RELATIONSHIP BETWEEN SHAREHOLDERS /OWNERS AND OTHER STAKEHOLDERS

Public
Corporation

Corporation
Stakeholders

Board of Shareholders/
Directors Owners

Executive External Auditors

Delegate Management
o f Directors Have
Shareholders
/Owners
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Operational Regulators
o f Directors
Management
 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
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o f Directors
 The board of directors and its audit committee oversee management and, in that role, are expected to protect the
shareholders’ right.
 However, it is important to recognize that management is part of the governance framework; management can
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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 the actions of the
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.
o 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 as response to society’s wishes to ensure that organizations, in their pursuit for their owner, 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.
o 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 compony 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 interests.
 The owners want disclosure from management that are accurate and objectively verifiable.
o For instance, management has a responsibility to provide financial reports, and in some cases, reports
on internal control effectiveness.
o 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:
o Choose which accounting principles best potray the economic substance of company transactions.
o Implement a system of internal control that assures completeness and accuracy in financial reporting.
o Ensure that the financial statements contain accurate and complete disclosure.

PARTIES INVOLVES IN CORPORATE GOVERNANCE:

THEIR RESPECTIVE BROAD ROLE AND SPECIFIC REPONSIBILITIES

 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 Overview of Responsibilites
1. Shareholders Broad Role:

Provide effective oversight through election f board members, approval of

major initiatives such as buying and selling stock, annual reports on
management compensation, from the board .

2. Board of directors Broad Role:

The major representative of of stockholders to ensure that the organization is

run according to the organization’s charter and that there is proper
accountability.

Specific activities include among others:

1. Overall operations
 Establishing the organization’s vision, mission, values and
ethical standards.
 Delegating an appropriate level of authority to
management.
 Demonstrating leadership.
 Assuming responsibility for the business relationship with
CEO including his or her appointment, succession,
performance renumeration and dismissal.
 Overseeing respects of the employment o the
management team including management renumeration,
performance and succession planning.
 Recommending auditors and new directors to
shareholders.
 Ensuring effective communication with shareholders other
stakeholders.
 Crisis management.
 Appointment of the CEO and corporate secretary.
2. Performance
 Ensuring the organization’s long-term viability and
enhancing the financial position.
 Formulating and overseeing implementation of corporate
safety.
  Approving the plan, budget and corporate policies.
 Agreeing key performance indicators (KPI’s)
 Monitoring /assessing assessment, performance of the
organization, the board itself, management and major
projects.
 Overseeing the risk management framework and
monitoring business risks.
 Monitoring developments in the industry and the
operating environment.
 Oversight of the organization, including uts control and
accountability systems.
 Approving and monitoring the progress of major capital
expenditure, capital management and acquisitions and
divestitures.
3. Compliance/ Legal performance
 Understanding and protecting the organization’s financial
position.
 Requiring and monitoring legal and regulatory compliance
including compliance with accounting standards, unfair
trading legislations, occupational health and safety and
environmental standards.
 Approving annual financial reports, annual reports and
other public documents/sensitive reports.
 Ensuring an effective system of internal controls exists and
is operating as expected.

3. Non-Executive or Broad Role:

Independent Directors
The same as the broad role of the entire board of directors.

Specific activities include among others:

 To understand the organization, its business, its operating

environment and its financial position.
 To apply expertise and skills in the organization’s best interests.
 To assists management to keep performance objectives at the top of
its agenda.
 To understand that his/her role is not to act a s auditor, nor to act as
member of the management team.
 To respect the collective, cabinet nature of the board’s decisions.
 To prepare for and attend board meetings.
 To seek information on a timely basis to ensure that he/she is in a
position to contribute to the discussion when a matter comes before
the board, or alert the chairman in advance to the need for further
information in relation to a particular matter, and
 To ask appropriate questions relative to operations.

4. Management Broad Role

Operations and accountability. Manage the organization effectively, provide

accurate and timely reports to shareholders and other stakeholders.

Specific activities include among others:

 Recommend the strategic direction and translate the strategic plan

into the operation of the business.
 Manage the company’s human, physical and financial resources to
 achieve the organization’s objectives—run the business.
 Assume day to day responsibility for the organization’s conformance
with relevant laws and regulations and its compliance framework.
 Develop, implement and manage the organization’s risk
management and internal control frameworks.
 Develop, implement and update policies and procedures.
 Be alert to relevant trends in the industry and the organization's
operating environment.
 Provide information to the board.
 Act as conduit between the board and the organization.
 Developing financial and other reports that meet public, stakeholder
and regulatory requirements.

5. Audit Committees of the Broad Role:

Board of Directors
Provide oversight of the internal and external audit function and the process of
preparing the annual financial statements as well as public reports on internal
control.

Specific activities include among others:

 Selecting the external audit firm

 Approving any non audit work performed by the audit firm.
 Selecting and/or approving the appointment of the Chief Audit
Executive (Internal Audit)
 Reviewing and approving the scope and busget of the internal audit
function.
 Discussing audit findings with internal auditor and external auditor
and advising the board (and management) on specific actions that
should be taken.t
6. Regulators Broad Role:
a. Board of
Accountancy Set accounting and auditing standards dictating underlying financial reporting
and auditing concepts, set the expectations of audit quality and accounting
quality.

Specific activities include among others:

 Conducting CPA licensure Board Examinations

 Approving accounting principles
 Approving auditing standards.
 Interpreting previously issued standards implementing quality control
processes to ensure audit quality.
 Educating members on audit and accounting requirements.

Broad Role:
b. Securities and
Exchange Ensure the accuracy, timeliness and fairness of public reporting of financial
Commission and other information for public companies.

Specific activities include among others:

 Reviewing filings with the SEC
 Interacting with the Financial Reporting Standards Council in setting
accounting standards.
 Specifying independence standards required of auditors that report
on public financial statements.
 Identify corporate frauds , investigate causes and suggest remedial
actions.
 7. External Auditors Broad Role:

Perform audits of company financial statements to ensure that

the statements are free if material misstatements including
misstatements that may be due to fraud.

Specific activities include among others:

 Audit of public company financial statements

 Audits of nonpublic company financial statements
 Other services such as tax or consulting.

8. Internal Auditors Broad Role:

Perform audits of companies for compliance with company

policies and laws, audits to evaluate the efficiency of operations,
and periodic evaluation and tests of controls.

Specific activities include among others:

 Reporting results and analyses to management including operations

management and audit committees.
 Evaluating internal controls.