Corporate Governance – Important Facts

Improving corporate governance practices indicates better transparency is paramount but there are several tips and recommendations which are central in establishing a sound governance regime:

Set the right tone at the top

The main concerns for the board should include guiding, approving and overseeing the company’s strategic objectives, corporate values and policies. This could be achieved by developing a code of conduct for the company employees, management, and board members. The board should clearly define areas of responsibility, authority levels and reporting lines within the company.

Ensure adequate qualifications of board members

The board should have adequate knowledge and experience relevant to each of the material financial activities the company intends to pursue to enable effective governance and oversight of the company.

To ensure that non-executive directors have an understanding of the business, the board should provide business awareness sessions on a regular basis and each director should be provided with a tailored induction, training and development to be reviewed annually with the chairman. Similar arrangements should be made for executive board members in business areas other than those for which they have direct responsibility.

Appoint independent non-executive directors

To foster an independent element within the board, companies should consider having at least three independent, non-executives directors (larger companies may need more). Non-executive directors should be able to devote sufficient time to the role in order to assess risk and ask tough questions about strategy.

Improve efficiency through board evaluation

The board and board committees should have a performance evaluation with external facilitation of the process every three years. The evaluation statement should either be included as a dedicated section of the Chairman’s statement or as a separate section of the annual report, signed by the Chairman.

Manage conflicts of interest effectively

Companies should establish information barriers (“Chinese walls”) between the different departments so that decisions by staff in one department are made in ignorance of confidential information available to staff in other departments which might affect their decision. A good corporate governance practice is to put in place and disclose a conflicts of interest policy.

Track potential governance failures

There should be a policy in place setting out procedures for employees with concerns about the integrity of the company’s operations or its staff (so called whistle-blowing policy). The establishment of proper communication channels would allow company staff to discuss their concerns in confidence and without fear.

Conclusion

Good corporate governance is crucial for today’s complex and dynamic business environment to ensure long-term sustainability and trust of stakeholders. It should be practiced regularly within companies at board and executive management levels because corporate governance is like a muscle – it should be exercised or it will atrophy!

Have you objectively reviewed your company corporate governance recently?

Adapted from an article by Hany Abou-El-Fotouh, Director Internal Audit, Risk & Compliance at Baker Tilly Kuwait.