Understanding Corporate Governance in Malawi

CORPORATE GOVERNANCE

1. CORPORATE GOVERNANCE An Introduction to Corporate
Governance

2. DEFINING CORPORATE GOVERNANCE
corporate governance is defined as “the structures and processes
for the direction and control of companies.”


3. THEORGANIZATION FOR ECONOMIC COOPERATION
AND DEVELOPMENT (OECD)
“Theinternalmeansbywhichcorporationsareoperatedand
controlled[…],whichinvolveasetofrelationshipsbetweena
company’smanagement,itsboard,itsshareholdersandother
stakeholders.Corporategovernancealsoprovidesthestructure
throughwhichtheobjectivesofthecompanyareset,andthemeans
ofattainingthoseobjectivesandmonitoringperformanceare
determined.Goodcorporategovernanceshouldprovideproper
incentivesfortheboardandmanagementtopursueobjectivesthat
areintheinterestsofthecompanyandshareholders,andshould
facilitateeffectivemonitoring,therebyencouragingfirmstouse
resourcesmoreefficiently.”

4. DEFINITION EXPLAINED
Corporategovernanceisasystemofrelationships,defined
bystructuresandprocesses
Theserelationshipsmayinvolvepartieswithdifferentand
sometimescontrastinginterests
Allpartiesareinvolvedinthedirectionandcontrolofthe
company
Allthisisdonetoproperlydistributerightsand
responsibilitiesandthusincreaselong-termshareholdervalue

5. THE CORPORATE GOVERNANCE SYSTEM

6. THE INTERNATIONAL SCOPE OF GOOD CORPORATE
GOVERNANCE
TheOECDcorporategovernanceframeworkisbuiltonfourcorevalues:
Fairness:Thecorporategovernanceframeworkshouldprotect
shareholderrightsandensuretheequitabletreatmentofallshareholders,
includingminorityandforeignshareholders.Allshareholdersshouldhave
theopportunitytoobtaineffectiveredressforviolationsoftheirrights.
Responsibility:Thecorporategovernanceframeworkshouldrecognize
therightsofstakeholdersasestablishedbylaw,andencourageactiveco-
operationbetweencorporationsandstakeholdersincreatingwealth,jobs,
andthesustainabilityoffinanciallysoundenterprises.

7. Transparency:Thecorporategovernanceframeworkshould
ensurethattimelyandaccuratedisclosureismadeonallmaterial
mattersregardingthecompany,includingitsfinancialsituation,
governancestructure,performanceandownership.
Accountability:Thecorporategovernanceframeworkshould
ensurethestrategicguidanceofthecompany,theeffective
monitoringofmanagementbytheBoard,andtheBoard’s
accountabilitytothecompanyandshareholders.

8. DISTINGUISHING CORPORATE GOVERNANCE

9. THE BUSINESS CASE FOR CORPORATE
GOVERNANCE

10. THE ROLE OF STAKEHOLDERS
IN CORPORATE GOVERNANCE

11. Goodcorporategovernancehelps…toensurethat
corporationstakeintoaccounttheinterestsofawide
rangeofconstituencies,aswellasofthecommunitieswithin
whichtheyoperate,andthattheirboardsareaccountable
tothecompanyandtheshareholders.This,inturn,helpsto
assurethatcorporationsoperateforthebenefit
ofsocietyasawhole.

12. STAKEHOLDERS IN CORPORATE GOVERNANCE
Primary Stakeholders
Shareholders
Boards of Directors/Managing
Boards
Executive Management
Other Stakeholders
Managers
Employees
Customers
Community at Large
Suppliers
Financial Institutions:
Creditors
Environment in general

13. STAKEHOLDERS IN CORPORATE GOVERNANCE
Employees:Thereiswidespreadagreementthattheyareaprime
stakeholder
Shareholders:Somewouldsaythatshareholdersarethefirststakeholder
Management:Controversial,butsomebelievethatmanagersare
stakeholders.Forexample,EvanandFreemanarguethatmanagershave
anadditionalduty-thatofmaintainingthehealthofthecompanyby
keepingstakeholderdemandsbalanced-whichmakesthemstakeholders
Creditors:Creditors’rightsareoftenprotectedundercontractand
backedbycollateralsotheyareseldomtreatedas“owners”asthe
shareholdersare

14. STAKEHOLDERS IN CORPORATE GOVERNANCE
Tradeunions:Somearguethatthisgroupisredundantwiththe
employeegroup
Customers:Moststakeholdermodelsincludecustomers
Suppliers:Oftenconsideredastakeholder
Thelocalcommunity:Broaderdefinitionsofstakeholderswiden
theconcepttoincluderesponsibilitiestolocalcommunitiesand,
moregenerally,civilsociety

15. THE ROLE OF STAKEHOLDERS
Internal Elementsof
Corporate Governance
Factors of Sound Corporate
Governance
•Shareholders rights protection
•Rights and responsibilities of Board
of Directors and Shareholders
•Quality of Disclosure
•Monitoring
•Effectiveness of the core
management functions
External ElementsofCorporate
Governance
Principal Factors
•Stakeholders
•Takeovers/acquisitions
•Bankruptcy frameworks
•Collateral and Foreclosure rules
•Enterprise Restructuring
•Investor and Creditors
•Agents: Management

16. THE ROLE OF STAKEHOLDERS
Theroleofstakeholdersingovernancehasbeendebatedinthepast,with
somearguingthatstakeholdershavenoclaimontheenterpriseotherthan
thosespecificallysetforthinlaworcontract.
Othershavearguedthatcompaniesfulfillanimportantsocialfunction,have
asocietalimpactand,accordingly,mustactinthebroadinterestsofsociety.
Thisviewrecognizesthatcompaniesshould,attimes,actattheexpenseof
shareholders.
Interestingly,thereisaconsensusthatmoderncompaniescannoteffectively
conducttheirbusinesseswhileignoringtheconcernsofstakeholdergroups.
However,thereisalsoagreementthatcompanieswhichconsistentlyplace
otherstakeholderinterestsbeforethoseofshareholderscannotremain
competitiveoverthelongrun.

