Corporate Governance & Ethics

A PAPER PRESENTED BY JESUNIYI YEMISI Bsc, MBA, ACIB @INTERNATIONAL EDUCATIONAL SEMINAR ACCRA GHANA.

What is Business Analysis?

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Learning ObjectivesIntroduction to Corporate Governance & Ethics

Understanding the Codes of Conducts.

Understanding Conflict of Interest Guidelines

Decoding the Whistle blowing process

Understanding Corporate Governance and Sustainability

INTRODUCTION

• The issues of corporate governance continue to attract considerable national and international attention.

• Corporate governance is about effective, transparent and accountable governance of affairs of an organization by its management and board.

• It is about a decision-making process that holds individuals accountable, encourages stakeholder participation and facilitates the flow of information.

INTRODUCTION

• The recent corporate crisis (Volkswagen, FIFA, etc) has further reinforced the message of governance of firms.

• Which is always aimed at protecting the interests of all stakeholders, which include shareholders, depositors, creditors, regulators and the public.

Definition of Corporate Governance

• Corporate governance refers to the broad range of policies and practices that stockholders, executive managers, and boards of directors use to;

I. manage themselves andII. fulfill their responsibilities to investors and other stakeholders. • Creating corporate governance standards of excellence and

filing shareholder resolutions , is one of the vehicle to influence board behavior as well as a broad range of social issues, e.g. employment ethics practices, environmental policies, and community involvement.

Business Ethics

• Business ethics is a form of applied ethics.

• It aims at inculcating a sense within a company’s employee population of how to conduct business responsibly.

• Some organizations choose to recast the concept of business ethics through such other terms as integrity, business practices or responsible business conduct.

Business Ethics

• The concept of Business Ethics can be described as framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company’s relationship with all stakeholders like a company’s financiers, customers, management, employees, government, and the community.

Business Ethics

The framework consists of;• explicit and implicit contracts between the company and the

stakeholders for distribution of responsibilities, rights, and rewards

• procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with their duties, privileges, and roles,

• procedures for proper supervision, control, and information-flows to serve as a system of checks-and-balances.

Codes of Conduct

• The cornerstone of any company’s ethics program is its set of values.

• The key mechanisms for articulating those values are ethics codes, also known as codes of conduct and standards of business.

• Ethics codes help create globally consistent codes which can be regarded as “fixed reference points” for employees.

• This code serves as a set of concrete statements about how the companies conduct business.

Conflict of Interest Guidelines

• A conflict of interest is often defined as any situation where an employee’s/board member’s personal interest, or those of a family member, close friend, business associate, corporation or partnership in which an employee/member holds a significant interest, or a person to whom the employee/member owes an obligation could influence the employee’s/member’s decisions and impair the employee’s/member’s ability to fulfill the business and social objectives of the company or represent the board fairly and without bias (Voien, 2000).

Conflict of Interest Guidelines

• Recent corporate scandals around the globe have brought to the forefront the importance of having strict conflict of interest standards in place.

• Employers use conflict of interest guidelines to inform new employees of potentially harmful situations, and to make it clear that employees are to avoid these clouded situations.

• New employees should fully understand the conduct and behavior that the employer expects from the outset.

• Communicating appropriate policies and procedures can help eliminate unacceptable behavior and work habits, and may be helpful if it becomes necessary to dismiss employees who cannot meet minimum standards.

Compliance /Ethics Officers

• It is important for employees to know who is in charge of handling potential ethical violations.

• A compliance/ethics officer manages a company’s ethics policies and ensures that every employee is well-informed of company values and standards.

• The officer ensures that employees who violate the codes of conduct are held accountable and disciplined for unethical behavior.

• They also maintain confidentiality when a whistle blower reports a possible violation.

Whistle Blowing Process

• Whistle blowers are people who often at great personal risk, choose to disclose information about improper government or industry actions that are harmful to public health, the environment, the economy or others (Dworkin & Near, 1992).

• It is important for companies to protect the rights of its employees and provide an anonymous open line of communication for those that have been exposed to violations of company policies or government laws.

Whistle Blowing Process

• The reporting steps should be clearly laid out for all employees and easily accessible should a sudden crisis occur.

• Companies should disclosed their whistle blowing process and make employees the priority by structuring the process to protect the whistle blower.

