In broad terms, corporate governance deals with the manner in which companies are run in order to meet the owners’ return on investment, whilst contributing to economic growth and efficiency as well as ethical business behaviour.
In general, the Board of Directors has responsibility to direct the affairs of a company and it delegates the day-to-day management of the company to the Managing Director and other members of the management team. The recent scandals in the financial sector have highlighted the culpability of Management in corporate governance failures and the need to ensure that the various Codes of Corporate Governance lay more emphasis on their role in upholding Corporate Governance principles.
The Need for Corporate Governance
The requirement to demonstrate compliance with corporate governance has gained urgency in the wake of the global financial crisis and the collapse of major corporations in the United States of America and Europe. These collapses have largely been attributed to lack of accountability and transparency; conflicts of interest and earnings misrepresentation.
Corporate governance increases probity and accountability and ensures that the appropriate structures and processes are in place to detect and avert potential failures before they occur.
The Role of Management
It is widely acknowledged that today’s manager is tomorrow’s director. Indeed, Corporate Governance Codes recognize the role of management in achieving good corporate governance. In particular, the NAICOM Code provides that Corporate Governance encompasses the means by which the Board and Senior Management are held responsible for their actions. The Code goes on to identify the foundation for good corporate governance as sound business strategy along with a competent and responsible management team.
In addition, according to the NAICOM Code, good corporate governance requires comprehensive internal control procedures and policies which should be established by the Board of Directors and implemented by effective management. Basic principles of good corporate governance under this Code include a proactive, responsible, responsive, accountable and committed Board/ Management.
According to the SEC Code, the responsibility for ensuring compliance with provisions of the Code resides primarily with the Board of Directors. However, of necessity, the Board delegates some responsibilities to Management. While this does not absolve the Board of its pivotal role in setting the tone of governance, Management has to ensure the implementation of the policies, processes and structures put in place by the Board, in order to engender a culture of corporate governance. This can be best achieved by working in tandem with the Board to arrive the optimal governance framework.
While compliance with the principles of Corporate Governance is fast catching on as a requirement for all organisations whether public or private and across business sectors, there is much more to compliance than simply following the rules. Effective Corporate Governance requires a proactive, focused state of mind on the part of Directors, the CEO and Senior Management, all of whom must be committed to business success through the maintenance of the highest standard of responsibility and ethical conduct.