Corporate Governance Dr. R. Jugurnath Director of Audit National Audit Office 8 April 2009 1
Corporate Governance Presentation Structure Part 1 1. Introduction and Definitions 2. Corporate Governance – What/Why? 3. Parastatal Bodies 4. Compliance & Enforcement 5. The Board – Role, Function & Composition 6. Main Actors - Parliament - Chairperson - GM/MD - Directors 1. Board Committee 2
Corporate Governance Presentation Structure Part 2 1. Accountability 2. Accounting 3. Risk Management 4. Auditing 5. Audit Committee 6. Communication & Disclosure 3
Corporate Governance Part 1 4
Introduction Governance Nowadays the terms \"governance\" and \"good governance\" are being increasingly used. Bad governance is being increasingly regarded as one of the root causes of all evil within our societies. Major donors and international financial institutions are increasingly basing their aid and loans on the condition that reforms that ensure \"good governance\" are undertaken. 5
Introduction (cont) Simply put \"governance\" means: the process of decision-making and the process by which decisions are implemented (or not implemented). 6
Introduction (cont) World Bank definition of Good governance Good governance is epitomized by predictable, open and enlightened policy- making, a bureaucracy imbued with a professional ethos acting in furtherance of the public good, the rule of law, transparent processes, and a strong civil society participating in public affairs. 7
Introduction (cont) • Corporate scandals in UK in 1990’s • Sir Adrian Cadbury • King Report, 1994 • Collapse of Enron and WorldCom • Collapse of Parmalat 8
Introduction (cont) Causes of Corporate Failures 1. Over-expansion, especially through acquisitions 2. Dominant CEO and other ‘star performers’ 3. Poor strategic decisions 9
Introduction (cont) Causes of Corporate Failures 1. Poor risk management 1. Weak internal controls; and most importantly 1. Ineffective boards and their audit committees 10
What is Corporate Governance? … a system by which corporations are directed and controlled (Report on Corporate Governance for Mauritius) 11
What is Corporate Governance? (cont) “ … the processes by which organizations are directed, controlled, and held to account.” (Australian National Audit Office, 1999). 12
What is Corporate Governance? (cont) • It is underpinned by the principles of openness, integrity and accountability • It is concerned with structures and processes for decision making, accountability, control and behaviour at the top of organisations 13
Why Corporate Governance? 1. Empirical evidence McKinsey Survey (June 2000) • Institutional investors indicated a willingness to pay a premium for the shares of a well- governed company over one poorly governed though with very good financial record 14
Why Corporate Governance? (cont) • By developing good governance practices, managers can potentially add significant shareholder value and other stakeholder benefits 1. Corporate governance is now widely recognised as an effective mechanism for encouraging efficiency and combating corruption 15
Why Corporate Governance? (cont) 1. Effective governance encourages the efficient use of resources, strengthen accountability and service delivery. 1. Effective governance is essential for maintaining confidence in organisations. 16
Why Corporate Governance? (cont) 1. It is now a “conditionality” of international aid donors (World Bank, European Union, African Development Bank, etc.) that recipients of aid should adhere to principles of good governance – • transparency • rule of law 17
Why Corporate Governance? (cont) • accountability, • participatory democracy, • strengthening of civil society, • capacity building, • control over corruption, and • respect for the environment 18
Why Corporate Governance? Cont) Conclusion Corporate governance codes have become a global phenomenon. Over the last few years, not less than 34 countries, including Mauritius, issued their first codes and nearly all other countries have revised their codes. 19
Corporate Governance The National Code Applies to the following business enterprises: • Companies listed on the official list of the Stock Exchange of Mauritius • Banks and non-banking financial institutions • Large Public Companies • SOEs, including statutory corporations and Parastatal Bodies • Large Private Companies 20
Parastatal Bodies • Definition An organization set up by an act of Parliament • Legal Framework - Set up with specific objectives and functions 21
Parastatal Bodies (cont) • Legal Framework (cont) - The Acts setting them establish the Board and delineate its functions and powers - Ministers retain some measure of control over delegated responsibilities for which they are accountable to the electorate 22
Parastatal Bodies (cont) • Administration - Managed and governed by a Board of Directors - Day to day running by a Chief Executive. - Ways financed are established in the Act. Most of them get a grant from the government 23
Parastatal Bodies (cont) • Accountability Because most of them obtain grants from the government they remain accountable vis-à-vis the Minister and Parliament. Consequence It is a statutory requirement that they should submit their annual reports and financial statements to the Minister to be tabled in the National Assembly. 24
Compliance and Enforcement • The Boards shall be responsible for the implementation and compliance of this Code • The extent of compliance with this Code shall be stated in the annual reports. Reasons for areas of non-compliance should given and alternative practice(s) adopted stated 25
Role and Function of the Board Focal point of corporate governance system and is ultimately accountable and responsible for the performance and affairs of the organization Main responsibilities • Determine organization’s purpose, strategy and values 26
Role and Function of the Board (cont) • Ensure procedures and practices are in place to protect organisation’s assets and reputation • Monitor and evaluate implementation of strategies, policies, performance criteria and business plans • Ensure that technologies and systems used are adequate 27
