3. Corporate GovernanceCorporate Governance
Corporate Governance is a relationship amongCorporate Governance is a relationship among
stakeholders that is used to determine andstakeholders that is used to determine and
control the strategic direction and performance ofcontrol the strategic direction and performance of
organizationsorganizations
Concerned with identifying ways to ensure thatConcerned with identifying ways to ensure that
strategic decisions are made effectivelystrategic decisions are made effectively
Used in corporations to establish order betweenUsed in corporations to establish order between
the firm’s owners and its top-level managersthe firm’s owners and its top-level managers
4. Corporate Governance PartiesCorporate Governance Parties
Shareholders – those that own theShareholders – those that own the
companycompany
Directors – Guardians of the Company’sDirectors – Guardians of the Company’s
assets for the Shareholdersassets for the Shareholders
Managers who use the Company’s assetsManagers who use the Company’s assets
5. Four PillarsFour Pillars
of Corporate Governanceof Corporate Governance
AccountabilityAccountability
FairnessFairness
TransparencyTransparency
IndependenceIndependence
6. AccountabilityAccountability
• Ensure that management is accountable to theEnsure that management is accountable to the
BoardBoard
• Ensure that the Board is accountable toEnsure that the Board is accountable to
shareholdersshareholders
FairnessFairness
• Protect Shareholders rightsProtect Shareholders rights
• Treat all shareholders including minorities,Treat all shareholders including minorities,
equitablyequitably
• Provide effective redress for violationsProvide effective redress for violations
7. TransparencyTransparency
• Ensure timely, accurate disclosure on allEnsure timely, accurate disclosure on all
material matters, including the financialmaterial matters, including the financial
situation, performance, ownership andsituation, performance, ownership and
corporate governancecorporate governance
IndependenceIndependence
• Procedures and structures are in place so as toProcedures and structures are in place so as to
minimise, or avoid completely conflicts ofminimise, or avoid completely conflicts of
interestinterest
• Independent Directors and Advisers i.e. freeIndependent Directors and Advisers i.e. free
from the influence of othersfrom the influence of others
8. Elements of Corporate GovernanceElements of Corporate Governance
Good Board practicesGood Board practices
Control EnvironmentControl Environment
Transparent disclosureTransparent disclosure
Well-defined shareholder rightsWell-defined shareholder rights
Board commitmentBoard commitment
9. Why Corporate Governance?Why Corporate Governance?
Better access to external financeBetter access to external finance
Lower costs of capital – interest rates onLower costs of capital – interest rates on
loansloans
Improved company performance –Improved company performance –
sustainabilitysustainability
Higher firm valuation and shareHigher firm valuation and share
performanceperformance
Reduced risk of corporate crisis andReduced risk of corporate crisis and
scandalsscandals
10. Why Corporate Governance?Why Corporate Governance?
In 2002, L Klapper and I Love from the WorldIn 2002, L Klapper and I Love from the World
Bank found evidence that improving a company’sBank found evidence that improving a company’s
corporate governance has proportionately greatercorporate governance has proportionately greater
impact in countries with weak legalimpact in countries with weak legal
environments.environments.
They have suggested that companies can partiallyThey have suggested that companies can partially
compensate for ineffective laws and enforcementcompensate for ineffective laws and enforcement
by establishing good corporate governance at theby establishing good corporate governance at the
company level and providing credible investorcompany level and providing credible investor
protectionprotection
11. ‘‘Independence’ as a conceptIndependence’ as a concept
An essential component of professionalism andAn essential component of professionalism and
professional behavior.professional behavior.
Refers to the avoidance of being undulyRefers to the avoidance of being unduly
influenced by a vested interest and to being freeinfluenced by a vested interest and to being free
from any constraints that would prevent a correctfrom any constraints that would prevent a correct
course of action being taken.course of action being taken.
Ability to make the correct and uncontaminatedAbility to make the correct and uncontaminated
decision on a given issue.decision on a given issue.
