1

Chapter 2
PRINCIPLES OF
CORPORATE GOVERNANCE

Objective
2

To understand the governance structure.

To have a detailed understanding of the roles,

duties and responsibilities of directors.

1. Elements of Corporate
Governance

Good Board practices

Control Environment

Transparent disclosure

Well-defined shareholder rights

Board commitment

Good Board Practices

4

Clearly defined roles and authorities

Duties and responsibilities of Directors

understood

Board is well structured

Appropriate composition and mix of skills

Good Board procedures

5

Appropriate Board procedures

Director Remuneration in line with best

practice

Board self-evaluation and training conducted

Control Environment
6

Internal control procedures

Risk management framework present

Independent external auditor conducts audits

Independent audit committee established

Control Environment
7

Internal Audit Function

Compliance Function established

Transparent Disclosure
8

Financial Information disclosed

Non-Financial Information disclosed

Financials prepared according to

International Financial Reporting
Standards (IFRS)

Well-Defined
Shareholder Rights

Minority shareholder rights formalised

Well-organised shareholder meetings

conducted

Board Commitment
10

The Board discusses corporate governance

issues and has created a corporate governance
committee
The company has a corporate governance
champion
A corporate governance improvement plan has
been created
Appropriate resources are committed to
corporate governance initiatives

Board Commitment
11

Policies and procedures have been formalised

and distributed to relevant staff
A corporate governance code has been
developed
A code of ethics has been developed
The company is recognised as a corporate
governance leader

Other Entities
12

Corporate Governance applies to all types of

organisations not just companies in the
private sector but also in the not for profit and
public sectors

Examples are NGOs, schools, hospitals,

pension funds, state-owned enterprises

2. Directors and Board Structure

13

Shareholders
Board Structure
Unitary board or two tier (dual) board
structure
Board of Directors
Some key board roles
Key Board Committees

Shareholders
14

The term shareholders may seem quite

straightforward but shareholders may be
individuals, institutions, firms, or other entities
that own shares in a company.
In the UK and US there is a predominance of
institutional shareholders: for example,
pension funds, insurance companies, mutual
funds.

Stakeholders
15

The term stakeholders can encompass a

wide range of interests: it is any individual or
group on which the activities of the company
have an impact.

Board structure
16

Unitary board or two tier (dual) board structure.

Implications of board structure

Examples of unitary structure

Examples of two tier structure

Unitary Board
17

Is the traditional Anglo-American form of company.

A unitary board structure means that the
organisation is governed by a single decision
making body.
Is characterized by one single board comprising
both executive and non-executive directors.
The unitary board is responsible for all aspect of
the companys activities. The shareholders elect
the directors to the board at companys AGM.

Two tier (Dual) Board

18

A dual board system consists of a supervisory

board and executive board of management.
The supervisory board overseas the direction of
the business, whilst the management board is
responsible for the running of the business.
Key operation decisions are taken by a
management board, which is accountable to a
senior supervisory board.
The supervisory board exercises powers for
strategic decisions and non-operational
decisions, such as financing and dividend policy.

Two tier (Dual) Board

19

It comprises a board of non executives directors,

found.
A management board comprises of executive
managers, chaired by CEO
The chairman of the management board reports to
the chairman of the supervisory board.
Members of one board cannot be members of
another.
Shareholders appoint the members of the
supervisory board, whilst the supervisory board
appoints the members of management board.

20

One and two tier board

structures
One tier system: closer relationship and better

information flow
Two tier system: embodies a clearer, formal
separation between the supervisory body and
those being supervised

21

One and two tier board

structures

However whether the structure is one tier or

two tier, many codes show consensus on
issues relating to board structure, function,
roles, and responsibilities.
Provisions designed to enhance the distinction
between the roles of the supervisory and
managerial bodies, such as supervisory body
independence, separation of Chairman and
CEO roles, reliance on board committees.

Establishing The
Board

22

Step 1

Determine the boards authority, access to timely

information, independent advice and companys
management, board size and committees in
accordance with the companys purpose,
objectives and strategies.

Step 2

Develop roles and responsibilities and identify core

competencies and the mixed of skills required for the
board and its committees.

Establishing The
Board

23

Step 3

Step 4

Established a well-ordered process to elect and

appoint board and board committee members.

Develop key performance indicators for directors.

Step 5

Annual assessment of the effectiveness and

contribution of the board, its committees and
individuals directors

Role of the Board

24

The board is responsible for:

Determining the companys aim and the
strategies, plans and policies to achieve those
aims.
Monitoring progress in the achievement of
those aims.
Appointing a CEO with appropriate leadership
qualities

Role of the Board

25

Board must achieve three core objectives:

Provide superior strategic guidance to ensure the
companys growth and prosperity,
Ensure accountability of the company to its
stakeholders including shareholders, employees,
customers, suppliers, regulators and the community.
Ensure that a highly qualified executive team is
managing the company.

