Corporate Governance 101: The Essential Principles of Transparency, Accountability, and Responsiveness
Good corporate governance refers to the set of systems, principles, and processes by which a company is directed and controlled. It includes the roles and responsibilities of the board of directors, management, and shareholders, and the procedures and processes used to make decisions and hold the various parties accountable.
Some key principles of good corporate governance include:
Transparency: A company should disclose accurate and timely information to its shareholders and other stakeholders and make it easy for them to access this information.
Accountability: The board of directors and management should be accountable to the shareholders and other stakeholders, and should act in the best interests of the company as a whole.
Independence: The board of directors should be independent from management and free from any conflicts of interest.
Fairness: The rights and interests of all shareholders should be respected, and the company should not engage in any actions that would be detrimental to any particular group of shareholders.
Responsibility: The board of directors and management should take responsibility for the company's actions and performance.
Ethical behavior: The company should be guided by strong ethical principles and should not engage in any illegal or unethical conduct.
Source: Accion
Accion – Global Nonprofit Organization for Financial Inclusion – provides suggested benchmarks on appropriate governance structures and practices at various stages of maturity and funding. It is shown that even since seed stage, startup should have regular audits in place from a designated audit committee.
Much has been published about corporate board responsibilities in start-up governance as they relate to risk oversight, including the various legal standards which impose these obligations.
But other important factor is the role that an effective Internal Audit function can play in helping a governing board meets these risk oversight responsibilities. Management is responsible for the management and control of various risks throughout the enterprise, and the primary role of Internal Audit is to provide independent, objective assurance to the board as to whether or not these risks are being mitigated to an acceptable level.
This is often achieved through the completion of annual audit plan and the communication of the results of audit engagements to the board. Contrary to common misperceptions, the role of the Internal Auditor is not to simply validate the accuracy of financial records. But rather, Internal Auditors should evaluate risk mitigation activities as they relate to all categories of risk (strategic, operational, compliance, financial, reporting, IT, and others).
Navigating the Complexities of Different Corporate Governance Model
There are several different models of corporate governance that have been developed over time. Some of the most widely recognized models include:
The "Anglo-American" model: This model of corporate governance is characterized by a separation of ownership and control, in which shareholders elect a board of directors to manage the company on their behalf. The board should consist of both insiders and independent members. This model also known as One – Tier (Unitary) where supervisory and management functions is combined in one board of directors. This system is implemented in Anglo-Saxon countries such as England, United States, Canada and Australia. Several Asian countries such as Singapore, Hong Kong and India also apply this system.
Advantages: The decision-making process is expected to be less time consuming as interaction between executive directors and non-executive directors could become more effective with them being in one board.
Disadvantages: non-executive directors are considered to be less independent than supervisory board members, which could potentially harm effectiveness of supervision, and might also hurt the ability to be a coach to the executive directors of the company.
Source: KPMG
The "Continental" model: The model is also known as the "two-tier board" model, is characterized by the presence of two separate boards: a management board, which is responsible for the day-to-day management of the company, and a supervisory board, which is responsible for the oversight of the management board and represents the interests of the shareholders. The management board is typically composed of executive directors (Board of Directors), who are responsible for the operational management of the company, while the supervisory board is composed of non-executive directors (Board of Commissioners), who are typically representatives of the shareholders. The two-tier board system is intended to provide a balance between the interests of management and shareholders, and to ensure that the management board is held accountable to the shareholders. Countries that implemented this system is Germany, Austria, Poland, Indonesia, and China.
Advantages: the check and balance mechanisms are being carried out, help to ensure that the company is being run in which important decisions are made with long-term interests of the company.
Disadvantages: potentially limit the flexibility of management to make quick decisions and typically requires more resources than a single-board model.
The "Japanese" model: The Japanese model is the outlier of the three governance models. One of the key features of the Japanese model is the concept of the "main bank," where a bank acts as a central point of contact for a company and plays a key role in decision-making and financial management. This system is based on the idea that the bank and the company share a long-term relationship and that the bank's interests are aligned with those of the company. Affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government also play major role in controlling the corporate governance. The board of directors is usually comprised of insiders, including company executives. Keiretsu may remove directors from the board if profits wane.
In this model, corporate transparency is less likely due to the concentration of power and the focus on interests of those with that power.
OCBC NISP Ventura
January (Wk4) 2023 Newsletter