GOOD corporate governance is conducting the business with integrity and fairness, being transparent, complying with all the laws of the land, accountability and responsibility towards the stakeholders and commitment to conducting business in an ethical manner.
Seven characteristics, or principles of good corporate governance are listed in King II, namely discipline, transparency, independence, accountability, responsibility, fairness, and social responsibility.
King II recommends that every organisation should report at least annually on the nature and extent of its social, transformation, ethical, safety, health and environmental management policies and practices, while stakeholder reporting is also important.
Discipline
Discipline in corporate governance means that the senior management should be aware of and committed to adhere to behaviour that is universally recognized as correct and proper.
Transparency
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Transparency is the measure of how easy it is for outsiders to find out and analyse a company’s financial and non-financial fundamentals. Companies should make this information available in timely and accurate press releases to give outsiders a true picture of what is happening within the company.
Independence
For good corporate governance, it is important that all decisions are made objectively with the best interest of the enterprise in mind and without any undue influence from large shareholders or an overbearing chief executive officer.
This requires putting in place mechanisms such as having a diversified board of directors and external auditors to avoid any potential conflict of interest.
Accountability
People who make decisions in a company must be held accountable for their decisions. Mechanisms must exist to allow effective accountability. In public companies, investors hold individuals running the company accountable for their actions by carrying out routine inquiries to assess the actions of the board.
Responsibility
In a corporate governance, managerial responsibility means that the management be responsible for their behaviour and have means for penalising the mismanagement. It also means putting in place a system that puts the company on the right path when things go wrong.
Fairness
The company must be fair and balanced and consider the interests of all of the company's stakeholders. In this sense, the rights of each of the groups of stakeholders must be recognised and respected.
Social responsibility
A well-managed company must also be ethical and responsible regarding environmental and human rights issues. As such, a socially responsible company would be non-exploitative and non-discriminatory.
Below are corporate governance models:
The Anglo-Saxon model
According to A. Cadbury (1992), and C.A. Mallin (2011), the Anglo-American model is centred on a single-tiered Board of Directors that has more non-executive directors elected by shareholders.
Because of this, it is also known as the unitary system. Non-executive directors are expected to hold key posts, including chairing audit and compensation committees.
The United States (US) and the United Kingdom differ in one critical respect regarding corporate governance: In the United Kingdom, the CEO generally does not also serve as chairperson of the board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance (Bebchuck, 2004).
According to Cheffins (2003), the Anglo-American model is categorised as arm’s length since the company’s shareholders control their shares at a distance by putting their trust in the company’s management to run daily company’s activities.
The model exists in the US and the UK because most of their large companies are listed in stock exchanges.
The principal-agent or the finance model and the market model can be used to analyse the Anglo-American model. The finance model concerns the maximisation of shareholder’s prosperity which is regarded as the only function of corporations.
Like the finance model, the market model supported the maximization of shareholders wealth as the key company target.
The continental European model
Tricker (2000) observed that in some continental European countries, including Germany and the Netherlands, there are two-tiered Board of Directors as a means of improving corporate governance.
The executive board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors represent shareholders and employees, hires, and fires the members of the executive board, determines their compensation, and reviews major business decisions.
This is the insider/control-oriented model pertaining in continental Europe and Japan. This model according to Hertig (2006) propounds a close relationship between the corporations and its capital providers, including shareholders and bankers and other financial institutions as the core element of the model.
The American model
The collapse of some of the huge companies, such as Enron, Worldcom and Tyco International in 2001 is considered as heralding the new era in corporate governance.
The above catastrophe occurred despite the application of some corporate governance models. According to Atkins (2003), this can be assumed that previous American corporate governance was powerless to prevent those companies from bankruptcy.
Consequently, the American Congress passed the Public Company Accounting Reform and Investor Protection Act of 2002 (The Serbanes-Oxley Act, 2002).
The Act was adopted as a mandatory model where all companies that have registered equity or debt securities with the Security Exchanges Commission were to adhere to it.
The Australian model
Unlike the American model, Australia is one of the countries utilising the voluntary model.
The Australian Stock Exchange Corporate Governance Council (ASX) explicitly asserts that the Australian Principles of Good Corporate Governance and the Best Practice Recommendation contain a voluntary system.
Listed companies might not comply with the principles, but have to provide sufficient and reasonable arguments as to why they don’t i.e.” if not why not”?
As opposed to “one size fits all.” The underlying principle of the Australian Code is that the market can come to its own conclusions about the significance of non-compliance based on circumstances of individual companies.
The Indian model
The Indian model on corporate governance is based on the Ghandhian principle of trusteeship, which is about commitment to values, ethical business conduct and about distinguishing between corporate and personal funds.
It is about recognition by managers that they are only trustees of shareholders’ funds.
However, Mervin King, a world-renowned authority of corporate governance said he was against legislating corporate governance.
He argued that if you start legislating corporate governance you have rigidity.
It is impossible to legislate against dishonesty and principles are better than rules.
He alluded to the Enron corporate scandal, saying the company’s directors and accountants managed to circumvent the 428 procedural rules governing accounting in the USA using what he termed “misdirected intellectual energy”.
He said what is needed is a good corporate governance culture that ensured that the four basic tenets of common law of faith, care, skill, and diligence are upheld and maintained in the manner companies are directed and controlled.
- Munhenga is a human resources and corporate governance professional. — tendayimunhenga@gmail.com/ 0772 380 340 / 0719 380 340