 Governance, Business Ethics, Risk Management and Internal Control

 Corporate Governance

Corporate Governance

 A system of rules, policies, and practices that dictate how a company’s board of directors
manages and oversees the operations of a company;

 Includes principles of transparency, accountability, and security.

 Poor corporate governance, at best, leads to a company failing to achieve its stated goals, and,
at worst, can lead to the collapse of the company and significant financial losses for
shareholders.

A Key Principle of Corporate Governance

 Shareholder Primacy

 Perhaps one of the most important principles of corporate governance is the recognition
of shareholders. The recognition is two-fold. First, there is the basic recognition of the
importance of shareholders to any company – people who buy the company’s stock fund its
operations. Equity is one of the major sources of funding for businesses. Second, from the basic
recognition of shareholder importance follows the principle of responsibility to shareholders.

 The policy of allowing shareholders to elect a board of directors is critical. The board’s “prime
directive” is to be always seeking the best interests of shareholders. The board of directors hires
and oversees the executives who comprise the team that manages the day-to-day operations of
a company. This means that shareholders, effectively, have a direct say in how a company is run.

 Transparency

 Shareholder interest is a major part of corporate governance. Shareholders may reach out to
the members of the community who don’t necessarily hold an interest in the company but who
can nonetheless benefit from its goods or services.

 Reaching out to the members of the community encourages lines of communication that

promote company transparency. It means that all members of the community – those who are
directly or indirectly affected by the company – and members of the press get a clear sense of
the company’s goals, tactics, and how it is doing in general. Transparency means that anyone,
whether inside or outside the company, can choose to review and verify the company’s actions.
This fosters trust and is likely to encourage more individuals to patronize the company and
possibly become shareholders as well.

 CORPORATE GOVERNANCE PRINCIPLES


Corporate governance refers to all laws, regulations, codes and practices, which defines how
institution is administrated and inspected, determines rights and responsibilities of different
partners, attracts human and financial capital, makes institution work efficiently, provides
economic value to stack holders in the long turn while respecting the values of the community it
belong. For corporate governance, the management approach should be in accordance with the
following principles.

 Principal 1 : Governance structure:

All Organizations should be headed by an effective Board. responsibilities and
accountabilities within the organization should be clearly identified.

 Principal2 : The structure of the board and its committees :

The board should comprise independent minded directors. It should include an
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 taking. The board should be of a size and level of diversity
commensurate with the sophistication and scale of the organization. Appropriate board
committees may be formed to assist the board in the effective performance of its duties.

 Principal 3: Director appointment procedure:

There should be a formal, rigorous and transparent process for the appointment,
election, induction and re-election of directors. The search for board candidates should be
conducted, and appointments made, on merit, against objective criteria (to include skills,
knowledge, experience, and independence and with due regard for the benefits of diversity on
the board, including gender). The board should ensure that a formal, rigorous and transparent
procedure be in place for planning the succession of all key officeholders.

 Principal 4: Directors duties, remuneration and performance:

Directors should be aware of their legal duties. They should observe and foster high
ethical standards and a strong ethical culture in their organization. Each director must be able to
allocate sufficient time to discharge his or her duties effectively. Conflicts of interest should be
disclosed and managed. The board is responsible for the governance of the organization’s
information, information technology and information security. The board, committees and
individual directors should be supplied with information in a timely manner and in an
appropriate form and quality in order to perform to required standards. The board, committees
and individual directors should have their performance 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.

 Principal 5: Risk governance and internal control:

The board should be responsible for risk governance and should ensure that the
 organization develops and executes a comprehensive and robust system of risk management.
The board should ensure the maintenance of a sound internal control system

 Principal 6: Reporting and integrity:

The board should present a fair, balanced and understandable assessment of the
organization’s financial, environmental, social and governance position, performance and
outlook in its annual report and on its website.

 Principal 7: Audit:
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 and
maintain an appropriate relationship with the organization’s auditors.

 Principal 8: Relations with share holders and other key shareholder:

The board should be responsible for ensuring that an appropriate dialogue takes place among
the organization, 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.

