To avoid mismanagement, good corporate governance is necessary to enable companies to operate
more efficiently, improve access to capital, mitigate risk, and safeguard stakeholders. It also makes
companies more accountable and transparent to investors to minimize expropriation and unfairness
for shareholders. Corporate governance makes companies more accountable and transparent to
investors and gives them the tools to respond to legitimate stakeholder concerns such as sustainable
environmental and social development. It contributes to development and increased access to
capital encourages new investments, boosts economic growth, and provides employment
opportunities. In this module, we discuss the importance of good corporate governance and the
general responsibilities that the board of directors has in its implementation.
After successful completion of this module, you should be able to:
➢ Understand the importance of good governance.
➢ Identify different responsibilities of the board of directors.
Importance of Good Governance
Employing good corporate governance helps the company to regulate risk and reduce the
opportunity for corruption. Often, scandals and fraud within a company become more likely and
directors and senior management do not have to comply with a formal governance code. The board
should meet regularly, retain control over the business, and monitor those in management, to enable
it to see how the company is functioning. Furthermore, a good corporate governance scheme will
make clear to every officer of the company, his or her duties and will encourage them to keep these
duties in mind when making decisions. The following are the fundamental reasons why
organizations should adopt good governance practices:
• To preserve and strengthen stakeholder confidence – nothing distracts an organization
more than having to deal with a disgruntled stakeholder group caused by a lack of
confidence in the governing body. On the positive side, a supportive stakeholder base can
generate benefits for the organization through social and emotional support, intangible but
very valuable attributes that all organizations should strive to achieve and sustain;
• To provide the foundation for a high-performing organization – the achievement of goals
and sustainable success requires input and support from all levels of an organization. The
Board, through good governance practices, provides the framework for planning,
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implementation and monitoring of performance and without a foundation to build high
performance upon, the achievement of this goal becomes problematic. Achievement of the
best performance and results possible, within existing capacity and capability, should be
an organization’s ongoing goal. Good governance should support management and staff to
be “the best they can be”; and
• To ensure the organization is well placed to respond to a changing external environment–
business today operates in an environment of constant change. Technology has created an
information age that has transformed our world and for a business to both survive and
remain profitable to enable it to fulfill its mission and achieve its vision, a system has to be
in place to assist an organization in identifying changes in both the external environment
and emerging trends. This process of understanding our changing world does not happen
by chance, it requires leadership, commitment, and resources from the governing body to
establish and maintain such a system within the organization. Change generally does not
happen “over-night”, it is there for all to see if they have in place a system for looking.
Governing bodies, as the ultimate leaders of an organization, should take prime
responsibility for this activity.
• To prevent and combat corruption – companies that are transparent, and have sound systems
that provide full disclosure of accounting and auditing procedures, allow transparency in
all business transactions, and provide an environment where corruption would certainly
fade out. Corporate Governance enables a corporation to compete more efficiently and
prevent fraud and malpractices within the organization.
• To improve access to capital – Several structural changes like the increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices
available to investors, increased competition, and increased risk exposure have made
monitoring the use of capital more complex thereby increasing the need of Good Corporate
Governance. Evidence indicates that well-governed companies receive higher market
valuations. The creditworthiness of a company can be trusted based on corporate
governance practices in the company.
Responsibilities of the Board of Directors
Corporate board directors face the continual challenge of aligning the interests of the board,
management, shareholders, and stakeholders. They respond to their duties and responsibilities with
full regard to transparency and accountability. It’s often said that corporate boards are generally
responsible for providing hindsight, oversight, insight, and foresight (4Sight). That’s a tall order in
today’s marketplace, which is complex and volatile. Good governance principles are fundamental
to the work that board directors do.
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Foresight
Foresight is about maintaining constant surveillance for possible opportunities and potential
threats, systematically exploring possible, plausible, probable, and preferred futures. As a result,
people will be better prepared for uncertainty and change.
Foresight requires an inward focus so people anticipate and notice problems, errors, and issues that
could grow into significant incidents—so encourage people to heed the warning signs, and watch
for ‘weak signals’ of impending problems. Embrace multiple viewpoints, and listen to diverse
voices. The board of directors shall actively anticipate and do its best to prepare for possible
scenarios. In line with this, they should establish long-term strategic objectives for the company.
Insight
Insight is about bringing people together to pause, step back, and see the big picture, helping them
consider the interactions between the various parts of the organization. This involves
systematically gathering information and evidence from diverse sources, to continually refine and
update the status of ongoing operations and the business environment being faced. In short, it is
about building situational awareness.
So search relentlessly for latent problems and errors, encourage people to report anomalies,
mistakes, and concerns—however minor—without fear of retribution, and provide confidence that
people’s concerns will be addressed. If required, re-frame or disrupt conventional thinking about
solutions by challenging the commonly accepted understanding of underlying problems. The board
of directors should interact with employees and shareholders to ensure that the problems faced
will be resolved in the best interests of stakeholders. They should encourage active
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participation and collaboration among employees by providing a work culture where
employees can feel free to share their thoughts about specific subject matters.
Oversight
Oversight refers to the actions taken to review and monitor organizations and their policies,
plans, programs, and projects, to ensure that they: (1) are achieving expected results; (2)
represent good value for money; and (3) are in compliance with applicable policies, laws,
regulations, and ethical standards. To achieve this, the organization must monitor its
performance and track how things are going, as well as understand the risks inherent in the
business model, including key assumptions underlying the continued viability of the
mission, together with the business’s risk appetite and tolerance of failure.
The board carries out oversight responsibility across the organization in areas such as
business and risk strategy, organization, financial soundness, and regulatory compliance.
Hindsight
Finally, Hindsight is about investing time in learning from experience and past events and
understanding that future performance can only be enhanced if the organization is willing and
able to change behavior as a result of experience.
Importantly, this goes beyond compiling statistics about events, because metrics rarely
promote learning by themselves. So avoid the classic ‘blame game’ and ask ‘Who’s fault
was it?’, but instead ask questions such as ‘Why did that person act the way that they did at
that time?’ This will better help uncover the situational and organizational factors that were
involved. The board of directors should be composed of people who are experienced or
experts in certain areas relative to the business. This will ensure that appropriate levels of
competencies can be expected from them when the need arises.