If investors and the transaction advisors who advise them have learnt anything from Enron and other companies closer to home whose problems came to light during the past few years, it’s that the quality of corporate governance and the effectiveness of the board of directors are critical to an organisation’s success. With the ink on the Public Entities Corporate Governance Act [Chapter 10:31], and related SEC rules to implement it, just beginning to dry, most investment advisers are beginning to give substantive thought to the consequences of good or bad corporate governance on any investment’s prospects and we are all beginning to use it as an investment-screening tool for all of our investor-clients.
By definition, corporate governance refers to the mechanisms through which corporations (whether private, publicly traded, or state-owned) and their management are governed. It involves a set of relationships between a company’s management, its board, its shareholders, and its other stakeholders, and also provides the structure through which the objectives and the monitoring of performance are determined. Corporate governance has far-reaching effects not only for the business itself but for the financial market as a whole.
In Zimbabwe, we have seen a lot of effort being placed in Corporate Governance issues since the banking crises of 2003-2004. In December 2003, various bankers were fingered for speculative activities and unethical behaviour and were directed to unwind their positions overnight. The RBZ issued stringent corporate governance directives and reform was seen in the banking industry. Failure to address corporate governance issues within your organisation is detrimental to you bottom line ultimately. Organisations that do not observe good corporate governance practices are at a high risk of:
Making poor investment decisions which benefit management only but are detrimental to the company’s shareholders;
Heightened exposure to legal, regulatory and reputational risks. For example, a company may be subject to an investigation by a regulatory authority due to a violation of laws and regulations. The company could also receive lawsuits from one of its stakeholders due to some form of impropriety. These could potentially damage the reputation of the company and lead to significant legal costs; and
Reducing the company’s ability to honor its debt obligations may become a hindrance. This exposes it to bankruptcy risk if its creditors decide to take legal action against it. (Reflect on the rise in the number of judicial management and liquidation cases in Zimbabwe over the last 10 years).
If your organisation is striving to improve governance, it needs to closely examine their internal business structures, processes, and projects. You could use the last 20 articles we have done to assist your review. As you put in place the necessary foundation for good corporate governance in your organisation ensure the following:
Roles and Responsibilities — There should be clarity with respect to individual responsibilities, the organisational expectations of executives and the role of executive and board committees. Refer to our article on the job analysis and job evaluation.
Structure and Composition — A board or executive committee must comprise the right people, with the right background, skills and experience, as the inclusion of an individual contributes to the collective capacity and effective functioning of the committee. Refer to our article on how the organisational structure relates to strategy.
Objective and Strategy — The board plays an important role in defining the organisation’s vision, purpose and strategies, helping the organisation to understand them and adapting the plans to implement them.
Risk Management — By implementing an appropriate risk and internal control supervision system, board committees can help increase the likelihood that the organisation meets its goals.
Organisational Performance — The board determines and evaluates appropriate performance categories and indicators for the organisation.
This article was compiled by Lisa-Rufaro Marowa, a transformational strategist and resource mobilisation consultant at Genesis Global Finance. The contents herein are for information purposes only, and GGF does not accept responsibility for any loss arising from the use of materials or opinions contained in this article. TO CONTACT GENESIS GLOBAL FINANCE:
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