 BENEFITS OF CORPORATE GOVERNANCE

 The Benefits to Shareholders

 Good CORPORATE GOVERNANCE can provide the proper incentives for the board and
management to pursue objectives that are in the interest of the company and shareholders, as
well as facilitate effective monitoring.

 Better CORPORATE GOVERNANCE can also provide Shareholders with greater security on their
investment.

 Better CORPORATE GOVERNANCE also ensures that shareholders are sufficiently informed on
decisions concerning fundamental issues like amendments of statutes or articles of
incorporation, sale of assets, etc.

FIVE GOLDEN RULES OF CORPORATE GOVERNANCE

 As we have iterated, this part of the report explains our view of best corporate governance
practice and the holistic approach by which we believe an organization can ensure that a state
of good corporate governance exists, or is brought into being if its existence is uncertain. It takes
the view that there is an over-riding moral dimension for running a business and that the
standard of governance will depend on the moral complexion of the operation.

 Five Golden Rules of best corporate governance practice is:

 Ethics: Clearly ethical practices applied to the business

  Align Business Goals: appropriate goals, arrived at through the creation of a suitable
stakeholder participation in decision making model

 Strategic management: an effective strategy process which incorporates stakeholder value

 Organization: an organization suitably structured to give effect to the good corporate

governance

 Reporting: reporting systems structured to provide transparency and accountability.

 Elements of Corporate Governance

 Direction

Providing overall direction for the business, its leaders and employees is a major part of
corporate governance. Making strategic decisions and discussing current and future concerns of the
company are tactics of this element. Company mission and vision statements stem from the governance
role of business. These statements provide a sense of purpose and illustrate primary motives for the
company's business activities.

 Oversight

The corporate governance role also provides some level of leadership oversight in companies. In
publicly owned companies, for instance, company boards monitor and evaluate decisions and actions of
CEOs and other executive officers. This ensures that leaders act in the best interest of shareholders and
other stakeholders. In smaller businesses, executive teams normally assume this role of preventing too
much power falling to one person. Without a governing board, though, this is more of a challenge.

 Stakeholder Relations

Corporate governance encompasses a business's accountability to each of its stakeholder

groups. Traditionally, this role has largely centered on investor relations and communication of company
decisions. Investors can often find contact information for board members on company websites. In the
early 21st century, there is more emphasis on balancing investor interests with concern for other
stakeholders, such as customers, employees and business partners. Governance web pages often
indicate specific things companies do to meet expectations of each.

 Corporate Citizenship

Another major evolution in the early 21st century is increased focus on corporate citizenship.
Companies commonly include a corporate citizenship statement on corporate governance or investor
relationships web pages. Such statements communicate the business's intent to act with social and
environmental responsibility. Philanthropy and other charitable contributions are among common
things noted within corporate citizenship statements. In general, governance includes an awareness that
companies should balance profit-generating activities with responsible policies and practices.

 Independence of Directors

If the directors of a company are also the owners and/or their family members, entrepreneurs
appointed by friends, or individuals who are involved in the daily management of the company, the
board is unlikely to be impartial. Having a majority of non executive independent directors will help
avoid prejudice and conflicts of interest between the board and the management. Independent
judgment is almost always in the best interest of the company.

 Effective Risk Management

Even if a company implements smart policy, competitors might still steal its customers,
unexpected disasters might cripple its operations and economy fluctuations might erode the buying
capabilities of its target market. Companies cannot avoid risk, so it is vital to implement effective
strategic risk management. For instance, a company’s management might decide to diversify operations
so the business can count on revenue from several different markets, rather than depend on just one.

 Solid Structure and Organization

A solid structure and organization within the company is essential to fluidly implementing and
dispersing corporate governance objectives. Companies will need to be able to monitor all of their
dealings, interactions, and transactions effectively. One of the fundamental objectives of corporate
governance is for companies to develop more transparent business practices, meaning a rigidly
structured framework through which to trace all such activity efficiently.