17. THE NEED FOR GREATER CORPORATE
GOVERNANCE

18. THE NEED FOR GREATER CORPORATE
Keydriversforthedevelopmentofcorporategovernance.
Increasinginternationalizationandglobalization
Issuesconcerningfinancialreporting
Anincreasingnumberofhighprofilecorporatescandalsand
collapses

19. INCREASING INTERNATIONALIZATION
AND GLOBALIZATION
Increasinginternationalizationandglobalizationwhichmeant
thatinvestors,andinstitutionalinvestorsinparticular,beganto
investoutsidetheirhomecountries.
Forinternationalsharetradingtobesuccessful,investorsneeded
tohaveconfidenceofmanagementandreportingstandardsinall
countries.

20. FINANCIAL REPORTING
Issuesconcerningfinancialreportingwereraisedbymany
investorsandwerethefocusofmuchdebateandlegalaction.
Inmanycases,confidenceinthemanagementandreportingof
companieswaseroded.
Theintroductionofcodesofconductwasseenasnecessaryto
rebuildit

21. HIGH PROFILE CORPORATE SCANDALS
Anincreasingnumberofhighprofilecorporatescandalsand
collapsespromptedthedevelopmentofgovernancecodesinthe
early1990s
ThemostfamouscorporatescandalisEnronCorporationinUSA
whichtookplaceintheearly2000s.

22. Itisimportanttorealisethatcorporategovernanceisdynamic
andwillcontinuetodevelopovertimetomeetsociety’sneedsand
totacklenewissuesastheyarise.

23. SYMPTOMS OF POOR CORPORATE GOVERNANCE
The following symptoms can indicate poor corporate governance.
Domination by a single individual
Lack of involvement of board
Lack of adequate control function
Lack of supervision
Lack of independent scrutiny
Lack of contact with shareholders
Emphasis on short-term profitability
Misleading accounts and information

24. DOMINATION BY A SINGLE INDIVIDUAL
Afeatureofmanycorporategovernancescandalshasbeen
boardsdominatedbyasingleseniorexecutivewithotherboard
membersmerelyactingasarubberstamp.Sometimesthesingle
individualmaybypasstheboardtoactionhis
owninterests
Evenifanorganisationisnotdominatedbyasingleindividual,
theremaybeotherweaknesses.Theorganisationmayberunbya
smallgroupcentredroundtheChiefExecutiveandChiefFinancial
Officer,andappointmentsmaybemadebypersonal
recommendationratherthanaformal,objectiveprocess.

25. ELEMENTS IN CORPORATE GOVERNANCE
Themanagementandreductionofrisk.
Thenotionthatoverallperformanceisenhancedbygoodsupervision
andmanagementwithinsetbestpracticeguidelines.
Goodgovernanceprovidesaframeworkforanorganizationtopursue
itsstrategyinanethicalandeffectivewayfromtheperspectiveofall
stakeholdergroupsaffected,andofferssafeguardsagainstmisuseof
resources,physicalorintellectual.
Goodgovernanceisnotjustaboutexternallyestablishedcodes,italso
requiresawillingnesstoapplythespiritaswellastheletterofthelaw.
Accountabilityisgenerallyamajorthemeinallgovernanceframeworks

26. LACK OF INVOLVEMENT OF BOARD
Boardsthatmeetirregularlyorfailtoconsidersystematicallythe
organisation'sactivitiesandrisksareclearlyweak.
Sometimesthefailuretocarryoutproperoversightisduetoa
lackofinformationbeingprovided.

27. LACK OF ADEQUATE CONTROL FUNCTION
Anobviousweaknessisalackofinternalaudit.
Anotherpotentialweaknessisalackofadequatetechnical
knowledgeinkeyroles,forexampleintheauditcommitteeorin
seniorcompliancepositions.
Arapidturnoverofstaffinvolvedinaccountingorcontrolmay
suggestinadequateresourcing,andwillmakecontrolmoredifficult
becauseoflackofcontinuity.

28. LACK OF SUPERVISION
Employeeswhoarenotproperlysupervisedcancreatelarge
lossesfortheorganisationthroughtheirownincompetence,
negligenceorfraudulentactivity.
ThebehaviourofNickLeeson,theemployeewhocausedthe
collapseofBaringsbankwasnotchallengedbecausehe
appearedtobesuccessful,whereashewasusingunauthorised
accountstocoveruphislargetradinglosses.
Leesonwasabletodothisbecausehewasinchargeofdealing
andsettlement,asystemsweaknessoflackofsegregationofkey
rolesthatfeaturedinotherfinancialfrauds.

29. LACK OF INDEPENDENT SCRUTINY
Externalauditorsmaynotcarryoutthenecessaryquestioningof
seniormanagementbecauseoffearsoflosingtheaudit,and
internalauditdonotaskawkwardquestionsbecausetheChief
FinancialOfficerdeterminestheiremploymentprospects.
Oftencorporatecollapsesarefollowedbycriticismsofexternal
auditors,suchastheBarlowClowesaffairwherepoorlyplanned
andfocusedauditworkfailedtoidentifyillegaluseofclient
monies.

30. LACK OF CONTACT WITH SHAREHOLDERS
Often,boardmembersgrowupwiththecompanyandlose
touchwiththeinterestsandviewsofshareholders.
Onepossiblesymptomofthisisthepaymentofremuneration
packagesthatdonotappeartobewarrantedbyresults.

