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Good governance in corporate sector

Corporate governance presents opportunities to manage risks and add value. Views of corporate governance are shifting from mere obligation and compliance
Masihul Huq Chowdhury
Good governance in corporate sector

Good governance is an indeterminate term used in the international development literature to describe how public institutions conduct public affairs and manage public resources. Governance is "the process of decision-making and the process by which decisions are implemented (or not implemented)".The term governance can apply to corporate, international, national, local governance or to the interactions between other sectors of society.

The concept of "good governance" then emerges as a model to compare ineffective economies or political bodies with viable economies and political bodies. The concept centres on the responsibility of governments and governing bodies to meet the needs of the masses as opposed to select groups in society. Because countries often described as "most successful" are Western liberal democratic states, concentrated in Europe and the Americas, good governance standards often measure other state institutions against these states. Aid organisations and the authorities of developed countries often will focus the meaning of "good governance" to a set of requirements that conform to the organisation's agenda, making "good governance" imply many different things in many different contexts. In international affairs, analysis of good governance can between governments and the private or voluntary sector between elected officials and appointed officials between government and Civil Society Organisations (CSOs)

The varying types of comparisons comprising the analysis of governance in scholastic and practical discussion can cause the meaning of "good governance" to vary greatly from practitioner to practitioner. One of the most important goals of corporate governance is to ensure that company directors and officers are aware of and accountable for the financial condition of the companies they manage. The board of directors lays at the heart of the notion of corporate governance -- it has a fiduciary duty to the shareholders. This can be difficult, especially when the vast majority of information boards receive about corporate performance comes from management, but nevertheless, the board is ultimately responsible for the integrity of a company's financial statements and internal controls. In corporate affairs, good governance can be observed in any of the following relationships between governance and corporate management.

between governance and employee standards

between governance and corruption in the workplace

The meaning of good governance in regards to corporate sectors varies between actors. Legislation has been enacted in an attempt to influence good governance in corporate affairs. In the United States, the Sarbanes Oaxley Act of 2002 set up requirements for businesses to follow. Whistle blowing  has also been widely used by corporations to expose corruption and fraudulent activity. The Worldwide Governance Indicators is a programme funded by the World Bank to measure the quality of governance of over 200 countries. It uses six dimensions of governance for their measurements, Voice & Accountability, Political Stability and Lack of Violence, Regulatory Quality, Rule of Law and Control of Corruption.

All men and women should have a voice in decision-making, either directly or through legitimate intermediate institutions that represent their interests. Such broad participation is built on freedom of association and speech, as well as capacities to participate constructively.

Legal frameworks should be fair and enforced impartially, particularly the laws on human rights.

Transparency is built on the free flow of information. Processes, institutions and information are directly accessible to those concerned with them, and enough information is provided to understand and monitor them.

Institutions and processes try to serve all stakeholders.

Good governance mediates differing interests to reach a broad consensus on what is in the best interests of the group and, where possible, on policies and procedures.

All men and women have opportunities to improve or maintain their well-being.

Processes and institutions produce results that meet needs while making the best use of resources.

Decision-makers in government, the private sector and civil society organisations are accountable to the public, as well as to institutional stakeholders. This accountability differs depending on the organisations and whether the decision is internal or external to an organisation.

Leaders and the public have a broad and long-term perspective on good governance and human development, along with a sense of what is needed for such development. There is also an understanding of the historical, cultural and social complexities in which that the time bound vision is implemented and measured accordingly.

 Many believe that only public companies or large, established companies with many shareholders need to be concerned about, or can benefit from, implementing corporate governance practices. The reality is that all companies – big and small, private and public, early stage or established – compete in an environment where good governance is a business imperative. One size doesn’t fit all, but right-sized governance practices will positively impact the performance and long-term viability of every company.

This belief that corporate governance “doesn’t apply” comes from a view that it’s only theoretical and doesn’t impact the bottom line or performance, is costly to implement, is “bureaucratic” (and slows decision-making), it can’t be tailored to a company’s size and stage of development – or all of these. But in reality, all companies compete in an environment where good governance is a business imperative in relation to things like:

•    raising capital;

•    securing debt;

•    attracting and maintaining talented, qualified directors;

•    meeting the demands and expectations of sophisticated shareholders; and

•    preparing for potential acquisition/exit or next phase of growth.

Right-sized governance practices will positively impact long-term corporate performance – but companies must design and implement those that both comply with legal requirements and meet their particular needs. Here are the top 5 corporate governance best practices that every Board of Directors can engage – and that will benefit every company.

1. Build a strong, qualified board of directors and evaluate performance. Boards should be comprised of directors who are knowledgeable and have expertise relevant to the business and are qualified and competent, and have strong ethics and integrity, diverse backgrounds and skill sets, and sufficient time to commit to their duties. How do you build – and keep – such a Board?

Identify gaps in the current director complement and the ideal qualities and characteristics, and keep an “ever-green” list of suitable candidates to fill Board vacancies.

The majority of directors should be independent: not a member of management and without any direct or indirect material relationship that could interfere with their judgment.

Develop an engaged Board where directors ask questions and challenge management and don’t just “rubber-stamp” management’s recommendations.

 Educate them. Give new directors an orientation to familiarize them with the business, their duties and the Board’s expectations; reserve time in Board meetings for on-going education about the business and governance matters.

Regularly review Board mandates to assess whether Directors are fulfilling their duties, and undertake meaningful evaluations of their performance.

1. Define roles and responsibilities. Establish clear lines of accountability among the Board, Chair, CEO, Executive Officers and management:

Create written mandates for the Board and each committee setting out their duties and accountabilities.

Delegate certain responsibilities to a sub-group of directors. Typical committees include: audit, nominating, compensation and corporate governance committees and “special committees” formed to evaluate proposed transactions or opportunities.

Develop written position descriptions for the Board Chair, Board committees, the CEO and executive officers.

Separate the roles of the Board Chair and the CEO: the Chair leads the Board and ensures it’s acting in the company’s long-term best interests; the CEO leads management, develops and implements business strategy and reports to the Board.

1. Emphasize integrity and ethical dealing. Not only must directors declare conflicts of interest and refrain from voting on matters in which they have an interest, but a general culture of integrity in business dealing and of respect and compliance with laws and policies without fear of recrimination is critical.  To create and cultivate this culture:

Adopt a conflict of interest policy, a code of business conduct setting out the company’s requirements and process to report and deal with non-compliance, and a Whistleblower policy.

Make someone responsible for oversight and management of these policies and procedures.

1. Evaluate performance and make principled compensation decisions. The Board should:

Set directors’ fees that will attract suitable candidates, but won’t create an appearance of conflict in a director’s independence or discharge of her duties.

Establish measurable performance targets for executive officers (including the CEO), regularly assess and evaluate their performance against them and tie compensation to performance.

Establish a Compensation Committee comprised of independent directors to develop and oversee executive compensation plans (including equity-based ones like stock option plans).

1. Engage in effective risk management. Companies should regularly identify and assess the risks they face, including financial, operational,

The Board is responsible for strategic leadership in establishing the company’s risk tolerance and developing a framework and clear accountabilities for managing risk. It should regularly review the adequacy of the systems and controls management puts in place to identify, assess, mitigate and monitor risk and the sufficiency of its reporting.

Directors are responsible to understand the current and emerging short and long-term risks the company faces and the performance implications. They should challenge management’s assumptions and the adequacy of the company’s risk management processes and procedures.

The writer, a banker by profession, has worked both in local and overseas market with various foreign and local banks  in ifferent positions




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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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