 Transparency

Managers sometimes keep their own counsel, limiting the information that filters down to
employees. But corporate transparency helps unify an organization. When employees understand
management’s strategies and are allowed to monitor the company’s financial performance, they
understand their roles within the company. Transparency is also important to the public, who tend not
to trust secretive corporations.

 Self-Evaluation

Mistakes will be made, no matter how well you manage your company. The key is to perform
regular self-evaluation to identify and mitigate brewing problems. Employee and customer surveys, for
example, can supply vital feedback about the effectiveness of the current policies. Hiring outside
consultants to analyze the operations also can help identify ways to improve a company’s efficiency and
performance.

• Corporate Governance Models

 There are many models of corporate governance in the world and there is no universal best
choice. The choice of the best model for a company depends on not only on its goals, motivations,
mission and business context but also on their economic, legal, political and social frameworks.
Nevertheless, there are 2 dominant governance models.

• The Anglo-American Model Of Corporate Governance

According to Ooghe and De Langhe, in Anglo-American countries, shareholders hold few

percentages of the total number of shares that are publicly traded and most shares are in the hands of
the agents of financial institutions. Moreover, in the USA and the UK, many companies are listed and
their shares are publicly traded which means that there is little personal contact with their shareholders.
Also, blockholders (owners of large blocks of companies’ shares) in the USA are less common than in
Europe meaning that the shareholders’ voting power is smaller and therefore it’s not so relevant for
companies to consider them.

Because of this greater focus on the interests of independent persons and individual
shareholders, this model is commonly referred to as the shareholders model. Hence, in countries where
most companies follow this governance model,  there is a higher individual power to hold shares and
make investments in the capital markets. As a consequence, there’s a higher dispersion of capital and
there isn’t a structured shareholder map. 

• Agency Or Stewardship Theory

“Broadly, agency theory is about the relationship between two parties, the principal (owner)
and the agent (manager). More specifically, it examines this relationship from a behavioral and a
structural perspective. The theory suggests that given the chance, agents will behave in a self-
interested manner, behavior which may conflict with the principal’s interest. As such, principals will
enact structural mechanisms that monitor the agent in order to curb the opportunistic behavior and
better align the parties’ interests.”

• This old but recent excerpt from a paper written in 1991 by Lex Donaldson and James H. Davis
provides a holistic view of this theory. Using business vocabulary, this theory means that
pursuing the interests of the shareholders (that own a company) may not be of the best interest
of the board of directors managing it.

• This happens because the success of managers is commonly measured according to short-term
goals whereas the shareholders are interested in the long-term performance of the company.
The capacity for managers to act according to their self-interest is because they are able to
influence strategic and investment decisions as they have more information available and are
better aware of the context of the company.

• The Continental European Model Of Corporate Governance

On the other hand, in Continental European countries such as Italy, France or Germany,
shareholders groups hold large percentages of the total number of shares that are publicly traded and
most shares are held by private companies, followed by financial institutions and in the last place by
private persons.

In these countries, fewer companies are publicly traded and people tend to invest their savings
on an individual basis, instead of betting on the capital market. This means that in this model there is a
high concentration of capital in a few shareholders that made big investments and took big risks too.

This model is often associated with the stakeholder theory, as it also assumes the importance of
companies having stakeholder engagement processes to strengthen the firms’ legitimacy to operate. 

Credit Controls

 Credit control is defined as the lending strategy that banks and financial institutions employ to
lend money to customers. The strategy emphasizes on lending money to customers who have
a good credit score or credit record.

 Customers with a good credit report generally have an excellent track record of repaying their
debt. This allows lenders to bring down the risk of defaults when issuing a new line of credit
to customers.

Understanding Credit Control

Credit control helps banks and financial institutions to recognize delinquent customers with a
poor credit report and ensure that such borrowers are extended a line of credit. This can eventually
help the lenders ensure to minimize the customers’ probability of not repaying their debt on time and
increase profitable lending.

10 key Considerations to Improve Your Credit Control Process

1. Create a clear credit control process

It’s crucial to implement a clear and co-ordinated procedure for credit control.

Late or delayed payments can put your business at risk of getting into bad debt, and it’s often
something that can easily be rectified with a quick nudge or reminder.

