CHAPTER 2

CORPORATE GOVERNANCE RESPONSIBILITIES

AND ACCOUNTABILITIES
INTRODUCTION

Many of the characteristics of good governance described in Chapter 1

are relevant to both SME’s and large listed public companies. As ab
organization grows in size and influence, these issues become
increasingly important.
However, it is also important to recognize that good corporate
governance is based on principles underpinned by consensus and
continually developing notions of good practice. There are no absolute
rules which must be adopted by all organizations “There is no simple
universal formula for good governance”. Instead emphasis is many
localities, has been to encourage organizations to give appropriate
attention to the principles and adopt approaches which are tailored to
specific needs of an organization at a given point in time.
When corporate governance is discussed, it is often spoken of in terms of
a company’s corporate governance framework. The key elements within
an effective governance framework, and the issues relating to each
elements, are set out on the following pages and are relevant to
organizations large and small, in both the private and the public sectors.
The table provides a useful structure for any company to consider its
own approach to corporate governance and the matters which may assist
to achieve its strategic objectives.
Many of the matters listed may not be directly relevant in all situations
and some may not, in particular circumstances, be within the board’s
control, but it provides a useful context in which any organization can
consider its governance need so that they might be most appropriately
addressed.
The essence of any system of good corporate governance is to allow the
board and management the freedom to drive their organization forward
and to exercise that freedom within a framework of effective
accountability.
RELATIONSHIP BETWEEN SHAREHOLDERS/ OWNER(S)
AND OTHER STAKEHOLDERS

The relationship between the shareholders / owners, management and

others stakeholders in a corporation is shown below.
Governance starts with the shareholders/owners delegating
responsibilities through an elected board of directors to management
and, in turn, to operating units with oversight and assistance from
internal auditors. The board of directors and its audit committee oversee
management and, in that role, are expected to protect the shareholders’
rights. However, it is important to recognize that management is part of
the governance framework; management can influence who sits on the
board and the audit committee as well as other governance controls that
might be put into place.
In return for the responsibilities (and power) given to management and
the board, governance demands accountability back through the system
to the shareholders. However, the accountabilities do not extend only to
the shareholders. Companies also have responsibilities to other
stakeholders. Stakeholders can be anyone who is influenced, whether
directly or indirectly, by the actions of a company. Management and the
board have responsibilities to act within the laws of society and to meet
various requirements of creditors, employees and the stakeholders.
A broad group of stakeholders has an interest in the quality of corporate
governance because it has a relationship to economic performance and
the quality of financial reporting. For example, it is likely that many
employees have significant funds invested in pension plans. Those
pension plans are designed to protect the financial interests of those
employees in their retirement. We use the word society in the diagram
to indicate those broad interests. In a similar fashion, employees and
creditors have a vested interest in the organization and how it is
governed. Regulators are a response to society’s wishes to ensure that
organizations, in their pursuit of returns for their owners, act responsibly
and operate in compliance with relevant laws.
While shareholders / owners delegate responsibilities to various parties
within the corporation, they also require accountability as to how well
the resources that have been entrusted to management and the board
have been used. For example, the owners want accountability on such
things as:
► Financial performance
► Financial transparency – financial statements that are clear with full
disclosure and that reflect the underlying economics of the company.
► Stewardship, including how well the company protects and manages
the resources entrusted to it.
► Quality of internal control
► Composition of the board of directors and the nature of its activities,
including information on how well management incentive systems are
aligned with the shareholders’ best intersts.
The owners want disclosures from management that are accurate and
objectively verifiable. For instance, management has a responsibility to
provide financial reports, and in some cases, reports on internal control
effectiveness. Management has always had the primary responsibility for
the accuracy and completeness of an organization’s financial statements.
From a financial reporting perspective, it is management’s responsibility
to:
► Choose which accounting principles best portray the economic
substance of company transactions.
► Implement a system of internal control that assures completeness and
accuracy in financial reporting.
► Ensure that the financial statements contain accurate and complete
disclosure.
PARTIES INVOLVED IN CORPORATE GOVERNANCE: THEIR
RESPECTIVE BROAD ROLE AND SPECIFIC
RESPONSIBILITIES
Corporate governance and financial reporting reliability are receiving considerable attention from a number of parties including
regulators, standard setting bodies, the accounting profession, lawmakers and financial statement users.

PARTY
1. Shareholders
2. Board of Directors
3. Non-Executive or Independent Directos
4. Management
5. Audit Committees of the BOD
6. Regulators
a) BOA
b) SEC

7. External Auditors
8. Internal Auditors