Every once in a while it is important to go back to basics and remind ourselves as to what is corporate governance and why is it so important?
Good corporate governance is the foundation of any successful business. In business, it refers to the processes, practices, and policies used to make formal decisions and run the company.
According to the OED, it is the “way in which directors and managers control a company and make decisions, especially decisions that have an important effect on the shareholders”.
Corporate governance has become increasingly important in the world of business, the public sector, non-profits, education and PLCs.
What is good governance?
Good governance requires that the board of directors meet regularly, retain control over the business, divide responsibilities clearly, and ensure that risk management is ongoing.
It is the company secretary’s responsibility to ensure the board procedures are followed and comply with all relevant rules and regulations.
There are many responsibilities associated with corporate governance, even though it will vary from company to company.
Incorporating good corporate governance can help reduce the chances of corruption in the company. Fraud and scandals within a company occur more frequently when directors and executives are not required to follow a formal governance code.
The board of directors
For the board to know how the company is doing, they should meet regularly, retain control over business matters, and monitor the management, including the CEO.
A sound governance system will make the company’s officers aware of their duties and encourage them to keep these duties in mind as they make decisions.
A robust corporate governance system ensures that the company protects its members, officers and management.
A well-structured business model is essential to investors and buyers. When a company fails to keep its books and registers up to date, it is unlikely to attract top buyers or investors.
A growing number of companies are becoming more conscious of their public image and the need for ethical behaviour. Good corporate governance, regular board meetings, and making the correct strategic decisions can help maintain and grow a company’s reputation and image.
By practising good corporate governance, a company will become trusted by the public.
For corporations to be successful, they must take steps to ensure their corporate governance systems are strong. This means their boards should be the right mix of executive and non-executive directors who are effective and capable of asking the right questions to ensure the organisation thrives.
A definition of corporate governance
Here are the ten primary aspects that define corporate governance, with particular attention to the UK and Ireland.
- The Cadbury Report, titled Financial Aspects of Corporate Governance, is a report issued by “The Committee on the Financial Aspects of Corporate Governance” chaired by Adrian Cadbury that sets out recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance risks and failures.The central components of this code, the then titled Cadbury Code, are:
- that there be a clear division of responsibilities at the top, primarily that the position of chairman of the board be separated from that of chief executive and that there be a strong independent element on the board;
- that the majority of the Board be comprised of non-executive directors;
- that remuneration committees for board members be made up of the majority of non-executive directors; and
- that the board should appoint an audit committee including at least three non-executive directors.
Further details can be found at the Cadbury Report site.
- Corporate Governance regulates the relationship between the organisation, shareholders, directors and the executive management team.
- The UK Corporate Governance Code, while primarily aimed at publicly listed companies, is a concise summary of governance principles, which is useful to, and can be applied to, all companies.
- Governance codes for different sectors may be mandatory or voluntary. For example, the Code of Practice for the Governance of State Bodies (2016) (in Ireland) is mandatory, whereas others, such as Building for the Future, A Voluntary Regulation Code for Approved Housing Bodies in Ireland – https://www.housing.gov.ie/ is voluntary.
- “Hard” law, involving legislation and mandatory codes, brings a unilateral set of requirements, with rules that can be enforced by law and for which there are specific consequences for breaches of the rules.
- “Soft” law, based on guidance and voluntary codes, has the advantage of flexibility and the ability to deal with unforeseen circumstances that the law cannot anticipate. It provides a conceptual framework for decision-making and resolving issues.
- The notion of “comply or explain” means that if a company does not comply with the provisions of the UK Corporate Governance Code it must explain why. If a company has decided that it wants to comply with the Code, however, its broad underlying principles must always be complied with.
- The Irish Companies Act 2014 is a consolidation of previous Companies Acts and other, secondary legislation, as well as common law principles.
- The focus of the Companies Act 2014 is the simplified private company limited by shares (the LTD company), which is now classed as the model company in Ireland, rather than the PLC as in previous Companies Acts.
- The Companies Act 2014 encourages better governance by clarifying penalties and codifying directors duties. It emphasises the accountability of directors.
The above summary is taken from “A Practical Guide for Company Directors” by David W Duffy, Ireland’s leading practitioner on corporate governance.