Decisions relating to board composition and structure

are importance in determining whether and to what
extend, the board is successful in achieving these
objectives

26

Principle Responsibilities of the

Board - MCCG
A board is required to explicitly assume
the six specific responsibility of the board
Reviewing and adopting a strategic plan
for the company.
Overseeing the conduct of the
companys business to evaluate whether
the business is being properly managed.
Identifying principal risks and ensuring
the implementation of appropriate
systems to manage these risks.

27

Principle Responsibilities of the

Board - MCCG

Succession planning, including appointing,

training, fixing the compensation of and where
appropriate, replacing senior management.
Developing and implementing an investor
relations programme or shareholder
communications policy for the company
Reviewing the adequacy and the integrity of
the companys internal control systems and
management information systems, including
systems and management for compliance with
applicable laws, regulations, rules, directives
and guidelines.

Directors Core Duties - MCCG

28

1.

Fiduciary duty

The duty to act in good faith

The duty to exercise power for a proper

purpose

Directors must act honestly in line with what they

believe to be the companys interest.

A director must at all times exercise his powers

for a proper purposes and in good faith, in the
best interest of the company.

The duty to exercise discretion properly

A director has wide latitude in exercising the

powers vested in him under articles of association
and he must exercise them properly.

Directors Core Duties

29

The duty to avoid conflict and self-dealing

2.

The improper use of a companys property, position,

corporate opportunity or competing with the company
by a director or an officer of a company is prohibited
unless with a consent of a general meeting

Duty to use reasonable care skill and diligence

A director is required to exercise reasonable care,

skill and diligence according to the knowledge, skill
and experience which may reasonably be expected
of a director having the same responsibilities, and
based on the fact , any additional knowledge, skill
and experience which the director in fact has.

30

Board Leadership and

Competencies
A balanced board avoids the risk of
being nominated by an individual or
a small group within management.
Wider skill sets will promote broadbased competencies with a plurality
of viewpoints that facilitate sound
and constructive decision-making.

Core Competencies
31

Personal
Qualities
Leadership
Strategic
Work ethics
Professionalis
m

Competencies
Industry
knowledge
Business
judgment
Expertise
Special skills

Independent Directors
32

A board is strengthened significantly

by a group of non-executive directors
who have no connection with the
company.
Independent directors are essential
for protecting the interests of minority
shareholders and can make significant
contributions to a companys decision
making.

Some key board roles

33

Chief Executive Officer (CEO)

Chairman

Senior Independent Director

Company Secretary

34

Chairman of BOD and

CEO

Every board should be headed by a chairman

who is able to discharge his duties effectively.

The chairman carry the authority of the board,

whilst CEO carry the authority delegated to
them by the board.

Chairman exercise their authority on behalf of

the board, CEO have personal authority in line
with the terms of their appointment.

Role of Chairman
35

Monitor the workings of the board, especially the

conduct of board meetings
Ensure that all relevant issues for the effective running
of companys business are on agenda.
Ensure that quality information to facilitate decision
making delivered to board members on a timely basis.
Encourage all directors to play an active role in board
activities.
Chair general meetings of shareholders.
Liaise with the CEO and the company secretary on the
agenda of board meetings.

Role of CEO
36

The role of CEO is seen as critical to the

performance of company. A CEO is expected
to provide:
Leadership
Strategic vision
High- level business judgment and wisdom.
The ability to meet immediate performance
targets without neglecting longer-term
growth opportunities of the company.

37

Senior Independent
Director

Act as "deputy" to the Chairman of the Board as

and when required.
Chair meetings with the other non-executive
directors (without the Chairman being present)
encouraging open dialogue, particularly
regarding the Chairman's performance.
Be available to shareholders in case they have
concerns which cannot, or should not, be
addressed by the Chairman or Executive
Directors.

38

Senior Independent
Director

Act on the results of any performance evaluation

of the Chairman.
Maintain sufficient contact with major
shareholders, when requested, to understand
their issues and concerns thereby assisting the
Board to develop a balanced understanding.
Attend the Company's AGM and be available for
discussion with shareholders.

Company Secretary
39

Must act in good faith and avoid conflict of

interest.
Responsibilities:
Facilitating the work of the board by ensuring
that the directors have all information they need
for the main board and board subcommittees.
Advise the boards via the chairman on all
governance matters.

Role of the Company

Secretary- MCCG
40

1.
2.
3.
4.

Implementation of corporate governance

Supports the board and chairman
Appointment a new directors
Compliance with filling and administrative
requirements.

Board Committees
41

Boards can delegate powers to committees but

such delegation should be subject to the
following:
Delegated authority in accordance with the
companys Articles of Association.
Clearly established terms of reference,
defining their responsibilities and authority,
which are approved by board.
The board must supervise its delegation.
The board must not merely adopt or rely on
the committees recommendations without
proper assessment and testing or challenging
the same.