12. ExampleExample
If an auditor is a longstanding friend of a client,If an auditor is a longstanding friend of a client,
the auditor may not be sufficiently independent ofthe auditor may not be sufficiently independent of
the client. Given that it is an auditor’s job to actthe client. Given that it is an auditor’s job to act
on behalf of shareholders and not the client, theon behalf of shareholders and not the client, the
friendship with the client may compromise thefriendship with the client may compromise the
auditor’s ability to effectively represent theauditor’s ability to effectively represent the
interests of the shareholders. He may beinterests of the shareholders. He may be
influenced to give the benefit of a doubt to theinfluenced to give the benefit of a doubt to the
client when he should not be doing so.client when he should not be doing so.
13. IndependenceIndependence
In corporate governance, independence isIn corporate governance, independence is
therefore important in a number of contexts. It istherefore important in a number of contexts. It is
vital thatvital that external auditors are independent ofexternal auditors are independent of
their clientstheir clients, that, that internal auditors areinternal auditors are
independent of the colleagues they are auditingindependent of the colleagues they are auditing,,
and thatand that non-executive directors have a degree ofnon-executive directors have a degree of
independence from their executive colleagues onindependence from their executive colleagues on
a board.a board.
14. External Auditors to beExternal Auditors to be
independentindependent
Why?Why?
• Act on behalf of the owners of the business, normallyAct on behalf of the owners of the business, normally
the shareholder.the shareholder.
• Report on the financial statements prepared byReport on the financial statements prepared by
management for the benefit of shareholders.management for the benefit of shareholders.
If External Auditors are not independent:If External Auditors are not independent:
• their ability to form an objective opinion on the financialtheir ability to form an objective opinion on the financial
statements will be impaired.statements will be impaired.
• the owners of the business will not have confidence inthe owners of the business will not have confidence in
the audit reports that the audits issue.the audit reports that the audits issue.
15. Phar-MorPhar-Mor
declared bankrupt in the year 1995.declared bankrupt in the year 1995.
Factor related to independent contributing to theFactor related to independent contributing to the
fraud:fraud:
• Familiarity threatFamiliarity threat
Phar-Mor’s fraud team was made up of several former auditors,Phar-Mor’s fraud team was made up of several former auditors,
including at least one former auditor who had worked for Coopersincluding at least one former auditor who had worked for Coopers
on the Phar-Mor auditon the Phar-Mor audit
Coopers checks only 4 stores out of 129.Coopers checks only 4 stores out of 129.
they knew in advance which stores will be checked and what thethey knew in advance which stores will be checked and what the
auditors were looking forauditors were looking for
16. Internal auditors to beInternal auditors to be
independentindependent
Internal auditing is an advisory functionInternal auditing is an advisory function
Independence and objectivity of internal auditorsIndependence and objectivity of internal auditors
must exist in both appearance and in fact;must exist in both appearance and in fact;
otherwise the credibility of the internal auditingotherwise the credibility of the internal auditing
work product is jeopardized.work product is jeopardized.
Internal auditors have to be independent fromInternal auditors have to be independent from
the activities they audit so that they can evaluatethe activities they audit so that they can evaluate
them objectively.them objectively.
17. Non-Executive DirectorsNon-Executive Directors
THE CODE OF CORPORATE GOVERNANCE FORTHE CODE OF CORPORATE GOVERNANCE FOR
MAURITIUSMAURITIUS
Independent directorIndependent director - a director who is non-executive and who:- a director who is non-executive and who:
(a) is not a representative or member of the immediate family (spouse, child,(a) is not a representative or member of the immediate family (spouse, child,
parent, grandparent or grandchild) of a shareholder who has the ability to control orparent, grandparent or grandchild) of a shareholder who has the ability to control or
significantly influence the board or management. This would include any directorsignificantly influence the board or management. This would include any director
who is appointed to the board (by virtue of a shareholders’ agreement or other suchwho is appointed to the board (by virtue of a shareholders’ agreement or other such
agreement) at the instigation of a party with a substantial direct or indirectagreement) at the instigation of a party with a substantial direct or indirect
shareholding in the company;shareholding in the company;
(b) has not been employed by the company or the group of which the company(b) has not been employed by the company or the group of which the company
currently forms part, in any executive capacity for the preceding three financialcurrently forms part, in any executive capacity for the preceding three financial
years;years;
(c) is not a professional advisor to the company or the group other than in a director(c) is not a professional advisor to the company or the group other than in a director
capacity;capacity;
(d) is not a significant supplier to, debtor or creditor of, or customer of the company(d) is not a significant supplier to, debtor or creditor of, or customer of the company
or group, or does not have a significant influence in a group related company in anyor group, or does not have a significant influence in a group related company in any
one of the above roles;one of the above roles;
(e) has no significant contractual relationship with the company or group;(e) has no significant contractual relationship with the company or group;
(f) is free from any business or other relationship which could be seen to materially(f) is free from any business or other relationship which could be seen to materially
impede the individual’s capacity to act in an independent manner;impede the individual’s capacity to act in an independent manner;
(g) in the case of banks, the Bank of Mauritius’ definition of independent applies.(g) in the case of banks, the Bank of Mauritius’ definition of independent applies.