31. EMPHASIS ON SHORT-TERM PROFITABILITY
Emphasisonsuccessorgettingresultscanleadtothe
concealmentofproblemsorerrors,ormanipulationofaccounts
toachievedesiredresults

32. MISLEADING ACCOUNTS AND INFORMATION
Misleadingfiguresareoftensymptomaticofotherproblems(or
aredesignedtoconcealotherproblems)butclearlypoorquality
accountinginformationisamajorproblemifmarketsaretrying
tomakeafairassessmentofthecompany'svalue.
GivingoutmisleadinginformationwasamajorissueintheUK's
EquitableLifescandalwherethecompanygavecontradictory
informationtosavers,independentadvisers,mediaandregulators.

33. THE CENTRAL PROBLEM OF
CORPORATE GOVERNANCE

34. THE CENTRAL PROBLEM OF CORPORATE GOVERNANCE
Althoughtheseparationofownershipandcontrol
facilitatedthegrowthoflargeindustrialcorporations
BerleandMeansrecognizedthatthatseparationalso
createdthepotentialforshareholderandmanagerial
intereststodiverge.
Astheresidualclaimantsonthecorporation’sassetsand
earnings,theshareholdersareentitledtothecorporation’s
profits.

35. THE CENTRAL PROBLEM OF CORPORATE GOVERNANCE
Butitisthecorporation’sdirectorsandmanagers,notthe
shareholders,whodecidehowtospendthefirm’searnings.
Accordingly,thereisariskthatdirectorsormanagerswillexpend
firmearningsonprojectsbenefitingthemselves,ratherthan
shareholders.
SupposetheboardofdirectorsofAcme,Inc.,ismusingoverthe
followingquestion:“Icaneitherspend$100milliononanew
corporatejetorIcandistributethe$100milliontothe
shareholdersbyincreasingthesizeofthedividend.”Cananyone
doubtthatsomeboardswillbuythejet?

36. THEORIES OF CORPORATE
GOVERNANCE

37. WHAT IS CORPORATION?
Thetermreferstoanassociationofmanypersons,whocontribute
moneyormoney’sworthtoacommonstockandemployitinsome
tradeorbusiness.Andsharestheprofitlossarisestherefrom.
Thecommonstocksocontributedisdenotedinmoneyandisthe
capitalofthecompany..
Thepersonswhocontributeitortowhomitbelongsarethe
membersofthecompany
Theproportionalofthecapitaltowhicheachmemberisentitledis
theshare.
Sharesarealwaystransferrable

38. CHARACTERISTICS OF A CORPORATION
Incorporated association
Artificial legal existence
Common seal
Extensive membership
Separation of management and ownership
Limited liability
Transerabilityof shares

39. THEORIES OF CORPPORATE
GOVERNANCE

40. AGENCY THEORY
Agencytheorydefinestherelationshipbetweentheprincipals
(shareholders)andagents(Directorsandexecutivemanagement)
Theprincipalsofthefirmhirestheagentstoperformworkonhis
behalf.Theprincipalsdelegatestheworkofrunningthebusiness
tothedirectorsandmanagers
Themanagementexpectstoactandmakedecisionsinthebest
interestoftheprincipal.

41. THE AGENCY PROBLEM
Governanceproblemsareoftenconsideredtobecausedbythe
separationofpowerbetweentheownersofthecompany(the
shareholders)andthemanagementofthecompany(theboardof
directors).
Youshouldnotethatinmostprivatecompaniesthedirectorsare
alsotheshareholderssotheagencyproblemislessprevalent.
Duetotheirsizeandtheexpertiserequiredtorunthem,most
publiccompaniesemploydirectorstorunthecompanyonthe
shareholders’behalf.

42. THE AGENCY PROBLEM
Directorsbecomeagentsoftheshareholdersandtheyare
entrustedtoformcontractualagreementswiththirdparties.
Thisallowstheshareholderstostepawayfromthemanagementof
thecompanyandfocusontheirmaininterests-capitalgrowthof
theirsharesanddividendincomefromthem.

43. AGENCY PROBLEM
Managerial discretion -Business judgement
Managerial opportunism –self dealing
Duty of loyalty of management to firm

44. AGENCY PROBLEM DUTY OF LOYALTY OF
MANAGEMENT TO FIRM
oIncentive contracts that align management interests with investors
oAgency costs –monitoring and compliance
oShareholder actions-shareholder democracy, proxy fights, access
to the proxy ballot, derivative lawsuits

46. STEWARDSHIP THEORY
The steward theory states that a steward protects and maximizes shareholders wealth
through firm performance.
Steward are company executive and managers working for the shareholders, protects
and make profits for the shreholders.
The stewards are satisfied and motivated when the orgainsationalsuccess is attained.
It stresses on the position of employees to acts autonomously so that the shareholders’
returns are maximized.

47. STEWARDSHIP THEORY
Managers are trustworthy
Managers attach significant value to their own personal reputation
Managers are stewards of principal
Steward will do good for the organization
Controls will demotivate people.

50. STAKEHOLDERS
Thetermstakeholderisusedtodescribeanypersonororganisation
withaninterestinthecompany.Therearetwotypesofstakeholder
whichcanbeidentified.
Financialstakeholdersarethosewithafinancialrelationshipwith
theorganisation,inotherwords,shouldfinancialproblemsoccurtothe
organisationthenthesestakeholderswillsuffer.
Intereststakeholdersareinterestedinhowtheorganisation
behavesandareveryoftenmorepowerfulthanthefinancial
stakeholdersduetotheinfluencetheyhaveoverit

51. STAKEHOLDERS THEORY
Stakeholderstheoryincorporatetheaccountabilityofmanagement
totheboardrangeofstakeholders.itstatesthatmanagersinthe
organizationshaveanetworkofrelationshipstoserve–this
includessuppliers,employeesandbusinesspartners.
Thetheoryfocusesonmanagerialdecisionmakingandinterestof
allstakeholdershaveintrinsicvalue,nosetsofinterestsisassumed
todominatetheothers.