Difference in focus between early corporate governance and the current focus of corporate governance

• Two decades ago, the term corporate governance meant little to all but a handful of scholars and shareholders. Today, it is a mainstream concern — a staple of discussion in corporate boardrooms, academic roundtables, and policy think tanks worldwide.

• Several events are responsible for the heightened interest in corporate governance. During the wave of financial crises in 1998 in Russia, Asia, and Brazil, the behavior of the corporate sector affected entire economies, and deficiencies in corporate governance endangered the stability of the global financial system.

Difference in focus between early corporate governance and the current focus of corporate governance

• Just three years later, confidence in the corporate sector was sapped by corporate governance scandals in the United States and Europe that triggered some of the largest insolvencies in history.

• And, the most recent financial crisis has seen its share of corporate governance failures in financial institutions and corporations, leading to serious harm to the global economy, among other systemic consequences.

• In the aftermath of these events, economists, the corporate sector, and policymakers worldwide recognize the potential macroeconomic, distributional, and long-term consequences of weak corporate governance systems.

Difference in focus between early corporate governance and the current focus of corporate governance

• The crises, however, are manifestations of several structural factors and underscore why corporate governance has become even more central for economic development and society’s well-being.

• The private, market-based investment process is now much more important for most economies than it used to be; that process needs to be underpinned by better corporate governance.

• With the size of firms increasing and the role of financial intermediaries and institutional investors growing, the mobilization of capital has increasingly become one step removed from the principal-owner.

Why is Corporate Governance Important?

• Good Corporate Governance ensures that the business environment is fair and transparent and that companies can be held accountable for their actions.

• Conversely, weak Corporate Governance leads to waste, mismanagement, and corruption.

• It is also important to remember that although Corporate Governance has emerged as a way to manage modern joint stock corporations, it is equally significant in state-owned enterprises, cooperatives, and family businesses.

• Regardless of the type of venture, only Good Governance can deliver sustainable Good Business Performance.

The Benefits of Corporate Governance

Companies Compliance can benefit the owners and managers of companies and increase transparency and disclosure by:

• Improving access to capital and financial markets

• Providing help to survive in an increasingly competitive environment through mergers, acquisitions, partnerships, and risk reduction through asset diversification

• Providing an exit policy and ensure a smooth inter-generational transfer of wealth and divestment of family assets, as well as reducing the chance for conflicts of interest to arise which is very important for the investors.

The Benefits of Corporate Governance

• Also, adopting good Corporate Governance practices leads to a better system of internal control, thus leading to greater accountability and better profit margins.

• It will pave the way for possible future growth, diversification, or a sale, including the ability to attract equity investors – nationally and from abroad – as well as reduce the cost of loans/credit for corporations.

• Many businesses seeking new funds often find themselves obliged to undertake serious corporate governance reforms at a high cost and upon the demand of outsiders, often in a time of crisis.

• When the foundations are already in place investors and potential partners will have more confidence in investing in or expanding the company’s operations.

Corporate Governance: Shareholders Benefits

• Good corporate Governance can provide the proper incentives for the board and management to pursue objectives that are in the interest of the company and shareholders, as well as facilitate effective monitoring.

• Better Corporate Governance can also provide Shareholders with greater security on their investment. Better Corporate Governance also ensures that shareholders are sufficiently informed on decisions concerning fundamental issues like amendments of statutes or articles of incorporation, sale of assets, etc.

Corporate Governance: Benefits to National Ecomony

• Empirical evidence and research conducted in recent years supports the proposition that it pays to have good Corporate Governance.

• It was found out that more than 84% of the global institutional investors are willing to pay a premium for the shares of a well-governed company over one considered poorly governed but with a comparable financial record.

• The adoption of Corporate Governance principles - as good Corporate Governance practice has already shown in other markets - can also play a role in increasing the corporate value of companies.

Corporate Governance: Benefits to National Ecomony

“If a country does not have a reputation for strong corporategovernance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere. All enterprises in that country will suffer the consequences.” (Arthur Levitt, former chairman of the US Securities & Exchange Commission)

The Importance of Business Ethics to Best Corporate Governance Practice

An ethical approach is fundamental to sound business practices as it underpins the structures and systems used to ensure good governance and without it governance will fail.

Rule One• is that the business morality or ethic must permeate an organization from top to bottom and embrace all

stakeholders.