18. Non-Executive DirectorsNon-Executive Directors
The primary purpose of a NED is to bringThe primary purpose of a NED is to bring
objective scrutiny on behalf of the shareholdersobjective scrutiny on behalf of the shareholders
Independence, when it comes to boards, allows aIndependence, when it comes to boards, allows a
director to be objective and evaluate thedirector to be objective and evaluate the
performance and well being of the companyperformance and well being of the company
without any conflict of interest or the unduewithout any conflict of interest or the undue
influence of interested parties.influence of interested parties.
Having a majority of independent directors (or atHaving a majority of independent directors (or at
least a critical mass) allows outside directors toleast a critical mass) allows outside directors to
feel they have support in raising contrary pointsfeel they have support in raising contrary points
of view.of view.
19. Non-Executive DirectorsNon-Executive Directors
A board with a majority of independent directors,A board with a majority of independent directors,
can bring expertise and objectivity whichcan bring expertise and objectivity which
• Assures owners that the company is being run legally,Assures owners that the company is being run legally,
ethically, effectively and in the best interest of itsethically, effectively and in the best interest of its
ownersowners
• And that they have “representatives” who are objectiveAnd that they have “representatives” who are objective
and have no “ax to grind”and have no “ax to grind”
• Who will look at issues with no vested interest orWho will look at issues with no vested interest or
“hidden agendas.”“hidden agendas.”
20. Non-Executive Directors inNon-Executive Directors in
Family BusinessFamily Business
For a family business, independence is even moreFor a family business, independence is even more
important. The independent director can helpimportant. The independent director can help
with issues where the family tends to lackswith issues where the family tends to lacks
objectivity and independence such as:objectivity and independence such as:
• Hiring, firing, promoting, and compensating familyHiring, firing, promoting, and compensating family
members as well as determining succession plans;members as well as determining succession plans;
• Bringing expertise and perspective to a business whichBringing expertise and perspective to a business which
is run on tradition and sentimental loyalty (“this is theis run on tradition and sentimental loyalty (“this is the
way dad did it”) rather than by current best businessway dad did it”) rather than by current best business
practices;practices;
• Acting as a neutral bridge between family owners andActing as a neutral bridge between family owners and
non-family managers.non-family managers.
21. Non-Executive DirectorsNon-Executive Directors
Some of the main arguments for havingSome of the main arguments for having
independent directors are the following:independent directors are the following:
• Selected to provide specialist skills;Selected to provide specialist skills;
• Add diversity to the board, thereby modifying theAdd diversity to the board, thereby modifying the
culture of a unitary Board;culture of a unitary Board;
• Provide independent appraisal – separation of ownershipProvide independent appraisal – separation of ownership
and control;and control;
• Corporate experience and leadership qualities;Corporate experience and leadership qualities;
• Provide expertise, explicitly to support the CEO;Provide expertise, explicitly to support the CEO;
• To provide leadership and vision; andTo provide leadership and vision; and
• Status and credibility of the governance model – toStatus and credibility of the governance model – to
represent the public face of the business.represent the public face of the business.
22. CONCLUSIONCONCLUSION
Independence is an essential quality in a numberIndependence is an essential quality in a number
of situations in corporate governance and inof situations in corporate governance and in
professional behaviour. Independence isprofessional behaviour. Independence is
sometimes enhanced and underpinned bysometimes enhanced and underpinned by
regulation and legislation, but over and aboveregulation and legislation, but over and above
that, it is expected of every professional personthat, it is expected of every professional person
and of every professional accountant.and of every professional accountant.