53. FINANCIAL AND INTEREST STAKEHOLDER

54. SOCIOLOGICAL THEORY
it focuses on
Board composition
Power and wealth distribution in the society
Power in few hands (Privileged class)
To promote equity and fairness

55. EFFECTIVE BOARD
By Willard

56. EFFECTIVE BOARD
Everycompanyshouldbeheadedbyaneffective
board,whichiscollectivelyresponsibleforthe
successofthecompany
Akeypointtobemadeaboutthesingleboardisthat
onaunitaryboard,everydirectorhasresponsibility
forthesuccessofthecompany.
Everydirectorhasanactiveroleinmanagingthe
company,notjustinsupervisingthecompany

57. PRINCIPLES SUPPORTING AN EFFECTIVE BOARD
Theboard'sroleistoprovideentrepreneurialleadershipofthe
companywithinaframeworkofprudentandeffectivecontrols.The
boardshould:
Setthecompany'sstrategicaims,
Ensurethatthenecessaryfinancialandhumanresources
areinplaceforthecompanytomeetitsobjectives,and
Reviewmanagementperformance
Theboardshouldsetthecompany'svaluesandstandardsand
ensurethatitsobligationstoitsshareholdersandotherare
understoodandmet
Alldirectorsmusttakedecisionsobjectivelyintheinterestsof
thecompany.

58. BOARD OF DIRECTORS

59. BOARD OF DIRECTORS
Assumeresponsibilityofleadershipandcontrolofthecorporate
Directandsupervisethecorporate’saffairs
Makedecisionsintheinterestsofthecorporate

60. BOARD OF DIRECTORS
Regular meetings
Active participation
Freedom to include items in agenda
Sufficient notice for board meetings
Access to advice and services of company secretary
and independent professional advice

61. BOARD OF DIRECTORS
Fullrecordofboard/committeeminutes,andavailable
forinspection
Independentnon-executivedirectorsshouldbepresent
atboardmeetingstodiscussmatterinvolvingconflictof
interest
Abstainfromvotingifconflictofinterestexists
Insurancecoverageinrespectoflegalactionagainst
directors

62. CHAIRPERSON AND CEO
Segregationofthemanagementoftheboardand
theday-to-daymanagementofthecorporate’s
business
Balanceofpoweratboardleveltoavoid
concentrationofpowerinasingleindividual

63. CHAIRPERSON AND CEO
SeparationofChairmanandCEO
DivisionofresponsibilitiesbetweenChairmanand
CEOclearlylaiddowninwriting

64. CHAIRPERSON
Provideleadershipfortheboard
Ensuretheboardworkseffectivelyanddischargesits
responsibilities
Ensuregoodcorporategovernancepracticesand
proceduresareinplace
Ensurealldirectorsareproperlybriefedonissuesarising
atboardmeeting
Responsibleforensuringappropriateinformation
receivedbydirectors

65. CHAIRPERSON
Encouragefullandactivecontributiontotheboard’saffair
Ensureeffectivecommunicationbetweenboardandthe
shareholders
Holdannualmeetingswithnon-executivedirectors
Ensureconstructiverelationshipsbetweenexecutiveand
non-executivedirectors

66. BOARD COMPOSITION
Balanceofskillsandexperiences
Balancedcompositionofexecutiveandnon-
executivedirectors
Non-executivedirectorsshouldbeofsufficient
calibre
Independentnon-executivedirectorsshouldbe
expresslyidentified
Listofdirectorsupdatedandtheirrespectiverole
andfunctionidentified

67. DIRECTORS

68. DIRECTORS
Thefirstdirectorsshallbeappointedinwritingbythe
subscribersofthememorandumofassociationora
majorityofthem.
Thenumberofthedirectors,notbeingfewerthan
three,shallbedeterminedbythesubscribersofthe
memorandumofassociationorbyamajorityofthem
or,failingsuchdetermination,shallbethenumberof
directorsappointedundertheprecedingarticles.

69. REQUIRED NUMBER OF DIRECTORS
Atleastfivedirectorsforcompanieswith1,000and
fewershareholderswithvotingrights;
Atleastsevendirectorsforcompanieswithmore
than1,000shareholderswithvotingrights;
Atleastninedirectorsforcompanieswithmorethan
10,000shareholderswithvotingrights.

70. WHO CAN BE A DIRECTOR?
Onlyindividualswith“fulldispositivecapacity”canbe
directors.
Directorsshouldhavethecapacitytoacquireand
exercisecivillawrightsbytheiractions,beabletocreate
civillawobligations,andfulfilltheserightsand
obligations;

71. WHO CAN BE A DIRECTOR?
Alegalentitycannotbeadirector,althoughan
individualwhohappenstobearepresentativeofa
legalentitycanbeelectedtotheSupervisoryBoard.
Inthiscase,theindividualelectedtotheSupervisory
Boardmayonlyserveinhiscapacityasadirectorand
notasarepresentativeofthelegalentity,i.e.hemust
actintheinterestofthecompanyonwhose
SupervisoryBoardheissittingandnotofthecompany
heisrepresenting

72. WHO CAN NOT BE A DIRECTOR?
RevisionCommissionmemberscannotbedirectors
CountingCommissionmemberscannotbedirectors
AnExecutiveBoardmemberortheGeneralDirector
ofCompanyAcanonlybeadirectorofCompanyB
aftertheSupervisoryBoardofCompanyAhasgiven
itsconsent.

