Corporate governance involves a set of relationships between a company’s management and its stakeholders. Corporate governance is also essential to a vibrant financial markets.
The Cytonn Corporate Governance Ranking (CGR) Report 2017, highlighted the strong correlation between corporate governance and returns on stocks of the listed companies.
The top 25 companies as rated in the report delivered an absolute return of approximately 37.8 per cent over the last five years compared to the bottom 25 companies, which delivered an absolute return of 5.1 per cent per annum over the the same period.
Here are eight steps that a company can take to enhance its Corporate Governance:
1. Structure, Composition and facilitation of the Board of Directors
The following can be considered:
• Board members need to have the right qualifications and competence.
• Independence- At least one third of the board members should be non-executive and independent, with a lead director for leadership.
• Diversity – Specific criteria include gender, nationality, regional balance and age.
• Board members need to continually disclose conflicts of interest as good practice.
• Continuous skills development and annual board evaluations.
• Timely dispatch of board papers before meetings for ample review.
2. Shareholder Rights
Investor protection and rights are imperative to ensuring that a company is able to compete effectively without shareholder activism. Information needs to flow to the shareholders especially with regard to access to annual reports and accounts as well as holding annual general meetings.
3. Stakeholder relations
Stakeholders include any group of persons who can either affect or be affected by the decisions of a company or its reputation. The board is encouraged to take a an inclusive approach when executing its strategy. The company needs to identify who those stakeholders are and develop policies on how to manage the specific relations.
4. Ethical Standards
The board is responsible for setting the standard of ethical behaviour that is expected of its members, managers and employees. It is therefore important to have a code of conduct in place. This way, decisions will comply with the legal requirements, the company’s core values and the legitimate
5. Good Corporate Citizenship
The company has the responsibility to act as a good corporate citizen of the community in which it conducts its day to day business. This can be done by having programmes that address social and environmental issues that impact the community for the long-term. There is no good measure of what an effective programme is as long as the leadership is selflessly committed to ensuring good corporate citizenship for social good.
6. Risk Management
Risk management is essentially identifying and analyzing any risks that are associated with the company and then taking the requisite steps to manage those risks. The Board is charged to ensure that proper systems are in place to enhance accountability and promote risk management. This can be done by having a competent Audit and Risk committee that reviews and oversees the Company’s risk frameworks.
Disclosure is a very powerful tool. It can attract investors to invest in the company, maintain confidence of the company in the markets as well as enhance shareholder protection. If the company’s disclosure is weak, it can encourage unethical practices by the Board.
or the company’s employees, leading to loss of investor confidence. For this reason, companies are encouraged to issue detailed annual reports touching on all activities being undertaken by the Company.
8. Corporate Governance framework
The final step is to ensure that the company has a framework, which it will use to gauge the level of Corporate Governance.
To ensure that corporate power is exercised in the best interest of the company and its stakeholders, a company can evaluate itself against best practice codes. \
In Kenya, one of those regulations is the Capital Markets- Code of Corporate Governance Practices for the Issuers of Securities to the Public 2015, which can serve as guideline to any company that wants to enhance its governance to local best practice standards.