Why corporate governance is the need of the hour

dubai - Shareholders appoint board of directors for smooth functioning of the organisation and achieving objectives

Governance is a set of policies and procedures for the proper running of a household/organisation/institution, implementation of such policies, monitoring and reporting. Good governance is important, more so in the corporate world.

Corporate governance is the mechanisms, processes and relations by which corporates are controlled and directed. It includes processes by which business objectives and goals are to be achieved in the light of regulatory, social and economic environment. Shareholders appoint board of directors for the smooth functioning of the organisation and achieving objectives. The board appoints an audit committee which looks into the transparency and accuracy of financial reporting and disclosures, robustness of the systems of internal audit and internal controls. However, the responsibility of governance remains with the board.

In the light of several accounting frauds, corporate governance has been made mandatory as part of regulatory requirement by different countries. For example:

. SEBI (Securities and Exchange Board of India) monitors and regulates corporate governance of listed companies in India through Clause 49.

. After the massive bankruptcies of Enron and Worldcom, Sarbanes Oxley Act, 2002 was enacted in the US to emphasise the importance of internal controls and corporate covernance.

. In the UK, the FRC (Financial Reporting Council) is responsible for promoting high quality corporate governance and reporting to foster investment. The UK Corporate Governance Code 2016 sets standards of good practice in relation to board leadership and effectiveness, remuneration, accountability and relations with shareholders.

. In Saudi Arabia in November 2006, the Capital Market Authority issued a corporate governance code in Arabic.

. In Japan, the Tokyo Stock Exchange and the Financial Services Agency established the Corporate Governance Code in June, 2015.

In spite of several regulations and guidelines, governance must be tackled with due diligence. There can be new scenarios to be dealt with every time. The management have to use their judgement in most practical cases.

Several points must be given due consideration to have robust corporate governance:

1. Selection and election of board members: The people who constitute the board should be have the necessary experience and skill. This is the greatest challenge since the organisation is defined by the people making it.

2. The independence of board members should not be compromised. The transactions with directors and related parties should be minimum and disclosed as per the disclosure requirements of various legislations and accounting policies.

3. Availability of independent directors: The compensation paid to independent directors to retain them has to be kept in mind.

4. Constitution of audit committee: All members should be competent. In many instances, the major shareholder is a part of the audit committee. This may defeat the very purpose of an audit committee.

5. Risk management: Identification and prioritisation of risks and measures to mitigate them are important. There might be instances where the management willingly accepts certain risks. A close watch should be kept on such risks.

6. People in the organisation must be aware of the importance of corporate governance. Trainings should be arranged and people should be taken into confidence that governance is for the good of all.    

7. Shareholders' participation and reporting methodology: Due consideration has to be given to how engaged shareholders are.

In addition to the above, there are many other factors in recent times like cybersecurity. We have seen several cyber breaches and an unprecedented increase in the number of cyber threats. Similarly, globalisation has its own risks as the company has to consider the legal framework, risks and exposures across the globe. In recent times, with the growth of digital marketing, social media, e-commerce and artificial intelligence, corporate governance also has to evolve and the board and audit committee have to consider the new risks which these new marketing tools bring.

The writer is director - advisory and consulting, Crowe Horwath - UAE. Views expressed are her own and do not reflect the newspaper's policy.