Corporate governance is not a new term. Many organizations back then had bad practices and these led to the Cadbury report of 1992. This report has the goal of improving corporate governance in the United Kingdom. There are good and bad corporate governance practices. Knowledge of this can be useful to every organization. Let's begin.
What makes bad corporate governance
One important reason why there is bad corporate governance (CG) is when too much power is placed in the hands of the managing director or the chairman of the board of directors. Also, if the chairman is the managing director or CEO, he has too much power and can lead to bad CG. Why is this so? See what might result when a chairman or CEO has too much power. To avoid complexity I use the CEO to represent an individual with all the powers in the company.
Authoritarian
Because he has all the power and no one to check on it, the CEO will become authoritative. His/her decision is final! One reason for many corporate failures, including Enron, is that the managing director has all the power. And no one can contradict whatever he says, not even the external auditor.
Access to the treasury
The CEO, due to their authoritarian nature, may have access to the company treasury, including the vault. And may use funds for projects that are not economically viable.
Access to books of accounts
Too much power for the CEO can lead to window dressing of the books. This is because the CEO has the final say. Either you do it the way he commands or you resign or get laid off. This can also result in poor controls, and any control put in place will have to be for the interest of the CEO.
Personal interest
The CEO and other executive directors will be interested in their personal interests and not those of shareholders. Personal gains such as huge salaries and other remuneration. If they don't have shareholders' interest, it won't be easy to have an interest in other stakeholders, including employees and the community.
What makes good corporate governance
Good corporate governance occurs when a company complies with regulations and has a code of conduct that it follows. In addition, the company does not have a CEO or chairman who is all-powerful. There is a separation of roles between the entity's chairman and its CEO. And in stock market companies, there are independent directors on the board with a senior independent director who can challenge the chairman in areas that might not be in the best interest of the shareholders.
Compliance with regulation
When a company has good corporate governance, it complies with regulations. One of such is the accurate payment of taxes. Also, it follows what is in the company law of the country it is situated. The FRCN and Nigeria Exchange Group have a code of corporate governance that listed companies are mandated to comply with.
Separation of powers
Good corporate governance means there is a separation of powers. The CEO is a different individual from the Chairman. Both have separate powers and rights and can keep their powers in check. However, for stock market companies, there is the senior independent director (SID). He can also keep in check the power of the Chairman. Most SIDs are expected to promote the interest of the shareholders.
Companies interest
Good corporate governance means that the board of directors has the interest of the company at heart. From strategy to operations management, the goal is to ensure long-term sustainability and profitability.
Internal control
Controls are necessary in every organization and should never be overlooked. It is the responsibility of the board of directors to ensure adequate control is in place. They do this by approving internal control policies and monitoring them.
Risk management
Similar to internal control, the board is responsible for risk management. They approve the risk profile and ensure that executive directors and senior managers do not go against it. The directors do these to comply with their code of corporate governance.
Interest of shareholders
Where there are independent non-executive directors in the quorum of a board of directors, this group may ensure that the interests of shareholders are pursued. Good CG implies that the goal is to maximize the investment returns of shareholders.
Environmental consideration
Aside from supporting shareholders' interests, good corporate governance is concerned with the local environment. They measure their environmental footprints, such as carbon and social footprints, and ensure that the benefits are higher than the cost. More recently, listed companies are encouraged to provide sustainability reports or explain why they failed to do so. In the future, this will be a mandatory report for all organizations.
Why do these matters?
Companies with bad corporate governance will find it difficult to get funding. They cannot get listed on a recognized stock market. More so, they may have reputation issues. This can be bad for business. However, companies with good corporate governance will be the hallmark for investors. If the company considers its environment, it might as well get green bonds and other green investments from international investors and donors. It is also easier to get listed in a reputable stock exchange market as well as build a good reputation for themselves.
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