CHAPTER THREE

CORPORATE
GOVERNANCE
 WHAT IS CORPORATE
GORVANANCE?
• The system or means by which organisations are directed and
controlled.
However, CG goes beyond just the above definition;
• Corporate governance refers to the structures and processes for the
direction and control of companies.
• Corporate governance concerns the relationships btwn. the Board of
Directors AND Shareholders (both controlling and minority
shreholders).
 WHY DO WE NEED CORPORATE
GORVANANCE

• Good Corporate Governance helps companies;

• Operate More Efficiently,

• Improve Access To Capital,
• Mitigate Risk And Safeguard Against Mismanagement.
• It ensures that adequate structures are put in place to align
management interests to that of s/holders.
• It makes companies more fair, accountable, responsible and
transparent to investors and gives them the tools to respond to
legitimate stakeholder concerns such as sustainable environmental and
social development.
 CORPORATE GOVERNANCE PRINCIPLES

• Several principles have been developed to regulate and guide

good corporate governance; the most pronounced are the
principles laid down by the Organisation of Economic
Corporation Development (OECD).
 THE UK SYSTEM OF CORPORATE
GOVERNANCE

• The UK has made its own principles on how to regulate corporate

governance through revision of the combined code and creating the
Principles of UK Corporate Governance Codes.
• The code contains both broad principles and more specific provisions and
other separate code.
• All listed companies should adopt, comply and explain any deviations from
the code.
 THE UK SYSTEM OF CORPORATE
GOVERNANCE

• The UK broad principles of the code:

• Leadership
• Every co. should be headed by an effective Board responsible for long term
success of the Co.
• Clear division of responsibilities of the board and executive functions
• The chairman is responsible for Leadership and ensure its effectiveness
• NEDs should constructively challenge and help develop proposals on strategy
Effectiveness
• All board members should have the appropriate skills, experience, knowledge of
the co.
 THE UK SYSTEM OF CORPORATE
GOVERNANCE

• The UK broad principles of the code:

• Effectiveness
• Formal, rigorous and transparent procedure for the appointment of new
directors to the board
• All board members should allocate sufficient time to the company
• All board members should receive induction on joining
• Provision of information in a form and quality appropriate enable them
discharge their duties diligently
• All board members should be subjected to Formal and rigorous annual
evaluation of their own performance
• All directors should be submitted for election at regular intervals
 THE UK SYSTEM OF CORPORATE
GOVERNANCE
• The UK broad principles of the code:
• Accountability
• The board should present a balanced and understandable assessment of
the company’s position and prospects
• Maintaining sound risk management and internal controls
• Establishing formal and transparent arrangement of corporate reporting
and risk management and internal control principles for maintaining
appropriate relationship with the co.’s auditor
Remuneration
• Levels of remuneration should be sufficient to attract retain and motivate
directors of the quality required to run the co. successfully.
• There must be a formal and transparent procedure of developing a policy
on executive remuneration. No deciding for self remuneration amount and
procedure.
 THE UK SYSTEM OF CORPORATE
GOVERNANCE

• The UK broad principles of the code:

