22 Dec Key features of Good Corporate Governance

Corporate Governance is the system of rules, principles and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders such as shareholders, management, customers, suppliers, government and the community.

Good corporate governance creates a transparent set of rules and controls in which shareholders, directors and officers have desired incentives. Most companies strive to have a high level of corporate governance. For many shareholders, it is not enough for a company to merely be productive, it also needs to demonstrate good corporate citizenship through ethical behavior and several corporate governance practices.

It is also important to note that there is a strong correlation between good corporate governance practice and the commercial success of a company.

Corporate governance in Nigeria is regulated by several codes issued by the Financial Reporting Council of Nigeria, Securities and Exchange Commission and other foreign bodies catering for same, including The Organisation for Economic Co-operation and Development (OECD). The Companies and Allied Matters Act 2004 (CAMA) also plays a key role in regulating adherence to corporate governance.

Below are some key practices of good Corporate Governance which companies should integrate into their businesses/practices;

Strong and Qualified Board of Directors

The Board should comprise of directors who are knowledgeable and have expertise in the company’s area of business. They should be qualified, competent and have sufficient time to carry out their obligations. Directors should be from diverse backgrounds and must exercise independent judgement when making decisions and also avoid conflict of interests.

Directors act as agents of a company in business transactions and thus, are expected to discharge their fiduciary duties with a duty of skill and care. Fair dealing, that is, unbiased and equitable dealing in accordance with the relevant rules and guidelines must be displayed. This means that they must not take undue financial advantage of the company.

To achieve these qualities, majority of the directors should be independent, that is, without any direct or indirect relationship that could hinder their judgement. Proper and timely access to information must be ensured for the effective discharge of their duties. Continuous professional trainings should be organized in order to ensure that they are kept abreast of the company’s business and aware of their duties and responsibilities. It is also important to develop an engaged board where directors can ask questions and challenge the company’s management.

Defined Roles

The roles and responsibilities of the Board, Chairman, Chief Executive Officer (CEO), Executive Officers and Management should be clearly defined to avoid overlapping of duties. Each officer should have a clear idea of what he/she is expected to do by virtue of written position descriptions that is contained in their various contracts. A written mandate should be set out for the board for the purpose of accountability.

The Board may also set up sub-committees to which they delegate certain responsibilities, such as auditing, nomination, remuneration, risk management, inter alia. The roles of the Chairman and CEO should be separated to avoid over concentration of powers in one individual and give room for proper checks and balances. The CEO should be in charge of the day to day running of the company affairs while the Chairman should ensure the effective operation of the Board.

Integrity and Ethical Dealing

There should be a general culture of good working ethics and integrity in business dealings. Directors must comply with all relevant laws and policies and should be objective in their decision making. They should refrain from voting on matters which they have interests and must declare any conflict of interest or interest in specific contracts with the company.

Directors must act in their best capacity by ensuring that their transactions are directly connected to the business of the company. Such transactions should also be bonafide, that is, carried out in good faith, honesty and sincerity.

In implementing the above, a conflict of interest policy, a code of business conduct and a whistle blower policy may be adopted. The code of business conduct should set out the company’s requirements and process to report and deal with non-compliance.

Risk Management

Companies must be able to identify and assess potential risks such as financial, operational, environmental and legal risks. The Board should exercise strategic leadership and develop a framework for managing risk. This responsibility may be delegated to the executive management who will develop a risk control system that will be able to identify, assess, mitigate and monitor risks.

The Board may also establish a Risk Management Committee to regularly review the risk control system developed by the executives. The effectiveness and adequacy of the risk control system should be regularly reviewed by the Board.

Accountability and Transparency

The Board is answerable to the shareholders and other stakeholders of the company. There should be timely and accurate disclosure of information by the company to the shareholders and stakeholders on issues such as the company’s financial position, performance and governance.

There must be effective monitoring of management (the CEO and Executive Directors) by the Board. Insufficiency and lack of transparency in corporate governance often leads to fraud and scandals.

Accountability and Transparency brings investor confidence. Potential investors are able to evaluate which company to invest in and get good returns on their investment.

There is no “one size fits all” approach to good corporate governance, but a right sized governance practice will positively impact the long term viability of a company.

Berkeley Legal is capable of advising on the best corporate governance practice that will be suitable for any company.

The information provided in this article is for general informational purposes only and does not constitute legal advice. If you require specific legal advice on any of the matters covered in this article please contact info@berkeleylegal.com.ng