Corporate Governance Codes and Practices19th October 2022 1 By indiafreenotes
Some evidence demonstrates that governance codes can be viewed as mechanisms facilitating governance convergence across countries. Such convergence is the result of several external forces among which the most powerful are globalization, market liberalization and influential foreign investors. Namely, globalization, the internalization of markets and deregulation has led to rapid changes in traditionally grounded models of corporate governance. These external forces ‘lead to pressure on national governments, institutions and companies, to conform to internationally accepted best practices of corporate governance at the international level’, thereby influencing the attractiveness of countries and companies for foreign investors. Countries that are more exposed to other national economic systems experience greater pressure to change governance practice not only to improve efficiency of domestic companies but also ‘to harmonize the national corporate governance system with international best practices’.
A principle of good governance is that stakeholders should be informed about the company’s activities regarding its plans in the future and any risks involved in its business strategies.
Transparency means openness by the company willing to provide clear information to shareholders and other stakeholders. For example, it refers to the openness to disclose financial performance figures which are truthful and accurate.
Disclosing materials concerning the organization’s performances and activities should be will timed and accurate to ensure that all investors have access to clear, factual information which reflects the financial, social and environmental position of the organization. A company should clarify the roles and responsibilities of the board and management to provide a level of accountability.
Transparency ensures that stakeholders can have confidence in the decision-making and management processes of a company.
Corporate accountability refers to the obligation and responsibility to provide an explanation or reason for the company’s actions and conduct such as:
- The board should present a balanced and understandable assessment of the company’s position and prospects.
- The board is responsible for determining the nature and extent of the significant risks the company is willing to take.
- The board should maintain sound risk management and internal control systems.
- The board should establish formal and transparent arrangements for corporate reporting and risk management and for maintaining an appropriate relationship with the company’s auditors.
The board should communicate with stakeholders at regular intervals giving a fair, balanced and explicit analysis of how the company is achieving its business purpose.
The Board of Directors are given authority to act on behalf of the company. They should therefore accept full responsibility for the powers that it is given and the authority that it exercises. The Board of Directors are responsible for overseeing the management of the business, affairs of the company, appointing the chief executive and monitoring the performance of the company. In doing so, it is required to act in the best interests of the company.
Accountability goes hand in hand with responsibility. The Board of Directors should be made accountable to the stakeholders for the way in which the company has carried out its responsibilities.
Eight Codes of Corporate Governance
All organizations should be headed by an effective board and all the responsibilities and accountabilities within the organisation should be clearly distinguished.
Structure of the Board and its Committees:
The board should consist of appropriate combination of executive directors, independent directors and non-independent non-executive directors to prevent one individual or a small group of individuals from dominating the board’s decision. The board’s size and scale should be in proportion with the level of diversity of the organisation. Appropriate board committees may be formed to assist the board in effective performances to fulfil the duties.
Director’s Appointment Procedure:
There should be a formal, rigorous and transparent process for various activities like appointments, election, re-election of directors etc. Members for the board should be appointment on merit basis fulfilling objective criteria which should include skills, knowledge, experience, and independence for the benefits of the company. The board should ensure that a formal, rigorous and transparent procedure be in place for planning the succession of all key officeholders.
Directors’ duties, remuneration and performance:
Directors should be aware of their legal duties. They must observe and foster high ethical standards and a strong ethical culture in their organisation. Each director must be able to give sufficient time to discharge his or her duties effectively. Conflicts of interest should be disclosed and managed.
The board of members is responsible for the governance of the organisation’s information, information technology and information security. The board, committees and individual directors should be supplied with informations in a timely manner and in an appropriate form and quality. The performances of board members should be evaluated and be held accountable to appropriate stakeholders. The board should be transparent, fair and consistent in determining the remuneration policy for directors and senior executives.
Risk Governance and Internal Control:
The board will be held responsible for risk governance. It must check the development and execution of a comprehensive and powerful system of risk management and also ensures the maintenance of a sound internal control system.
Reporting with Integrity:
The board must present a fair, balanced and understandable assessment of the performances and outlook of organization’s financial, environmental, social and governance position in its annual report and on its website.
All the organizations should consider having an effective and independent internal audit function that has the respect, confidence and cooperation of both the board and the management. The board should establish formal and transparent arrangements to appoint organisation’s auditors and maintain an appropriate relationship with them.
Relations with Shareholders and other key Stakeholders:
The board should be responsible for ensuring that an appropriate interchange and disclosure takes place between the organisation, its shareholders and other key stakeholders. The board should respect the interests of its shareholders and other key stakeholders within the context of its fundamental purpose.
Five Pillars of Good Corporate Governance Make Up the Corporate Governance Code
Much like the pillars of good corporate governance in the United States, the Corporate Governance Code in the United Kingdom comprises the pillars of leadership, effectiveness, accountability, remuneration and shareholder relationships.
The code requires companies to ensure to shareholders that they have an effective board of directors that’s capable of providing excellence in board leadership. Boards of directors are collectively responsible for the short- and long-term success of the corporations they serve.
Strong leadership requires corporations to have a clear division of the responsibilities between board directors and executives. Boards are responsible for strategic planning and oversight, and the executives are responsible for the day-to-day responsibilities of running the company. The board chair is responsible for the board’s leadership and the chair must ensure that the board operates as efficiently as possible in relation to all of their board duties and responsibilities.
Non-executive board directors should constructively challenge the board and help to develop successful proposals for strategy. The code expressly states that no single person should have total decision-making power on a board.
The code requires corporate boards to ensure that they have a composition that encompasses the appropriate balance of skills, experience, independence and knowledge of the company so that they’re able to perform their duties and responsibilities effectively:
- Boards are required to develop a formal, rigorous and transparent process for appointing new board directors.
- Before accepting a position on a board of directors, nominees should ensure that they have sufficient time to fulfill their board duties and responsibilities.
- Boards should avail their board directors of a comprehensive board orientation and onboarding process. In addition, boards should provide regular opportunities for board director training and education.
- Management should provide accurate information to the board that has the appropriate form and quality so that the board can fulfill its duties in a timely manner.
- Boards should also conduct rigorous annual self-evaluations for the board, individual directors and significant committees, with the goal of improving their performance. All board directors should be subject to regular elections as long as they continue to perform satisfactorily.
The board is wholly accountable for the actions and decisions of the company. The board should make annual disclosures to shareholders that represent a fair, accurate and comprehensive assessment of the corporation’s positions and corporate outlook.
The board is additionally responsible for assessing the nature and extent of risks it is willing to take to achieve its strategic plans. Boards should participate in sound risk management and internal control systems.
Boards should also establish formal procedures for corporate reporting, risk management reporting and internal control principles. Procedures should include details of relationships between the company and the internal and external auditors.
The United Kingdom favors remuneration packages that are designed to promote the long-term success of the company and that are directly aligned with performance. Remuneration should sufficiently challenge executives, be transparent and be rigorously applied.
The company should have a formal, transparent process for developing remuneration policies and setting remuneration packages. Directors shouldn’t be involved in setting their own pay.
Boards should utilize their annual general meetings to communicate and engage with investors on their objectives and strategic planning. The board should ensure that communications with shareholders are satisfactory.
These pillars are considered the minimum for the basics of good governance. Corporations are encouraged to add their own best practices as they develop them and learn from other corporations around the world.
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