73. APPOINTMENT, RE-ELECTION
AND REMOVAL OF DIRECTORS
Formal and transparent procedure for appointment
Succession plan
Re-election at regular intervals
Proper explanation for resignation/removal of
directors

74. APPOINTMENT, RE-ELECTION
AND REMOVAL OF DIRECTORS
Specifictermfornon-executivedirectors
Alldirectorssubjecttoretirementbyrotationat
regularinterval
Nominationcommitteeformedtomake
recommendationonappointmentofdirectorsand
successionplanningfordirectors,chairmanand
CEO

75. RESPONSIBILITIES OF
DIRECTORS
Keepabreastoftheresponsibilitiesasadirector
Exercisedutiesofcare,skill,integrityanddiligence
expected
Ensureproperunderstandingoftheoperation,business
andtheregulatoryrequirement
Contributesufficienttimeandresourcestoservethe
corporate
AttendAGMstosharetheviewsofshareholders

76. DISQUALIFICATION OF DIRECTORS
Theofficeofdirectorshallbevacatedifthedirector—
ceasestobeadirectorbyvirtueofsection144ofthe
Act;or
becomesbankruptormakesanyarrangementor
compositionwithhiscreditorsgenerally;or
becomesprohibitedordisqualifiedfrombeinga
directorbyreasonofanyordermadebyacompetent
court;or

77. DISQUALIFICATIONOFDIRECTORS
becomesofunsoundmind;or
resignshisofficebynoticeinwritingtothecompany;or
shallformorethansixmonthshavebeenabsent
withoutpermissionofthedirectorsfrommeetingsofthe
directorsheldduringthatperiod;or
isdirectlyorindirectlymateriallyinterestedinany
contractorproposedcontractwiththecompanyand
failstodeclarethenatureofhisinterestinmanner
requiredbytheAct.

78. TYPES OF DIRECTORS

79. EXECUTIVE DIRECTORS
Executivedirectorscanbedefinedasthose
thatalsoholdanexecutivepositioninthe
company,namelythatof:
TheGeneralDirector;
AnExecutiveBoardmember;or
AmanagerofthecompanywhoisnotanExecutive
Boardmember.

80. NON-EXECUTIVE DIRECTORS
Non-executivedirectorsareSupervisory
Boardmembersthatdonotholdanexecutive
positioninthecompany.

81. NON-EXECUTIVE DIRECTORS
Non-executivedirectorsshould:
Constructivelychallengeandhelpdevelopproposalson
strategy
Scrutinisetheperformanceofmanagementinmeeting
agreedgoalsandobjectives
Monitorthereportingofperformance
Satisfythemselvesontheintegrityoffinancialinformation
andthatfinancialcontrolsandsystemsofrisk
managementarerobustanddefensible

82. NON-EXECUTIVE DIRECTORS
Beresponsiblefordeterminingappropriatelevelsofremunerationof
executivedirectors
Haveprimerolesinappointing,andwherenecessaryremoving,
executivedirectors,andinsuccessionplanning
Active participation in board meetings
Bring in independent judgment
Take lead if conflict of interest arise
Serve on committees
Monitor the corporate’s performance in achieving pre-set goals

83. INFORMATION ACCESS BY
DIRECTORS
Directorsshouldbeprovidedwithaccurateandappropriate
informationinordertomakeinformeddecisionandto
dischargetheirresponsibilities

84. INFORMATION ACCESS BY DIRECTORS
Agendaandboardpapersshouldbesentinfullina
timelymannertodirectors
Informationsuppliedmustbecompleteandreliable
Directorsshouldhaveaccesstothesenior
managementforinformation
Informationsuppliedshouldbeofformandqualityto
facilitateinformeddecision

85. REMUNERATION OF DIRECTORS AND
SENIOR MANAGEMENT
Transparencyofdirectors’remunerationpolicy
Remunerationshouldbesufficientbutnotexcessive
Eachdirectornottoinvolveindecidinghis/herown
remuneration

86. REMUNERATION COMMITTEE
Remunerationcommitteetobeformed,mainlyfromnon-
executivedirectors
ConsultChairman/CEOifneeded
Accesstoprofessionaladvice,marketcomparable
information
Makerecommendationonpolicyandstructureof
remuneration
Determinespecificremunerationpackagesofall
executivedirectorsandseniormanagement

87. REMUNERATION COMMITTEE
Reviewandapproveperformance-basedremuneration
Reviewandapprovecompensationarrangementinconnection
withlossorterminationofoffice,dismissalorremovalofdirectors
formisconduct

89. RELATIONS WITH THE CEO AND THE
TOP MANAGEMENT
By Willard

90. RELATIONS WITH THE CEO AND THE TOP
MANAGEMENT
TheBoardofDirectorselectsandremovestheChief
ExecutiveOfficerandestablisheshis/herremuneration.
TheBoardofDirectorsdecidesonproposalssubmitted
bytheCEOinregardtoelectionoftopmanagers.
TheBoardsupervisestheactionandtheperformanceof
theCEOandthetopmanagement.

91. RELATIONS WITH THE CEO AND THE TOP
MANAGEMENT
TheBoardofDirectorsshouldpayaspecialattentionto
themannertheCEOandtopmanagersarehandling
relationsbetweenthecompanyanditsstakeholders.
TheBoardofDirectorsshouldnotinterferewiththe
managementinoperationalmatters.

92. RELATIONS WITH THE INDEPENDENT
AUDITORS

93. RELATIONS WITH THE INDEPENDENT AUDITORS
TheBoardofDirectors,representingtheowners,selects
andremovestheIndependentAuditors.Itshouldapprove
theauditplanandnegotiatethefees.