Key Board Committees

42

The board may appoint various subcommittees:

Audit committee

Remuneration committee

Nomination committee

Risk committee

Audit Committee
43

The audit committee is fundamental to the

concept of corporate accountability and
sound governance.
An audit committee provides the board
with assurance of the quality and reliability
of financial information used by the board
and of the financial information issues
publicly by the company.

Audit Committee
44

The Audit Committees primary purpose is to:

Assist the Board in its oversight responsibilities to shareholders,
specifically with respect to:
1.

the integrity of the Companys financial statements,

the Companys compliance with legal and regulatory
requirements
the qualifications and independence of the independent
auditor and internal auditing function,
the performance of the Companys internal audit function
and independent auditor, and
the risks associated with the foregoing; and

Prepare the audit committee report required to be included in the

Companys annual proxy statement.
2.

Audit Committee
45

The Audit Committees primary duties and responsibilities

are to:
Monitor the integrity of the Companys internal controls
over financial reporting.
Monitor the qualifications, independence and performance
of the Companys independent auditor and internal auditing
function.
Provide a channel of communication among the Board, the
independent auditor, internal auditing function, management
and other concerned individuals.
As a committee of the Board of Directors, assist the Board
in meeting its fiduciary duties to shareholders and the
Company.

Remuneration committee
46

The remuneration committee is established to ensure

that remuneration arrangements support the strategic
aims of the business and enable the recruitment,
motivation and retention of senior executives while
complying with the requirements of regulatory and
governance bodies, satisfying the expectations of
shareholders and remaining consistent with the
expectations of the wider employee population.
Key Role:

Link rewards to both company and individual

performance
Align the interests of directors and shareholders in
promoting the companys progress

Remuneration committee
47

A remuneration committee will, in accordance with the

Codes provisions, commonly have delegated authority
to set executive pay. Its proposals will be discussed
with the chairman and/or chief executive, and there
may be a broad policy on directors pay agreed with
the board, but the responsibility will lie with the
committee, not the board.
By contrast, the nomination committee will usually
make recommendations to the full board and leave the
final decision to the board as a whole. Membership of
these committees is closely defined by the Code.

Nomination Committee
48

The nomination committee has two

responsibilities: identifying and nominating
directors and evaluating them on an annual basis.
The board of every company should appoint a
committee of directors composed exclusively of
non-executive directors, a majority of whom are
independent, with the responsibility for proposing
new nominees to the board and for assessing
directors on an ongoing basis.
The actual decision as to who should be
nominated should be the responsibility of the full
board after considering the recommendations of
such a committee (MCCG)

RISK COMMITTEE
49

The Risk Committee must assist the Boards in

assessing the different types of risk to which
the organization is exposed Management is
responsible for executing the organization's
risk management policy.
The Risk Committee must exercise oversight,
and must provide evidence about it. The
members of the committee must have direct
access to, and receive regular reports from
management.

50

Potential Ad Hoc
Committees

The following list is not intended to

suggest that all of these committees
should exist; it's ultimately up to the
organization to determine which
and coordinates major fundraising
Campaign
committeesPlans
should
exist and what they
event; sometimes a subcommittee of the
(nonprofit)
should do. Fundraising Committee

Develops and applies guidelines for ensuring

ethical behavior and resolving ethical conflicts
Plans and coordinates major events, such as
fundraising (nonprofits), team-building or planning;
Events (or Programs)
sometimes a subcommittee of the Fundraising
Committee
Conducts specific research and/or data gathering
Research
to make decisions about a current major function in
the organization
Ethics

Potential Ad Hoc Committees

51

Plans and coordinates major fundraising

Campaign
event; sometimes a subcommittee of
(nonprofit)
the Fundraising Committee
Develops and applies guidelines for
Ethics
ensuring ethical behavior and resolving
ethical conflicts
Plans and coordinates major events,
such as fundraising (nonprofits), teamEvents (or
building or planning; sometimes a
Programs)
subcommittee of the Fundraising
Committee
Conducts specific research and/or data
gathering to make decisions about a
Research

52

Non-executive directors
(NEDs)
Provide a control or counterweight to the

executive directors, that is, independent nonexecutive directors help provide balance on the
board
Contribution to the overall leadership and
development of the company

Independence of NEDs
53

Independence means that the non-executive

director is not:
Employed by the company
Former employee of company (within last 5
years)
Closely related to the company by economic or
other ties
Closely related to the directors or advisers of the
company (no family ties)
Serving on board for more than 10 years
Representing a significant shareholder

Concluding comments
54

Boards may be one tier (unitary) or two tier

(dual)
Under both types of system there is usually a
supervisory function and a managerial function
(a distinction more formalised in the two tier
system)
Role, duties, and responsibilities of directors
concern strategic decisions based on adequate
information, and with accountability to
shareholders (and other stakeholders as
appropriate).

55

Best Practice in Corporate

Governance

There is no single model of good corporate

governance.
Principles and best practices recommendations
in code of corporate governance (differences
between countries)