Corporate Governance

Definition and Practice

Bolaji Okusaga

1. Principles

The Need for Corporate GovernanceIncreasing scale and

activity of corporations

• Trans-national Corporations like Apple, Exxon-Mobil, Chevron are becoming larger than Countries and have great impact on economies

The Sub-prime Mortgage Bust

• Deregulation of International financial markets

• The Financial Supermarket Model which created a situation where Retail Deposits are channeled to risky investment assets

Corporate Infractions and Reporting Errors

• Issues with Enron involving Arthur Anderson, the Worldcom Collapse and others

• These issues created a heightened recognition that governance matters for accountability and business performance.

As trust becomes a scare commodity, there is a general trend in society towards openness, transparency and disclosure

Defining Corporate GovernanceTHE FLOW OF

RESPONSIBILITY

Corporate Governance defines the relationship between the ownership as typified by the Shareholders, the

wielders of supervisory authority vested by ownership in the Board of

Directors, who in turn gives the mandate for the day to day running

of the organization in the management headed by the CEO.

THAT DEFINES BUSINESS OPERATIONS AND

REPORTINGCorporate Governance deals with to

the governing system of an organization

It is the method by which companies are directed and managed.

OECD Definitions•“Involves a set or relationships between a company’s management, its board, its shareholders, and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” (OECD, Principles of Corporate Governance, 1999; 2004)

Corporate governance framework ensures 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.

The Pillars of Corporate Governance

Accountability

Render Explanation on Business Stewardship – Board to Shareholders and Management to

Board

Fairness

Be equitable in business dealings

Protection of Shareholders Rights

Transparency

Be open in dealings and render full disclosure to regulators,

shareholders and other stakeholders

Independence

Expression of self-regulating thought and

action

Avoidance of conflicts of interest

Hierarchy and ExpectationsMarket Expectations Transparent and Timely Reports

Shareholders ExpectationsShare appreciation

Dividend

Board ExpectationsBusiness Performance

Profit

Management ExpectationsSound Business

Retention of Going Concern

Customers ExpectationBusiness Delivery

Sustainability

2. Practice

9

Board Composition

Balance of skills and experiences

Balanced composition of executive and non-executive

directors

Non-executive directors should

picked on the basis of skill and representation

List of directors updated and

their respective role and function

identified

Independent directors may be picked for better

scrutiny and governance

10

Appointment, re-election and removal of directors

Formal and transparent procedure for appointment• Specific term for non-executive

directors

Succession plan• Nomination committee formed

to make recommendation on appointment of directors and succession planning for directors, chairman and CEO

All directors subject to retirement by rotation at regular interval• Re-election at regular intervals • Proper explanation for

resignation/removal of directors

11

Chairman and CEO

Separation of Board from Management

Separation of the board from the day-to-

day management of the company’s

business

Balance of power at board level to avoid

concentration of power in a single

individual

Separation of Chairman and

CEO

Division of responsibilities

between Chairman and CEO clearly laid

down in writing

12

Role of the Chairman

THE LEADER

Heads the board and provides strategic

direction

Ensure the board works effectively and

discharges its responsibilities

THE SOUL

Ensure good corporate governance

practices and procedures are in

place

Ensure all directors participate at board

meeting

THE REPRESENTATIVE

Protects Shareholder’s interest

Responsible for ensuring appropriate information received

by Shareholders

13

Responsibilities of Directors

Represents the interest of

Shareholder Blocks

Attend Board Meetings to

share the views of shareholders

Exercise duties of care, skill, integrity and

diligence expected

Ensure proper understanding

of the operation,

business and the regulatory requirement

Contribute insights and

perspective to enrich

Management’s view of the

business

14

Non-executive directors

Active participation in board meetings

Bring in independent judgment

Take lead if conflict of interest arise

Serve on committees

Monitor the corporate’s

performance in achieving pre-set goals

15

Access to InformationACCESS TO INFORMATION

• Directors should be provided with accurate and appropriate information in order to make informed decision and to discharge their responsibilities

• Directors should have access to the senior management for information

• Information supplied should be of form and quality to facilitate informed decision

PROCESS

• Agenda and board papers should be sent in full in a timely manner to directors

• Information supplied must be complete and reliable

16

Remuneration of directors and senior management

PRINCIPLE

PRACTICE

• Transparency of directors’ remuneration policy• Remuneration should be sufficient but not excessive• Each director not to involve in deciding his/her own

remuneration

• Remuneration committee to be formed, mainly from non-executive directors

• Consult Chairman/CEO if needed• Access to professional advice, market comparable

information• Make recommendation on policy and structure of

remuneration• Determine specific remuneration packages of all

executive directors and senior management

3. Process

18

Remuneration Committee

Review and approve performance-based

remuneration

Review and approve compensation

arrangement in connection with loss or termination of office,

dismissal or removal of directors for misconduct

19

Audit Committee

PRINCIPLE

Have clear terms of reference

A formal and transparent arrangement to apply the financial

reporting and internal control principles and maintain appropriate relationship with external auditors

PRACTICE

Full minutes of audit committee to be kept

Provided with sufficient resources to discharge its duties

Independent from external auditors

PRIORITIESMake recommendation for

appointment and removal of external auditors

Monitor the effectiveness of the audit process, ensuring auditor’s

independence and objectivity

Monitor the integrity of the financial disclosures

Oversight of the financial reporting and internal control procedures

20

Financial ReportingManagement provide explanation and information to the board to enable them to make informed assessment of financial and other information

The board should present comprehensive assessment of the corporate’s performance, position and prospects in annual and interim reports, price-sensitive announcements and other financial disclosures

Ensure the maintenance of sound and effective internal controls to safeguard assets

Conduct regular reviews of the effectiveness of the internal control system, covering financial, operational, compliance and risk management control functions

Prevent fraud, corruption, and malpractices

21

Delegation by the Board

Formal schedule of matters specifically reserved to the

board for decision

Clear directions to management as to matters requiring board approval

before decision made

Clear directions to the delegation of the management and

administration functions as well as the powers of

management

Review the arrangement for segregation of duties between board and

management regularly

Board Committee to be formed, with specific terms

of reference, as needed

22

Communication with ShareholdersSTANDARD

• Maintain on-going dialogue with shareholders and make use of annual general meetings or other general meetings to communicate with shareholders

• Transparency in corporate governance practices and business performances through proper and adequate disclosures

• Encourage shareholders’ participation

SPECIAL

• Separate resolution for each separate issue

• Chairman of the board and chairman of each board committees be present in general meetings to answer questions at any general meeting

• Chairman of independent board committee be present to answer any questions in any general meeting to approve transaction requiring independent shareholders’ approval

STRATEGIC

• Inform shareholders about procedure for voting by poll

• Ensure proper compliance to regulatory requirement about voting by poll

Thank you.