94. MANAGEMENT –THE CHIEF
EXECUTIVE OFFICER (CEO)

95. RESPONSIBILITIES
TheCEOisinchargeofcarryingouttheguidelines
establishedbytheBoardofDirectors.

96. NOMINATION OF TOP MANAGEMENT
TheCEOshouldnominatetopmanagementforthe
approvaloftheBoardofDirectors

97. DISCLOSURE
TheCEOshoulddiscloseallimportantinformation,whether
mandatoryorvoluntary,totheowners,theboardof
Directorsandthestakeholders.

98. THE ANNUAL REPORT
Theannualreportisthemostimportantandcomprehensive
informationonthecompany.Itshouldincludeeveryaspectof
itsbusinessactivitiesthroughoutthefiscalyear,ascompared
topreviousyears.
Itshouldtargetadiversepublic,includingowners,investors,
financialinstitutions,media,opinionmakers,suppliers,
communities,governmentdepartments,clients,staff,etc.

99. THE ANNUAL REPORT
Theannualreportshouldincludeanopeningaddressby
theChairmanoftheBoardortheCEO,amanagement
report,andasetoffinancialstatementswithnotesandthe
opinionsoftheindependentauditors.
Itistheresponsibilityofthemanagementtopreparethe
annualreport,buttheBoardofDirectorsshouldapproveit
andrecommendadoptionorrejectionbytheGeneral
Assembly.

100. COMPLIANCE

101. COMPLIANCE
CompliancewiththeCodeofBestPracticeofCorporate
Governance
Theannualreportshouldcontainastatementofcompliance
withtheCodeofBestPracticeofCorporateGovernance,
indicatingwhichpracticesthatthecompanyfollowed

102. TRANSPARENCY
Companyinformationshouldbebalancedandinclude
bothpositiveandnegativeaspects,soastoallowthe
readertocorrectlyevaluatethecompany.

103. INTERNATIONAL ACCOUNTING STANDARDS
Financialreportsshouldalsobepreparedaccordingto
IAS(InternationalAccountingStandards)orGAAP
(GenerallyAcceptedAccountingPrinciples)

104. AUDITING –THE
INDEPENDENT AUDITORS

105. THE INDEPENDENT AUDITORS
Anindependentauditisanimportanttoolforownersofall
typesofcompanies,sincetheauditors’mainroleisto
verifywhetherthefinancialstatementsadequatelyreflect
therealsituationofthecompany

106. RESPONSIBILITIES
TheIndependentAuditorsshouldgiveanopiniononthe
financialstatementstobesubmittedtotheownersand/or
themarket,inaccordancewithprofessionalstandardsand,
forthatpurpose,assessthecompany’sinternalcontrolsand
procedures.

107. AUDIT PLAN AND FEES
TheBoardofDirectors,assistedbyitsauditcommittee(if
inplace),shouldestablishtheauditplantogetherwiththe
IndependentAuditorsandreachanagreementonthe
fees.
Duringthefirstyear,theauditorsaregettingfamiliar
withthecompanyandwillnaturallydevotemanymore
workhoursthaninsubsequentyears.Thisshouldbe
reflectedintheirremuneration.

108. CONTRACT DURATION
Theauditorsshouldbecontractedforaspecificnumber
ofyearsinordertoensuretheindependenceoftheir
opinions.
Thecontractmayberenewedafteranevaluationof
independenceandperformance.

109. CONSULTING
Someindependentauditorsareofferingbothauditand
consultingwork.
TheBoardofDirectors,ortheAuditCommittee(ifin
place),shouldmakesurethatthereisaclearseparation
betweenauditingandconsulting.
Otherwise,itshouldeithercontractdifferentconsultants,
ordifferentIndependentAuditors.

110. RELATIONS
RelationswiththeOwners,theBoardofDirectorsand
theAuditCommitteeAccountability
TheIndependentAuditorsareselectedbytheBoardof
Directorsasrepresentativeoftheowners.
TheIndependentAuditorsarethereforeaccountable
directlyorindirectlytotheowners.

111. RELATIONS WITH THE CEO AND THE
MANAGEMENT
TheIndependentAuditors’relationswiththeCEO,the
Managementandothercompanyemployeesshouldbeat
arm’slengthandstrictlyprofessional.

112. ANNUAL STATEMENT OF INDEPENDENCE
TheIndependentAuditorsshouldannuallysubmitaletter
totheBoardofDirectors/AuditCommitteeconfirmingtheir
independenceasperrecommendationsofthe
IndependenceStandardsBoard.

114. ROLE OF ETHICS IN CORPORATE
GOVERNANCE

115. WHAT IS ETHICS?
•Ethicsisnotarecentdiscovery.Overthecenturies
philosophersintheirstrugglewithhumanbehaviorhave
developeddifferentapproachestoethics,eachleadingto
differentconclusion.
•Theword“Ethics”whichiscoinedfromtheLatinword‘Ethics’
andGreekword‘Ethikos’pertainstocharacter.
•Ethicsisthussaidtobethescienceofconduct.
•Asamatteroffactitdealswithcertainstandardofhuman
conductandmorals.

116. WHAT IS ETHICS?
Ethicsinvolvesadisciplinethatexaminesgoodorbad
practiceswithinthecontextofamoralduty.
Moralconductisbehaviorthatisrightorwrong.
Businessethicsincludepracticesandbehaviorsthatare
goodorbadinthecorporateworld.

117. BUSINESS ETHICS
Businessethicsreferstothemoralprincipleswhichshould
governbusinessactivities.
PurposeofBusinessEthicsisto
Regulateobjectives(ends)ofbusiness
Themeanstoachievetheobjective
Asetofmoralprincipleswhichshouldplayasignificantrolein
guidingtheconductofmanagersandemployeesintheoperation
ofenterprise.