• Communication with shareholders
• Dialogue with shareholders should be established based on
mutual understanding of objectives.
• The board should use the AGM to comm. with investors and
to encourage their participation
 THE UK SYSTEM OF CORPORATE
GOVERNANCE
SPECIFIC PROVISIONS
1. The position of the chairman and the chief executive officer(CEO) should not be held
by same person.
 This is ensure that no one person has unfettered power of the board and the
executive management(Exco)
2. The Number of Non Executive Directors should be at least half (1/2) the board or
should be equal the number of Executive Directors.
 This is to ensure that Executive Directors who are involved in the day to day
running of the business do not have dominance over board meetings discussions
and decisions
3. A Remuneration Committee should be set up comprising SPECIFICALLY Non Executive
Directors.
 Their role will be to set Executive Directors remuneration. Non Executive Directors
should only get sitting allowances (agreed) and not salaries.
 THE UK SYSTEM OF CORPORATE
GOVERNANCE
SPECIFIC PROVISIONS
4. The board should also have a nomination committee made SPECIFICALLY
Non Executive Directors
 to deal with all appointments and performance reviews and removal
of Executive management
5. The board should have an Audit committee comprising SPECIFICALLY
Non Executive Directors
The committee will deal all financial reporting issues, risk policies and
auditing issues within the company
 AUDIT COMMITTEE
• An Audit committee is a sub-committee of the board of
directors responsible for:
• Auditing,
• Risk Management And Internal Controls
• Financial Reporting Issues
• The committee SHOULD comprise of at least three (3) NEDs.
• One of whom must have current knowledge of accounting
training and experience in accountancy and auditing related
issues.
• Must have written terms of reference
• Must be provided with sufficient resources
ROLES OF THE AUDIT COMMITTEE
• Review financial & management reports & systems for
adequacy
• Recommend appointment & liaise with external auditors on
audit related issues
• Review internal audit structure/work
• Review effectiveness of internal control
• Review effectiveness of risk management policies/systems
• Review results of one-off investigations
 ADVANTAGES OF HAVING AN AUDIT
COMMITTEE
• Advantages:
• Increases public confidence in credibility and objectivity of
published financial information.
• Allows the executive directors to devote their attention to
management, not financial reporting issues which the
committee now handles
• Enhances independence of external auditors
• Assists the board in fulfilling its corporate governance
obligations e.g. risk magt. & internal control
• Enhances independence of internal auditors
DISADVANTAGES OF HAVING AN AUDIT
COMMITTEE
• Disadvantages:
• Costly to the company (sitting allowances)
• Committee may be resented by executive directors
due to its monitoring role
• NEDs on committee may not make meaningful
contributions due to lack of financial knowledge
 INTERNAL CONTROL AND CORPORATE
GOVERNANCE
MANAGEMENT RESPONSIBILITY
• Management has the responsibility for the stewardship of the
resources of shareholders.
• To safeguard these resources and run the business efficiently,
there is need for a good internal control system.
• Management has the responsibility to set up procedures of
internal controls to manage risk effectively.
They have the ultimate responsibility to:
1. Assess risk and design systems to manage assessed risk
2. Review systems implemented to manage risk and upgrade
them to meet objectives
3. Employ processes that facilitate risk review and management
(e.g. internal auditor)
INTERNAL CONTROL AND CORPORATE
GOVERNANCE
AUDITORS RESPONSIBILITY
• Auditors have no responsibility on internal controls or reporting
on all weaknesses in internal controls
• They have a responsibility to review work of management if
consistent with their findings during the course of the audit
 COMMUNICATION WITH THOSE CHARGED WITH
GOVERNANCE – ISA 260

• Auditors shall communicate specific matters to TCWG and ISA 260 provides
guidance to auditors in this area
• Those TCWG are those responsible with the strategic direction of the entity
(Board of Directors)
• Management are person(s) with the executive responsibility for the conduct
of the entity’s operations
• Matters to be communicated to TCWG include:
• Auditors responsibilities (FS audit, opinion)
• Overview of the Planned scope and timing of the audit
• Significant findings from the audit (accounting policies,
difficulties met, written representations, any other etc.
• Auditors independence (statement of independence, relations
between firm & entity, applicable safeguards)
• Auditor independence issues e.g. ethical threats & ethical
safeguards
 IMPORTANCE OF COMMUNICATING WITH THOSE
CHARGED WITH GOVERNANCE

Importance Of Communicating With Those Charged With Governance

• To ensure both auditors and management understand audit related
matters
• To facilitate the collection of other information relevant to the audit
• To point out the strengths and weaknesses of the systems of those
charged with governance so that it helps them improve or maintain
standards
• The comm. Process will be in the form, timing and expected general
content of comm. on a timely basis
 COMMUNICATION PROCESS

• The communication process shall be done on a timely

through:
• Engagement letter
• Planning meeting (entry meeting)
• Planning letter
• Report to management (letter of weaknesses)