Successful firms thrive on good corporate governance

Good corporate governance contributes to companies’ long-term sustainability and creates transparency and trust. FOTOSEARCH 

By PETER WERE

There are many stakeholders with varying interests in a company. They include customers, creditors, employees and the government. All of them want a stake.

Their needs arise out of varied reasons. Investors want a good return . The government, because of legislation, will expect a company to behave in a certain way— for example pay taxes promptly, be conscious about the environmental standards and adhere to labour laws.

Creditors on the other hand need to be paid for goods sold and services rendered. The payments must be fair and timely. The society may not necessarily contribute directly to an organisation’s success but will still need a piece of the pie.

Specifically, they may want the company to contribute to philanthropic activities. Depositors in a bank want assurance that their money is safe . Ordinarily, it is incumbent upon managers and board of directors to ensure these needs are met without bias.

Corporate governance principles guide on how these desires can be fulfilled. It sets the relationship between managers, shareholders and other stakeholders. But there is no standard model for good corporate governance.

The current events in corporate Kenya, the recent being the financial shenanigans in some banks, has rekindled the question as to who exactly is responsible for ensuring the company acts in manner which is both ethical and effective. How are other stakeholders being protected?

Is it possible that a director can siphon billions out of a company for so long without the knowledge of other key players in a bank for instance?

How is it possible in a company with board of directors, audit committee and external auditors to boot? Some organisations may not be in the news but a lot could be going on which other stakeholders may not be aware of.

Applying sound corporate governance principles is one way of ensuring that a company acts ethically and that the needs of all stakeholders are met.

The key principle of good corporate governance is leadership. This leadership is ordinarily headed by a board of directors and the executive management.

For effectiveness, there ought to be clear division of responsibilities between the running of the board and the executive whose responsibility is to manage the company.

Non-executive directors should be able to constructively challenge and help develop proposals on strategy. Also, the board should have a mechanism of evaluating its own performance and that of individual committees and directors.

It is not sufficient just to have numbers on the board. It should comprise people with the appropriate balance of skills, experience and knowledge of the company and the industry in which the firm is operating.

This will ensure the board discharges its responsibility effectively. The board should have a mix of executive and non- executive directors, some of who should be independent. This guards against an individual or group of individuals dominating activities in the company, sometimes for selfish reasons.
Accountability by the board is an important business practice. The board of directors is ordinarily accountable to the shareholders whom they represent and at large, all other stakeholders in the company.

The board should present a balanced assessment of the company’s performance and in a way that is understandable to the stakeholders.

It is required to establish formal and transparent arrangements regarding risk management (for business involves taking calculated risks and also managing those risks) and internal control principles which ensure the assets of the company are safeguarded.

Further, modern organisations should establish an audit committee whose role will include among other things, monitoring the integrity of the financial statements, reviewing the external auditor’s independence, reviewing the company’s internal control and risk management principles and monitoring the effectiveness of the internal audit function.

At best, the audit committee should also have of independent non-executive directors.

It is said that at times managers stray because of the level of remuneration. This is however debatable. It is imperative that the remuneration should be enough to attract, motivate and retain the best managers with ability to run the company successfully.

However, paying a select number of top managers and directors much more than they actually need is itself poor corporate governance. There must be a transparent policy for fixing remuneration packages for specific directors.

He should not be allowed to fix his own remuneration package. Of course directors and senior managers may have contracts tied to a period of time.

The board and managers foremost work for the benefit of shareholders and hence the relationship between them and the shareholders must be one of mutual understanding of objectives.

Directors must encourage dialogue with investors through annual general meetings and other fora.

The company exists to satisfy mainly the needs of the shareholders by maximising their wealth overtime, but we should not forget as we have said before that there are many stakeholders with different needs.

The company should protect the rights of its shareholders and treat them equally but at the same time recognise the various needs of other stakeholders such as creditors, government, regulatory authorities.

How then as an investor or any other stakeholder can you detect that the company in which you have interest is not practising sound corporate governance? This is a discussion coming in the next few days.

Mr Were is a consultant with Anchorage Ltd, a business and financial advisory firm based in Nairobi. odindiwere@anchorage.co.ke