118. BUSINESS ETHICS
ThisisThestudyofproperbusinesspoliciesandpractices
regardingcontroversialissuessuchas,corporate
governance,insidertrading,bribery,discrimination,
corporatesocialresponsibility.
Businessethicsareimplementedinordertoensurethata
certainrequiredleveloftrustexistsbetweenconsumers
andvariousformsofmarketparticipantswithbusinesses.

119. IMPORTANCE OF ETHICS IN BUSINESS
Attractcustomerstothefirm'sproducts,therebyboostingsales
andprofits.
Makeemployeeswanttostaywiththebusiness,reducelabour
turnoverandthereforeincreaseproductivity.
Attractmoreemployeeswantingtoworkforthebusiness,reduce
recruitmentcostsandenablethecompanytogetthemosttalented
employees.
Attractinvestorsandkeepthecompany'ssharepricehigh,
therebyprotectingthebusinessfromtakeover.

120. PURPOSE OF ETHICS
Ethics are the guiding principles.
Where the proposed business activity/ operation of the company
borders on the unknown, the company needs to apply the ethics
principle to decide on the project.
Ethics help make relationships mutually pleasant and productive-
absorbs a sense of community among members-a sense of
belongingness to society.

121. WHY CODE OF ETHICS?
To define acceptable behavior
To promote high standards of practice
To provide a benchmark for self-evaluation
To establish a framework for professional behavior and
responsibilities
As a vehicle for occupational identity
As a mark of occupational maturity

122. ETHICAL THEORIES
Where decisions are based…

123. UTILITARIANISM/ TELELOGICALTHEORY
GivenbyJeremyBentham&JohnStuartMill
Anactionisjudgedasgoodorrightonthebasisofits
consequences.
Endsofanactionjustifythemeanstakentoreachthoseends.
ExampleDrillingoilinlakeMalawiisgoodiftheresultshelpsthe
economyofMalawi.Thoughitwilldoharmtothefishandother
livingcreaturesupportedbythelake,buttheresultswilldogood
tothemajorityofMalawians.

124. UTILITARIANISM CONSEQUENTIALIST
PRINCIPLES
Anactionismorallyrightifitproducesthegreatestgoodforthe
greatestnumberofpeople.
Anactionismorallyrightifthenetbenefitsovercostsaregreater
forallaffected,comparedwiththenetbenefitsofallother
possiblechoices.
Anactionismorallyrightifitsbenefitsaregreatestforeach
individualandifthesebenefitsoverweighthecostsandbenefitsof
thealternatives.

125. PROBLEMS WITH UTILITARIANISM
No agreement about the definition of good for all.
No agreement about who decides, but rather their consequences.
Actions are not judged.
Cost benefit analysis of non monetary stakes i.e. Health & safety
Principle of justice and rights are ignored

126. UNIVERSALISM/ DEONTOLOGICAL
Given by Immanuel Kant
Regardless of consequences this approach is based upon universal
principles such as justice, rights, fairness, honesty and respect.
This approach believes in categorical imperative (The
moralprinciple that behavior should be determined by duty)

127. PARTS OF CATEGORICAL IMPERATIVE
Firstpartstatesthatapersonshouldchoosetoactifandonlyif
sheorhewouldbewillingtohaveeverypersonontheearth,inthe
samesituation,actexactlythesame.
Secondpartsaysapersonshouldactinawaythatrespectsand
treatsallothersinvolvedasendsaswellasmeanstoanend.

128. CRITICISM OF UNIVERSALISM
Imprecise and lack practical utility.
Hard to resolve conflicts of interest.
Difficult to take an absolute decision when limited resources, time
and conflicting values are factors.

129. ENRON CORPORATION A CASE OF BAD
CORPORATE GOVERNANCE
Enronwasformedin1985followingamergerbetweenHoustonNatural
GasandOmaha-basedInterNorth.KennethLay,whohadbeenthechief
executiveofficer(CEO)ofHoustonNaturalGas,becameEnron'sCEO
andchairman,andquicklyrebrandedEnronintoanenergytraderand
supplier.By1993,Enronhadsetupanumberoflimitedliabilityspecial
purposeentitiesthatallowedEnrontohideitsliabilitieswhilegrowingits
stockprice.InAugustof2001,shortlyafterthecompanyachieved$100
billioninrevenues,then-CEOJeffSkillingunexpectedlyresigned,
promptingWallStreettoquestionthehealthofthecompany.

130. COMMON ETHICAL ISSUES
FACING BUSINESSES IN 2021

131. SEXUAL HARASSMENT
Themostimportantstepinaddressingsexualharassmentasa
seriousethicaldilemmainbusinessistoimplementemployee
training.Startbymakingsureeverybodywhoworksforyouis
madeawareoftherules,thatthoserulesarepostedaround
theworkplace,andbyenforcingazero-tolerancepolicyfor
sexualharassment.
Ifsexualharassmentdoesoccuratabusiness,acknowledge
thecharge,investigatethecasethoroughly,respondwithcare,
andadministerdisciplineifneedbe.

132. DIVERSITY & DISCRIMINATION
Discriminationintheworkplaceisessentiallyanyaspectaboutthe
jobitselforthedutiesrelatedtoitwhicharetreateddifferently
withrespecttoanyofthecategorieslistedbelow.Ensuring
diversityandactivelypreventingdiscriminationarecriticalaspects
ofresolvingethicaldilemmasinbusiness.
Age,Disability,EqualPay/Compensation,Sex,Pregnancy,
NationalOrigin,Race/Color,Religion.

