CORPORATE GOVERNANCE THEORY, SCOPE AND IMPORTANCE

CORPORATE GOVERNANCE THEORY, SCOPE AND IMPORTANCE

What is on the agenda Corporate Governance: In Theory Brief history The concept Principles Corporate Governance: In Practice Corporate governance elements Corporate Governance- Audit Audit Committee External Audit Internal Audit Conclusion 2

CORPORATE GOVERNANCE: IN THEORY 3

History 17 th century: The corporation as we know today 19 th century: Large companies 20 th century: Separation of ownership and control System to ensure accountability by those who run companies to those who invest in these companies 4

How did it actually start? What did we learn from the global crisis Markets are interconnected Markets matter Governance matters 5

What is Governance IIA Definition Governance is the combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives. 6

S t a k e h o l d e r s S h a r e h o l d e r s Concept Objectives Internal controls Strategy Board Committees Management Culture Day to day business Personnel 7

WHY? Ethical business behavior Accountability Transparency Sustainable business environment properly run and professionally managed corporation. 8

The added value Is this legal? Is this right thing to do? Improving financial performance Bad governance Red flag Enhancing investor confidence 9

WHY? Source: http://www.againstcorruption.eu/wp-content/uploads/2015/12/wgi_cocgraph.jpg 10

PUBLIC INSTITUTIONS Public good governance is ensuring that entities act in the public interest at all times. 11

PRINCIPLES Rule of Law/ Fairness Participation/ Responsibility Accountability Transparency 12

Rule of Law/ Fairness OECD Principle 1: The corporate governance framework should protect shareholders rights. OECD Principle 2: The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. 13

Participation/ Responsibility OECD Principle 3: The corporate governance framework should recognise the rights of stakeholders as established by law and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises. 14

Accountability OECD Principle 4: The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board s accountability to the company and the shareholders. 15

Transparency OECD Principle 5: The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. 16

CORPORATE GOVERNANCE: IN PRACTICE 17

Relevant Factors Private Start-up Mature Public 18

Bacis Corporate Governance Elements Effective board oversight Ethics and integrity Rigorous risk management Strong internal controls and compliance Audit 19

Board Oversight Board of Directors Senior management Management Highest policy making Policy Guidelines Operational policies 20

Board Oversight Board Dynamics Board Structures -How many - Who -Committees -Meetings Board Competencies - Knowledge - Skill -Competencies Board Behaviours - Values -Norms -Management relations 21

Board Oversight Board s core accountabilities Defining purpose and values of companies Setting the governance framework Strategic planning Risk management and compliance Monitoring and fiscal control Policy & Authorization Shareholder & Stakeholder management Succession planning Hire and Fire CEO 22

Board: Best practices Have a balance of executive and non-executive directors Have a formal charter for board Create formal responsibility for corporate governance Provide independency Have an independent chairperson Provide competency Provide predesigned selection procedures Educate the board 23

Board: Best practices- cont Evaluate performance Disclosure!!! Have formal charter for board committees Have an audit committee Remuneration report: Have and publish policy for setting remuneration of executives Meeting without management 24

Ethics Governance Principles Rules & Regulations Operating Principles Code of Ethics/Conduct CHARTER 25

Ethics Tone at the top Written code of conduct Well understood Avoiding cliches Ethics officer/committee Whistleblowing? 26

Ethics If it is not right, don t do it. If it is not true, don t say it. Marcus Aurelius Is this action legal? Is there any conflict? Does it comply with company policies and standards of ethical business conduct? Do I have all the facts to enable me to make a decision Is this a rational decision based on all the facts Is the decision in the best interest of the company How is the communication with the stakeholder, is it transparent? 27

Ethics Is the company acting in a socially responsible manner Am I (are we) acting as a good steward of the company s assets Is it something I would not want my supervisors, fellow employees, subordinates or family to know about? Is it something I would not want the general public to know about? Would the board be embarrassed if its decision appeared the front page of the national newspaper 28

Ethics: Best practices Have a written code of ethics: Standards, conflict of interest, using entity s properties, unethical activities, being fair, gifts, compliance, reporting, whistleblowing, breaches of the code Communicate the code, provide employee training Monitor the implementation Review the code Publish the code and disclose serious instances. Have a Chief Ethics Officer 29

Risk management / Internal controls Board s role Set tone at the top Determine risk appetite Risk management policy Risk management framework Risk and compliance monitoring 30

RM/IC: Best practices Have rigorous RM/IC processes Monitor the process Report to your stakeholders regularly. Have a risk management committee or disclose 31

CORPORATE GOVERNANCE: AUDIT 32

Where does audit fit in Public Internal Audit Shareholders Board Audit Committee Regulators External Auditor 33

Audit committee Financial reporting External auditors Internal audit function Internal control and risk management systems Compliance Whistle blowing practices Code of conduct Fraud 34

Audit Comittee: Best practices Having the comittee The structure of the committe Independency Qualifications Written charter Have a clear complaint policy Meet auditors independently 35

External Audit Cadbury Report (1992): The annual audit is one of the cornerstone of corporate governance...the audit provides an external and objective check on the way in which the financial statements have been prepared and presented 36

External Audit: Best practices Select auditors based on professional capabilities. Provide independency Provide effective communication Provide reasonable rotation Differentiate audit work and non-audit work Disclose audit fees Disclose other important things 37

Role of internal audit in corporate governance Internal Audit Definition: Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. 38

International Standards 2110 - Governance The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: Promoting appropriate ethics and values within the organization; Ensuring effective organizational performance management and accountability; Communicating risk and control information to appropriate areas of the organization; and Coordinating the activities of and communicating information among the board, external and internal auditors, and management. 39

International Standards 2110.A1- The internal audit activity must evaluate the design, implementation, and effectiveness of the organization's ethics-related objectives, programs, and activities. 2110.A2 - The internal audit activity must assess whether the information technology governance of the organization supports the organization's strategies and objectives. 40

Three Line of Defense Business Unit Support functions Internal audit 41

Internal Audit Checking financial misstatement Reducing risk Focusing on internal controls Providing confidence Adding value 42

Internal Audit: Best practices Have a written charter Follow international standards and best practices. Effective communication Continuous improvements Quality assessment 43

Improving governance Surveys Training Hotline CSA Audits CG/ethics/standards/strategic plan Challenge everything 44

Challenges/barriers The belief that corporate governance doesn t apply Box ticking It is hard to measure Differences 45

Don t forget Avoid excessive legislation and regulation. Build broad-based support for reform. Opinion matters Think global, apply local. Stay focused on the long term. 46

Finally!!! Let s wrap this up 47

QUESTIONS??? Thank you for your attention and contribution 48