Definition:-Corporate governance can be defined as the system by which companies are directed and controlled. Its objective is often stated as being the enhancement of corporate profit and shareholder gain while having regard to the impact that this may have on other stakeholders of the company.
PRINCIPLE: – Every Company should have an effective Board for its lead and control. The responsibility of any long-term success is on the shoulder of the Board only.
BOARD’S ROLE: – To provide entrepreneurial leadership, establish a framework of prudent and effective controls, review management performance, identify the key stakeholder groups, set the company’s values and standards, and consider sustainability issues.
PRINCIPLE: – Board’s decision should be independent of the management and 10% shareholders.
INDEPENDENT DIRECTORS– An “independent” director is one who has no relationship with the company, its related corporations, its 10% shareholders or its officers that could interfere, or be reasonably perceived to interfere, with the exercise of the director’s independent business judgment with a view to the best interests of the company.
Independent Directors should make up at least one-third of the Board. But the independent directors should make up at least half of the composition of the Board, when:-
- the Chairman of the Board (the “Chairman”) and the chief executive officer (or equivalent) (the “CEO”) is the same person;
- the Chairman and the CEO are immediate family members;
- the Chairman is part of the management team; or
- the Chairman is not an independent director
NON-EXECUTIVE DIRECTORS: – It should constructively challenge and help develop proposals on strategy, review the performance of Management, and should meet regularly without the presence of Management.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER: – The Chairman and the CEO should be separate individuals in order to delegate their duties properly. However this is not mandatory, in case the Chairman and the CEO is the same person, immediate family members, part of the management team, or the Chairman is not an independent director then an independent director should be appointed as the lead independent director.
PRINCIPLE: – There should be a formal and transparent process for the appointment and re-appointment of the directors of the Board.
The board should establish a Nomination Committee which should make recommendations on the appointment and should expressly set out the duties and authorities of the directors.
There should exist an annual assessment system of the effectiveness of the Board, its committees and the contribution of each director.
PRINCIPLE: – There should be a formal and transparent procedure for developing policy on executive remuneration and for fixing the remuneration packages.
A Remuneration Committee (RC) should be appointed by the Board, which will comprise of at least three independent directors, the majority of whom, including the RC Chairman, should be independent. All of the members of the RC should be nonexecutive directors. The RC should review and recommend to the Board a general framework of remuneration for the Board and key management personnel.
ACCOUNTABILITY AND AUDIT:-
The Board should present a balanced and understandable assessment of the company’s performance, position and prospects.
PRINCIPLE:- The Board should establish an Audit Committee (AC) with written terms of reference which clearly set out its authority and duties.
The AC should comprise at least three directors, the majority of whom, including the AC Chairman, should be independent. All of the members of the AC should be non-executive directors. The AC should review the policy and arrangements by which staff of the company and any other persons may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters.
PRINCIPLE: – The Internal Auditor’s primary line of reporting should be to the AC Chairman. The Internal Auditor should carry out its function according to the standards set by nationally or internationally recognized professional bodies
SHAREHOLDR’S RIGHTS, RESPONSIBILITIES AND CONDUCT OF THEIR MEETINGS:-
Companies should treat all shareholders fairly and equitably, and should recognize, protect and facilitate the exercise of shareholders’ rights, and continually review and update such governance arrangements. Companies should encourage greater shareholder participation at general meetings of shareholders, and allow shareholders the opportunity to communicate their views on various matters affecting the company.
Corporate Governance requires a fine balance between governance and performance. There is probably no doubt that good corporate governance enhances corporate performance and that in turn increases shareholder value. Singapore Code is a unique one including family relations also, which is benefitting their system.