With credit control being of such importance, it’s essential that businesses establish a realistic time
table to ensure these payment delays don’t occur.

This timetable should include all the stages that need to be completed and adhered to by various
team members within your business.

Credit terms are vital; these should be set based upon how quickly you need to pay your
suppliers. After establishing these terms, you can then turn your attention to the stages involved in
chasing payments.

For example, your process may consist of the following:

  Establish the importance of prompt payment of invoices by politely reminding customers of
the payment schedule when the order is fulfilled

 Send reminder letters on the day the invoice becomes overdue

 Send subsequent letters every 7 days if the invoice remains overdue

 After a specific period of time, it might be useful to pass the debt over to a reliable,
commercial debt collection agency

 Simply recording this process ensures that all the relevant parties are aware of the terms and
conditions and, in addition, will help to reduce the problems associated with late payment
before they even occur.

2. Research your customers’ credit management

 Very often, this credit management tactic is often overlooked, partly because of the costs of
producing credit reports. However, some of these costs can be offset by establishing which of
your clients pose the greatest risk and focus your attention on researching these. Once you’ve
obtained all the necessary business information – such as full trading name, registration
number, addresses, and key contact details – you can easily check credit risk through a variety
of online services. Examining these reports can help you decide if that particular customer is
safe to do business with.

 While credit checking prospects isn’t 100% of a guarantee, the information will allow you to
make a more informed decision about the terms and conditions of their particular order.

3. Maintain a positive working relationship

 One of the best ways of achieving this is by making courtesy calls to confirm receipt of
paperwork or in advance of the invoice due date.

 This kind of courtesy in your procedure not only helps you to show that your business is
friendly and professional, it also gives your customer plenty of opportunities to explain their
situation.

4. Invoice quickly and accurately

The most basic way to improve your credit control procedures is by invoicing quickly and
accurately. There are some really simple tips that make help your business to increase the efficiency
of this process:

 Send invoices as soon as orders are fulfilled

 Email invoices rather than sending by post

 Ensure that the invoice is addressed to the right person

  Make sure that there are no mistakes in the invoices

After invoices have been sent, it’s worth confirming that the invoice has been received, as this
can help to solve potential problems at an early stage. You’ll also be able to find a reason to make
contact with your customer and build a rapport with them.

5. Encourage early payment

Giving incentives in payment is a further way of encouraging early payments.

In terms of incentives, you could offer early settlement discounts for those risky customers if
they pay within the stated credit terms. It can also sometimes be beneficial if certain customers pay
the majority of their invoice on time, rather than paying all of it late. If this sounds like it might have
an effect on your profit margins, these incentives can be incorporated into your pricing structure.

6. Compile a watch list and take action

Due to the problems that occur following late payment of invoices, you should never just
ignore them.

If a specific customer often pays late, it’s important that you monitor this. You could consider
adding them to a list of ‘companies to watch’. This will ensure that you undertake the necessary due
diligence when selling to them in the future. For example, for those companies on your watch list, you
could decide to only offer credit terms when they pay a deposit.

7. Forecast your cash flow and keep it up to date

It’s important to remember that forecasting is never a fully reliable source of information,
however, it will provide you with a rough outline of the expected revenue coming in as well as the
funds needed to clear any predicted debts.

By having a clear idea on whether the debt is going to exceed its credit terms, once this has
been established, it will be easier to make improvements or take action on already existing issues.
Once you have forecasted your cash flow, keep it up to date to ensure there are no surprises in the
coming months.

8. Trust your business instinct

It’s common for customers to provide excuses, and we have heard a lot of them. Clearly,
excuses cannot be discredited, but it’s within your rights to question their reasoning and ask them to
provide documentation if possible. If you are receiving statements from customers that may be
delaying the payment, again, question their reasoning. They may, for example, be informing you that
the invoice will be sent later that day, or even later that week. Request a specific time-frame, or even
call them back at a later time to chase up the delay.

