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Notes on corporate governance

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By Vivian C.H Madhlopa:

Corporate governance refers to the relationship among various participants in determining the direction and performance of organisations. It is also a form of strategic control in broader perspective. The primary participants in corporate governance are shareholders, management and board of directors.

In order to avoid creating an impression that this article is for organisations with share capital or only for the private sector, the word ‘shareholders’ will be effectively replaced with the word ‘owners.’ The implication of this change is that this article applies to any form of organisation, be it private or public.

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Organisation owner s employ a team of people known professionally as executive management who are paid to run the daily affairs of the organisation on the owners’ behalf.

The relationship between the owners and executive management is that of agency. In this agency, relationship the principals are the owners of the organisations while executive management are agents.

By its nature, agency theory is concerned with resolving problems that can occur in agency relationships. The goals of the owners of the organisations and those of executive management oftentimes conflict. It would also prove difficult or expensive for the owners of the organisations to verify what executive management is actually doing.

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Then there is the problem of risk sharing which arises when the owners of the organisations and executive management have different attitudes and preferences towards risk. For example, executive management may favour additional investment initiatives because, by their very nature, such initiatives would increase the size of the organisation and thus the level of executive management compensation.

At the same time, the real effect of such additional investment would be the erosion the organisation owners’ value because of failure to achieve some synergies. These are typical moments when executive management engage in actions that reflect their self – interest rather than the interest of owners.

The world is awash with stories of management members opting for an investment in a certain piece of expensive technology which the organisation does not even need, but simply just because the supplier of the technology has some special links with some of the members of executive management. The world is awash with stories of executive management members giving themselves hefty bonuses when in fact the organisation has not performed well.

However, these chaotic activities have their victims. As indicated earlier, owners of the organisation can either be private individuals or the general public, in case of public institutions. While the first direct victims of organisations which are not run well will be the owners who lose profits, the extent of suffering goes beyond the owners.

Organisations which are at the mercy of executive management fail to grow in a manner and trajectory that they would have done under normal circumstances. Their employees suffer from stagnant salaries and general poor conditions of service.

The organisations customers or clients suffer in terms of compromised product or service quality as well as including poor customer service which is a direct product disgruntled employees. Such organisations have ended up downsizing and getting rid of innocent non – managerial members of staff. In worst cases, some of these organisations have completely folded, resulting into massive joblessness.

For public organisations, also known as parastatals, those which are poorly run are characterised by substandard public goods and services (delivery to society) as well as corporate scandals involving gross financial mismanagement. There have been cases of monopoly parastatals which have always found themselves in dire financial hardships yet they are the sole suppliers of those product or service to the entire population.

This would have been understandable if such products or services were being supplied to the public for free. But the public pays an economic price for the products or services of the parastatal and you have the parastatal itself failing to financially float.

Many are incidents where executive management spend the organisations finances on expensive but unnecessary company cars. Many are incidents where executive management devote time and resources to unnecessary projects in which they have personal interest. Many are instances of executive management are involved in infighting of sorts over organisation resources trying to outdo each other in terms of who benefits most.

It is these types of challenges that make it imperative for organisation owners to add a layer between them and executive management in order to enhance corporate governance. This additional layer is what is known as board of directors whose role is to oversee the way the organisation is being run by executive management.

The board of directors has a fiduciary responsibility to ensure that executive management acts in the best interest of the owners in order to ensure long – term financial returns for the organisation as well as the trickling down of benefits to society in general.

The board of directors acts as an intermediary between owners and executive management. The presence of the board of directors does not by itself guarantee organisation success. However, there are more success factors which have to be borne in the mind of the owners of the organisations as they constitute the board.

The integrity of the persons elected into the board is non – negotiable. Otherwise, all the owners will have done after constituting the board will be an exercise in futility.

The board should have right expertise and experience that the executive management team would benefit from. If we look at an example of a power generating organisation, owners should consider board members with electrical engineering expertise, financial management expertise, legal expertise, expertise in procurement management expertise and expertise in human resources management and general administration expertise.

While the other expertise’s roles may look obvious, the human resource management and general administration expertise ensures that human resource and administration functions are fully aligned with the organisation’s strategic elements. Such an alignment is vital for organisation success.

Keep your board size manageable. In order for the board to be focused, keep it small. The level of connectedness among the board members is critical. When members of the board feel less connected with each other, decision making can become inefficient. Numerically, if five board members appear sufficient for your organisation, then do with five. But ensure you have an odd number.

Choose board members who can participate fully. Board members who are too busy with other commitments may not be a good choice. While they will be able to make themselves available for the scheduled board meetings, they will be doing so without having enough time to review the huge volumes of board papers prior to the meeting date.

Board members have a huge responsibility of overseeing management, verifying the firm’s financial statements, setting executive compensation and advising on strategic direction of the organisation. Therefore, persons whose plates are already full or those who are already on boards of several other organisations should be avoided.

Once the board is in place, it is important to have the members undergo some generic training as regards their duties. It is a must also that the board are reasonably familiarised with the business of the organisation of which they are its board. This will assist in terms of having an effective and efficient board which focusses all its energy on what it is supposed to be doing – its duties. The board discharges very critical duties.

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