The Importance of Business Ethics to Best Corporate Governance Practice

• Thus leading to;

Long-term growth: sustainability comes from an ethical long-term vision which takes into account all stakeholders. Smaller but sustainable profits long-term must be better than higher but riskier short-lived profits.

• Cost and risk reduction: companies which recognize the importance of business ethics will need to spend less protecting themselves from internal and external behavioral risks, especially when supported by sound governance systems and independent research.

The Importance of Business Ethics to Best Corporate Governance Practice

• Anti-capitalist sentiment: the financial crisis marked another blow for the credibility of capitalism, with resentment towards bank bailouts at the cost of fundamental rights such as education and healthcare.

• Limited resources: the planet has finite resources but a growing population; without ethics, those resources are depleted for purely individual gain at huge cost both to current and future generations.

The Importance of Business Ethics to Best Corporate Governance Practice

Rule Two• Business should be targeting an appropriate goal which

properly reflects the expectations of the stakeholders.

The Importance of Business Ethics to Best Corporate Governance Practice

Rule Three• Good corporate governance requires that an effective

strategic management process be in place.

Third Golden Rule of Corporate governance

• By this we mean that the company is organized and run according to rules which means setting a goal which matches the duly considered expectations of the stakeholders.

• work out a feasible strategy to achieve that goal• put in place an organization which can carry out the strategy

and attain the goal• set up a control and reporting function to permit

management to drive the organization effectively and make necessary adjustments to the strategy or even the goal

• Anything less rigorous than the above strategic management definition will only achieve success by accident and will be vulnerable to all kinds of unexpected events.

Corporate Governance for Sustainability

•Corporate citizenship is becoming increasingly important to business sustainability. It provides benefits that are both tangible—such as reducing waste and increasing energy efficiency—and intangible—such as improved employee productivity.•Corporate citizenship can help to improve the bottom line. Many firms view corporate citizenship as little more than public relations, but a minority are beginning to recognize its potential. Leading companies have moved from a do-no-harm reactive mode to a more proactive approach.

Corporate Governance & Strategy

•There are many lessons to be learned from the leading companies. In particular, they build on four foundations: leadership at all levels, employee engagement, solid measurements and public-private partnerships. •All these draw a co-relationship between Corporate governance and Ethics• To be successful, corporate citizenship must be driven from the top. But leaders of this initiative are needed at all levels of the firm.•Significant companies find ways to channel the passion of their employees into corporate citizenship activities.

Corporate Governance & Strategy

•Such activities help firms to recruit better-quality workers and retain them.

•To convince senior executives that corporate citizenship is effective, the financial benefit must be clear.

• Companies must set ambitious goals, along with ways of keeping track of progress towards them.

•Companies have discovered that financial advantages can accrue from forming partnerships with nontraditional stakeholders.

Corporate Governance & Strategy

•These include local, state and federal government, as well as activist groups and non-governmental organizations e.g. Nigeria LNG’s Let’s Care initiatives to the IDP Camps in Nigeria

•The principles and values anchoring good corporate governance practices are central to building better companies and better societies.

•The business landscape has changed dramatically, particularly consumer priorities and the corporate governance framework that guides the way that companies conduct business nationally and globally

Corporate Governance & Strategy

Sustainability initiatives generate important financial value and are good for business.

Examples are many and varies:• Wal-Mart is saving upward of US$25 million in fuel costs by introducing efficiency standards in its truck fleet

• GE has saved US$100 million by introducing energy management measures;

• BP saved US$650 million over three years by reducing GHG emissions

Corporate Governance & Strategy

•SAP’s sustainability strategy produced 90 million Euros of direct savings to the company in the first year of the program

• Apple’s iTunes has sold over 8.5 billion songs, the equivalent of 85 million CDs that would have been made, shipped, and someday discarded in landfills

• Nine of the recent World Cup teams sponsored by Nike wore jersey’s made entirely from 13 million plastic bottles saved from going to landfills, sharing its intellectual property openly to accelerate sustainability practices.

CONCLUSION

• For any corporate organization to stay healthy in order to maintain sustainable growth it becomes imperative for organizational leaders to ensure:

• Regular reporting processes in place.• Corporate policies are complied with • Internal control processes are not compromised.• Performance management is the organizational

watch word.

INTRODUCTION TO B.A 36

CONCLUSION

The connection between Corporate Governance, Ethics and the long term sustainability of an organization cannot be over-emphasized.