133. SOCIAL MEDIA
Oneofthemorecurrentethicalissuesinbusinessisthequestionof
employees’personalbehavioronsocialmediaoutsideofwork
hours.
Granted,there’sstillquitealargegrayareaofsituationsthat
mayormaynotmakeitethicallyjustifiabletofireanemployeefor
theirsocialmediaconduct.

134. SOCIAL MEDIA
Hereareafewquestionsyou’llwanttoconsiderwithregards
tothisethicaldilemmainbusiness:
Isitrighttopunishemployeesforcertaintypesofsocialmedia
posts?
Areyouobligatedtokeepanemployeewhoholdsoffensive
viewsandexpressesthemonline?
Shouldyoufilltheroleofamediatorifemployeesgetintoa
disagreementwitheachotheronsocialmedia?

135. HEALTH & SAFETY
Therearefewethicalproblemsinbusinessthataremoreserious
thanthehealth&safetyofyouremployeesandcustomers.
Besidestheobviousethicalimplicationsofpeoplegettinghurtor
sickwhileworkingforyourbusiness,there’salsothehugeriskto
yourbusiness’sfinancialstabilityandreputation.

136. WHAT CAN YOUR BUSINESS DO ABOUT HEALTH & SAFETY?
There’sbeenplentyofresearchdoneonthetopicofcombatingethical
problemsinbusinessrelatedtoworkplacehealth&safety.TheWorld
HealthOrganizationhasgathereddatatodevelopsomefundamental
adviceonhowtopromotesafetyandhealthintheworkplace:
Regularlyinspectyourworkplaceforanypotentialhazards
Trainyouremployeessothey’reeducatedonsafetyprotocols
Informemployeesthathelpisavailable
Recognizeandrewardhardwork
Createopportunitiesforemployeestogrow
Holdperiodicmeetingswithemployeestounderstandtheirneeds

137. ENVIRONMENTAL RESPONSIBILITY
Environmentalresponsibilityinbusinessmayseemlikeit’stargeted
atbigoilcompanies,lumberbusinesses,farming,andother
businessesthathaveamoredirectimpactontheenvironment.
Butthat’snotthecase!Evenifyourbusinessoperatesentirely
withintheconfinesofanofficebuilding,environmental
responsibilityisstillonthelistofethicalissuesinbusinessthatyou
shouldpaymindto.

138. WHAT CAN YOUR BUSINESS DO ABOUT ENVIRONMENTAL
RESPONSIBILITY?
Therearenumerouswaysthatyourbusinesscanaddressenvironmental
responsibility,someofwhichcanbeabitcostlyandothersthatyoucan
startimplementingtoday.Eitherwayyou’llwanttocreatean
environmentalmanagementsystem:
Assessforareastoimprove
Choosethewaystogogreen
DefinethegoalsforyourEMS
CreateanEMSteamtoimplementandoverseechanges

139. ACCOUNTING PRACTICES
Thisisoneofthemore‘classic’ethicalissuesinbusinessandcomes
alongwithsomeveryseriouslegalimplicationsaswell.
Manipulatingabusiness’sfinancialdatatomakethecompanylook
moresuccessful–alsoknownas“cookingthebooks”–isthemost
well-knownformofaccountingmisconduct(andisafederalcrime).
Beyondthelegalboundariesthatitcrosses,theethicaldilemmasin
businessrelatedtobadaccountingpracticescanputinnocent
peopleinharm’sway.

140. WHAT CAN YOUR BUSINESS DO ABOUT ACCOUNTING
PRACTICES?
Thesolutiontothisethicalissueinbusinessisquitesimple:
personallyreviewyourfinancialstatementsandreportstoensure
thatthey’rehonestandaccurate.
Ifthat’sgoingtobetootime-consuming,hireanaccountantyou
trusttorunthenumbers–eveniftheycostaprettypenny.

141. DATA PRIVACY
Thesedaysyou’llbehard-pressedtofindanyonewhodoesn’t
havesomesensitivedatastoreddigitally–includingyour
employees.
Infact,morethan80%ofpeopleownasmartphoneandthe
averagepersonusesroughly25applicationseverymonth.That’sa
tonofopportunitiesfordatatofallintothewronghands!

142. WHAT CAN YOUR BUSINESS DO ABOUT DATA PRIVACY?
Toavoidthereputationalandfinancialdamageofadatabreach,
you’llwanttodevelopasmallbusinesscybersecurityplanandputit
intoactionassoonaspossible.
Theethicalquestionsarisearoundthespecificaspectsthatmakeup
yourcybersecurityplan.
Businesseshavethelegalrighttolookintoyourbrowsinghistoryand
companyemailuse,andtheydo!

143. WHAT CAN YOUR BUSINESS DO ABOUT DATA PRIVACY?
Tobemoreprecise,whendoesmonitoringyouremployees’
behavioroncompanydevicescrossthelineandbecomeunethical?
Unlikesomeotherethicalproblemsinbusiness,thisonedoesn’t
havelegalrestrictions.

144. NEPOTISM
Nepotismreferstoaformoffavoritismforfamilymembersor
closefriends.
Whileitcandefinitelyintroduceissuesintotheworkplaceunder
certaincircumstances,nepotismisn’tinherentlyabadthingifthe
familymemberorfriendisfitforthepositionandgetsalongwell
withotheremployees.

145. WHAT CAN YOUR BUSINESS DO ABOUT NEPOTISM?
Besidesbeingverycarefulaboutwhoyoubringintoyourbusiness,
there’snotmuchyoucandotoeliminatethenegativeviewsthat
someemployeesmayhaveifandwhenyouhireafamilymember
orclosefriend.
Evenifyoursisafamilyownedbusiness,you’llwanttopayclose
attentiontotheratioofemployeesvs.friends/family.Afterall,as
theoldsayinggoes,“youcan’tbeabossandafriend”.