pursue its activities fearlessly, guiding and where relevant, criticizing executive management fairly but courageously. Board leadership should champion and seek to be adequately informed to canvass an independent view focused on the strengths and weakness of management with the intention to promote company’s prospect.

Overall, corporate governance should interest business owners and other stakeholders for reasons, most of which are summarized as follows:

  • Economic sustainability. A company’s ability to defend its financial well-being, robustness and going-concern status over time;
  • Company growth. This is the creation of job opportunities and skills development for people, who in turn affect the organization positively;
  • Financial prosperity through easy access to capital. This involves local and foreign direct investment-effective risk management, and financial governance;
  • Promotion of capital market and institutional investment activities, providing an environment for cooperatives, pensions funds, mortgage institutions, insurance companies and building societies to deepen their investment exploits; and
  • Check reckless risks-taking of executives and therefore reduce the predisposition to failure and bankruptcy of businesses globally.

 

 

1.2 Corporate Governance versus Corporate Management

Dayton (1984)3 in an article published in the Harvard Business Review attempted to identify a relationship between corporate governance and corporate management. The relationship and distinction is apt, to sensitize scholars to what happens in the business environment.

He referred to corporate governance and corporate management as two sides of the same coin. While corporate governance focuses on the “processes, structures and relationships through which the board of directors oversees what executives do”; corporate management is focused on “defining and achieving the objectives of the company” as approved by the board of directors. If good management is the face of the coin, good governance is the flip side. Corporate management is saddled with the day-to-day operational delivery and measurement of company performance and the professional board activities guide, steer and nudge management for top quality results. This partnering has until recently hardly been obvious if not lacking. The feeling is that every time we find a business that is in trouble, you find a board of directors failing or unwilling to fully discharge its responsibility as the primary force which should nudge and press corporate management to deliver on the set objectives of a company. Dayton therefore surmised that: “it is the board’s function, as representatives of the shareholders to be the primary force pressing the corporation to the realization of its opportunities and the fulfillment of its obligations to its shareholders, customers, employees and communities in which it operates.” For this to work effectively for results, it is essential that the relationship between corporate governance symbolized by the board of directors and corporate management led by the chief executive officer be optimized.

To ensure the required optimization is in place, the board and

management should start on a note of clear definition of roles and delineation of boundary of responsibilities and obligations between the board (governance) and the management (executives).

Second, the board defines the path and protects the future of the corporation. It should install a future oriented culture, which acts as the

sign post for the management to follow.

Third, the board should protect its independence, operating on the basis of policies which define its makeup, tenure, work timetable, specific reports expected from management, periodicity of such reports, and annual review of its activities and performance, distinct from the assessment of the chief executive officer.

Fourth, a separate leadership should be set up for the board as distinct from the management. This ensures that the chairman of the board of directors is recognized as steering the strategic direction of the business, setting and monitoring the strategy, defining the agenda for board meetings and able to call for the appropriate reports from management.

This independence offers ample freedom for the board of directors to thoroughly review/criticize matters without fear or favour. The chief

executive officer and the management committee should accept their subordinate role; reporting faithfully and loyally to the board in accordance with statutory requirements and best practice standards.

Fifth, there is the need for trust and faithfulness. The world we live in is deficit in trust. The numerous cases of corporate collapse for example, Tyco, Enron, Lehman Brothers bankruptcy and cases of corporate scandals

– The Nigeria LNG-TSKJ construction consortium bribery of public servants in Nigeria in the 1990s, and various similar examples paint a vivid picture of moral decay, directors’ recklessness and/or negligence. On both

the side of governance and executives, corporate leadership will have to do more to prove they are not only faithful, diligent but that they should be trusted with shareholders investments. The plethora of regulations –

the US Sarbanes-Oxley Act, UK Corporate Governance Code, Nigeria’s Economic and Financial Crimes Commission (EFCC) Act, etc. will not do

 

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