Concepts are usually the basis for theory and, of course, laws. This is also true with corporate governance. This guides the principles and codes set up by regulatory bodies for companies under their control. In this article, we consider corporate governance concepts that you should know.
Responsibilities and Accountability
Directors have the responsibility to manage the affairs of the company. They are expected to take responsibility for the success and failure of the business. However, the board may delegate some of these responsibilities to executive managers. Then, monitor how these managers carry this out. Such delegation does not free the board members from responsibilities.
There was a case in 2024 when the managing director of First Bank resigned because it was discovered that a senior staff member who worked in the IT department had stolen millions of customer funds.
When the board of directors practices accountability, it is part of good corporate governance. Directors are expected to be accountable to the shareholders. This is achieved by providing annual and other narrative reports to the shareholders. More so, directors are accountable if they provide material information to shareholders that can affect them from time to time.
Openness or Transparency
Transparency has the same meaning as openness. And accountability and transparency work together. If directors are transparent, they will provide accountability to their stakeholders. For a stock market company, openness is a must. Companies can be delisted if they fail to provide a good reason for not providing their financials to the public within three to six months after the end of their financial year.
More so, listed entities are expected to provide other qualitative and quantitative information impacting investors. This includes any new changes to the board members, material expenditures, and other decisions and actions taken in the boardroom.
Fairness
This refers to equal treatment of the shareholders by the board of directors. There should not be favoritism on the part of the directors. This can happen when the directors treat shareholders with more equity shares better than others with fewer. A board is fair if it ensures that shareholders have one vote per share.
In Nigeria, most, if not all, listed companies are fair in dealing with investors in the Nigerian Exchange Group. When issuing dividends and bonus shares, it is usually done per share. So that shareholders can take part in it, no matter how small their share quantity. For example, Beta Glass Plc is issuing a N30 dividend per share to its shareholders.
Honesty and Integrity (Probity)
Honesty means saying the truth without putting a spin on it to make a good impression. Integrity implies that the directors have high standards of behaviour and a clear ethical code. When the board complies with the corporate governance code without reservations they have Probity. Directors’ probity is necessary if they want to maintain the trust of the investing public.
Independence
Directors' independence means they can contribute to corporate decisions without influence from others. Influence can come in various forms. When the chairman has influence over the directors, whatever he/she says becomes the final decision. Executive directors, including the chief executive officer, do not have independence. They are familiar with the company and may not see things objectively.
In addition, Non-Executive Directors (NED) are not independent if they represent a stakeholder group. In Germany, NEDs are chosen from various stakeholder groups. In Nigeria, especially in the public sector, MDAs such as the Nigeria Tax Authority (FIRS) have various stakeholder groups that make up the board, including the Ministry of Finance.
Independence of the director exists in a corporation when the chairman and the NED are independent and can rely on their objectivity while making decisions.
Reputation
A company can have a good or a bad reputation. This has an impact on it. A company with a good reputation prospers while those with a bad one fail. A reputation is built from the company's product and the character of employees and management. Stakeholders do notice this and want to do business and invest in the corporate entity.
Suppliers of raw materials will continue providing the materials on credit if they know that the company will pay on time. Customers will continue buying a company's product or service if they perceive that the product is of high quality. Top talents will continue applying for roles in a corporation because they believe that the company has career growth prospects. And investors keep supporting a company financially when they are sure that the management is of good character.
Therefore, good corporate governance implies that maintaining a good reputation cannot be underrated and it should be sustainable to avoid failures and build Goodwill.
Judgement
This is closely related to independence. For a director to provide a good judgement, he/she must be independent at heart and actions. Companies' NED must be independent to have good judgment while choosing between options. An objective-based decision is more scientific and can reduce the probability of failure of the decision reached.
The company should ensure that all NEDs are independent. They can do so by annually reviewing the director's objectivity level.
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