Role and Function of the Board (cont) • Identify key risk areas and key performance indicators • Ensure compliance with all relevant laws, regulations and codes of best practices • Reserve specific powers for itself, and delegate other related matters with the necessary written authority to management 28
Role and Function of the Chairperson (cont) • Primary function is to preside over the meetings of directors and to ensure the smooth running of the Board in the interests of good governance • Chairperson must bring objective leadership, independence of mind and intellectual honesty 29
Role and Function of the Chairperson (cont) • Encourage and ensure active participation of each director • Act as main link between Board and Management • Ensure that all relevant information are placed before the Board • Ensure that the minutes of meetings accurately record all decisions taken 30
Role and Function of the GM/MD The chief executive has line responsibility for all aspects of executive management. He or she is accountable to the Board for the ultimate performance of the organisation and implementation of the Board’s policy. 31
Role and Function of the GM/MD (cont) The chief executive is also responsible to the Board for ensuring that • the Board’s procedures are followed, and • all applicable statutes and regulations and other relevant statements of best practice are complied with. 32
Role and Function of the GM/MD (cont) The chief executive officer is also responsible for: • Providing leadership to senior managers and other employees • Planning, directing and controlling day to day operations • Implementing the decisions of the Board and government policy 33
Role and Function of the GM/MD (cont) • Developing business plans, operational plans and budgets for approval by the Board • Ensuring that procedures are followed, and that all applicable statutes and regulations and other relevant statements of best practice are complied with 34
Role and Function of the GM/MD (cont) • Ensuring that the organisation has and maintains an effective, efficient and transparent system of internal control, including internal audit and risk management; and • Ensuring the the quality of services provided by the organisation is appropriate 35
Role of the Directors • Must manage their duties as a director in the best interests of the organisation • Must devote time to diligently carry out their responsibilities • Must exercise good faith, honesty and integrity 36
Role of the Directors (cont) • Must never permit conflicts of interests and must disclose potential conflicts to the Board • Must exhibit the skill and care expected from persons of their competence and experience 37
Role of the Directors (cont) • Must be informed about the financial, industrial, environmental and social milieu in which the organisation operates • Must not divulge confidential information • Must insist that board papers are provided in time for them to make informed decisions 38
Role of the Directors (cont) • Must be prepared to express disagreement with Board members • Must regularly attend meetings and must acquire a broad knowledge of the business of the organisation • The representative of a Ministry may disclose to his Ministry only those matters where the Ministry have a legitimate interest, and the prior approval of the Board should be sought for such disclosures. 39
Board Committees • Mechanism to assist the Board and its directors through a more comprehensive evaluation of specific issues • Board committees should comprise members of the Board (exceptionally, specialists may be co-opted) • Board chairperson should not be the chairperson of a Board Committee 40
Board Committees (cont) • Board must determine their TOR, role and function • The TOR for each committee should cover: – Objectives, purpose and activities – Composition – Delegated authorities – Tenure – Reporting mechanism, etc 41
Board Committees (cont) • Committee chairperson should give, as a minimum a verbal summary of the committee’s deliberations at the next board meeting. • He must be prepared to answer appropriate and legitimate questions pertaining to the committee’s work to the Board. 42
Board Committees (cont) • All organisations should have, at a minimum, an Audit Committee and a Corporate Governance Committee • Certain specific issues may dictate the necessity and requirements for other committees • A secretary should be appointed for each committee and minutes of each meeting recorded 43
Corporate Governance Part 2 44
Accountability Definition Accountability is a process where a person or a group of people are required to • present an account of their activities and • the way in which they have or have not discharged their duties. 45
Dimensions of Accountability • Accountability for good administration Ensuring that there has been no maladministration • Accountability for efficiency Ensuring that there is no waste in the use of resources • Accountability for performance Ensuring whether performance achieved meets required standards 46
Dimensions of Accountability (cont) • Fiscal Accountability Concern with whether the funds were expended as intended and whether items purchased were used for the purpose • Consumer Accountability Ensuring that the organisation is responsive to and meets the needs of those to whom they are supposed to be providing a service 47
Accountability Principle Organisations are usually managed and governed by a Board of Directors and the day to day running is done by a Chief Executive. The Board is accountable to the stakeholders for Parastatal Bodies while the Management is accountable to the Board. 48
Statutory Requirements • Statutory Bodies (Accounts and Audit) Act, 1972 • Financial Reporting Council Act, 2004 49
Statutory Bodies (Accounts and Audit) Act, 1972 Section 7 Every statutory body shall, not later than 3 months after the end of every financial year, prepare an annual statement of its income and expenditure and a balance sheet, made up to the end of the financial year. 50
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