Why corporate governance matters

By Udora Nnoli

Corporate Governance refers to how a company is governed and to what purpose, using practices and procedures to ensure that the company is run in a way to achieve its objectives.  Suffice to say that it is a toolkit that enables management and the board to deal more effectively with the challenges of running a company. It ensures that businesses have appropriate decision-making processes and controls in place so it balances the interests of all stakeholders.

It is pertinent to observe that a few writers have argued against the practice of corporate governance in an organization. Some arguments against corporate governance include:

a)  the cost of entrenchment of corporate governance practices in an organization outweighs its benefits;

b)  corporate governance practice guidelines are extensive and burdensome;

c)   the connection between good corporate governance and good financial results have not been proven;

d)  companies obliged to comply with corporate governance are at a competitive disadvantage to their rivals; and that

e)  corporate governance practice is a box-ticking exercise.

In the same vein, other writers have argued in favour of the practice of corporate governance in an organization. Some arguments for corporate governance include:

a)     enhancement of reputation for organizations;

b)  elimination of the risk of misleading financial reporting; 

c)    encouragement of long holding of shares by investors;

d)       attraction of huge investment premiums;

e)  access to cheaper financing and

f)      better performance of companies over their competitors.

Notwithstanding the various arguments for and against corporate governance, it is now of increasing interest to companies across the globe as many countries have issued codes of corporate governance following high-profile corporate failures. The importance of corporate governance in building sustainable business especially in emerging/frontier countries cannot be over-emphasized in the light of the following:

– It helps companies to achieve defined objectives: Every company is set up to achieve its goals and objectives. The entrenchment of corporate governance tenets will help companies achieve their objectives.

– It helps to satisfy the interests of the company’s stakeholders: A company comprises stakeholders with various interests, as the company’s activities will affect them directly or indirectly. Such stakeholders include shareholders, directors, employees, suppliers, government agencies, community, and creditors. Corporate governance practices in a company will ensure that it meets all these interests.   

– It ensures reasonable safety for investors’ money in a company: Where there is adequate separation of ownership from management, the shareholders’ capital will be more secured.

– It complements regulatory oversight especially in the capital market: It helps to ensure that companies are run properly, and this makes scrutiny of companies less cumbersome for the capital market regulators.

– It gives credibility and enhances the reputation of the company: A company which applies the core principles of good corporate governance will be trusted by its stakeholders and this will enhance the company’s brand.

It is therefore in the interest of companies to constantly evaluate their current practices/ procedures against defined corporate governance standards and ask relevant questions as outlined below:

• Does the board make conscious effort to ensure the implementation of good corporate governance practices?

• Does the board comprise an appropriate balance of executive and non-executive directors, with relevant skills, entrepreneurial spirit, integrity, knowledge and experience required to achieve the company’s objectives?

•    Are there independent directors on the board and do they truly bring independent judgement to the decisions of the board?

•    Does the company have a policy to guide the board and individual directors in conflict of interest situations?

•  Are board meetings regularly held and effectively conducted, and do board members commit sufficient time to the business of the company?

• Does the company formally evaluate the performance of the board, board committees, the Chairman and individual directors objectively on annual basis?

•   Does the company have a whistle-blowing policy which is made known to all stakeholders, and reaffirmed continually?

•  Is the company secretary properly empowered by the board to effectively discharge his/her corporate governance duties and responsibilities?

•   Are all shareholders treated fairly and given equal access to true information about the company?

The answers to some of these questions and others will assist companies determine where they currently stand on the corporate governance scale and thereby focus attention on weak areas.

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Head, Legal Unit/ Company Secretary, Nextzon Business Services.

‘udora.nnoli@nextzon.com’