9. Make it easier to get paid

 It’s easy for a customer to give the “the cheque is in the post” excuse, and the best way to
combat this is by researching alternate methods of payment you could offer them. You could offer the
following:

 Cheques

 BACS

 Credit/debit card

 Cash

This can give the customer options, and will greatly increase the percentage of invoices
paid on time.

10. Keep your terms and conditions clear and consistent

Ensure that when you begin working with a new customer you provide them with clear and
consistent terms. These should outline any or all terms regarding invoice payments to ensure it is
made as transparent as possible. Not only should the terms be clear for existing customers, but they
should also provide a basis to follow on your side of the process.

In order to keep your relationships with your customers amicable, actions need to be taking in
a consistent method from both parties. Ensure that your terms clearly state your tolerance policies on
late payments and the action that can be taken if a late payment issue occurs.

• The 4 Ps of Corporate Governance

• Corporate governance is a complex beast. Even those of us who have built their careers in fields
where governance is a necessity might not fully understand everything it encompasses.

• That’s why many governance experts break it down into four simple words:
People, Purpose, Process, and Performance.

• These are the Four Ps of Corporate Governance, the guiding philosophies behind why
governance exists and how it operates. Let’s have a look at exactly what each of the Ps means.

People

• People come first in the Four Ps because people exist on every side of the business equation.
They are the founders, the board, the stakeholder and consumer and impartial observer.

• People are the organizers who determine a purpose to work towards, develop a consistent
process to achieve it, evaluate their performance outcomes, and use those outcomes to grow
themselves and others as people.

• It’s cyclical, yes, but it has to start with people.

 Purpose

• Purpose is the next step. Every piece of governance exists for a purpose and to achieve a
purpose. The ‘for’ is the guiding principles of the organization. Their mission statement. Every
one of their policies and projects should exist to further this agenda.

• The ‘achieve’ is the small step on the road to completing that large goal. It might seem pointless
to type up minutes for a meeting that felt irrelevant, but those minutes and all the other
governance from that meeting contribute to making the business effective at achieving it’s
stated purpose.

Process

• Governance is the process by which people achieve their company’s purpose, and that process
is developed by analyzing performance. Processes are refined over time in order to consistently
achieve their purpose, and it’s always smart to take a critical eye to your governance processes.

• Can they be streamlined? Are they efficiently achieving their purpose? It takes work to make
your processes function, but once they do you will quickly see how they can help your company
grow.

Performance

• Performance analysis is a key skill in any industry. The ability to look at the results of a process
and determine whether it was successful (or successful enough), and then apply those findings
to the rest of your organization, is one of the primary functions of the governance process.

• Using these results to develop personal skills, both your own and your coworkers’, is how the
Four Ps cycle revolves endlessly. So take a critical eye to your governance: is it performing?

Six Pillars of Good Corporate Governance

1. Rules of law
•  Legislating and issuing regulations that are fair and acceptable to employees and society
•  Legally authorizing the power
•  Improving the process of drafting, issuing, and implementing the law with the consideration on
quality, fairness and quickness

2.   Moral integrity
•  Embracing the morality and cultural values
•  Encouraging the employees to conduct their duties and be role model for society
•  Encouraging the employees to be honest, sincere, disciplined, and diligent.

3.   Transparency
•  Building the trust within the organization or nation by encouraging transparent working process in
every division; disclosing information to employees, general public, and stakeholders to access the
information.
•  Providing the opportunities for employees, general public or stakeholders to check the correctness

4.   Participation
•  Providing the opportunities for employees, general public or stakeholders to understand the situation
•  Providing the opportunities for employees, general public or stakeholders to participate in solving the
organization problems by giving opinions or voting.

5.     Responsibility and accountability

•  Realizing that one has duties and responsibility for the society and environment
•  Concerning oneself with public problems
•  Enthusiastically solving the problems
•  Respecting the different opinions
•  Being responsible to one’s conduct
    

6. Effectiveness and Efficiency

•  Managing the limited resources for the optimal benefits for public and encouraging the employees
and public to be economical
•  Using the resources efficiently
•  Producing high quality goods and providing good service
•  Conserving the natural resources
•  Adding values