Archive | March, 2011

ACCOUNTABILITY IN CORPORATE GOVERNANCE

8 Mar

ACCOUNTABILITY IN CORPORATE GOVERNANCE

DEFINITION OF ACCOUNTABILITY

To account is to give a description or depiction of something that happens or happened. Accountability would therefore be taken to literally mean the process of giving an account of an event. The tricky part; about it, is that for the people to whom the account is being given, the accuracy and probity of the story is very important. To achieve this, accountability usually moves hand in hand with seven other principles. These include, “delegation, responsibility, disclosure, autonomy, authority, power and legitimacy.”- Chansa (2006).

IMPORTANCE OF ACCOUNTABILITY

The separation of ownership from management can cause conflict if there is a breach of trust by managers either by intentional acts, omission of key facts from reports, neglect, or incompetence. One way in which this can be avoided is for entities (in their entirety) to act with transparency and be accountable to the shareholders and other stakeholders. Therefore apart from just being a component of corporate governance, there are many advantages of accountability.

Firstly, it is a key to economic prosperity. If there is poor accountability by players in the economy, stakeholders may lose the confidence they have in it and hence become reluctant to put in their best. For instance; for some developing countries, lack of accountability may lead to a fall in the participation rate in their development programmes by their co operating partners- a situation that leads to further deterioration in the development process. Accountability is also a key to performance measurement. The more accountable corporate governors are, the more likely it is that results of performance measurement processes are going to be a true and fair representative of the performance being measured.

CONCLUSION

Accountability is a very important pillar of corporate governance. Without it, the agency problem would be hard to defeat. With it, the confidence of stakeholders is increased. It is achieved through faithfulness in various aspects of corporate governance especially reporting. The strength and accuracy of the reporting is also strengthened by various standards and regulations.

REFERENCES

Karen Chabala Chansa (2006) Project paper “Accountability: A case study of ZSIC”

Byrne Kaulu (2010) Project paper.”Accountability in Zambia:A case study of the Zambia Institute of Chartered Accountants (ZICA)”.

OBJECTIVITY IN CORPORATE GOVERNANCE

6 Mar

OBJECTIVITY IN CORPORATE GOVERNANCE
WHAT IS OBJECTIVITY?

Basically, all players in the organisation’s corporate governance must be objective. If you are objective, it means you are “not influenced by personal feelings or opinions in considering and presenting facts.”- Concise Oxford English Dictionary. This important corporate governance principle does not just ‘happen’ like a dream. It is achieved through deliberate and consistent steps.

IMPORTANCE OF OBJECTIVITY

Objectivity can be very difficult in an ever subjective and changing environment. It never the less is key to the success of corporate governance. This is because subjective behaviour may bring misunderstandings with stakeholders.
Let us explore the importance of objectivity in relation to one field- accounting. Have you ever heard of the misconception by most people (especially those not in the field) that Accountants are thieves? Because of lack of objectiveness (and other factors), fraudulent acts by some accountants as players in the corporate governance chain have in the recent past put the entire profession in disrepute. One famous example is that of Enron. “The public reputation of the accounting and auditing profession was seriously damaged by the major corporate failures such as Enron and Worldcom. The role of accountants operating within these entities as directors, or associated with them as auditors has raised questions about the integrity of the profession. Globally, ethics in organisations have been subject to increased scrutiny and criticism from the media, regulators and public interest groups.”- ACCA.

WHO SPECIFICALLY SHOULD BE OBJECTIVE IN CORPORATE GOVERNANCE?

There are many groups of people who are involved directly and indirectly in the governance of a corporation. Each group has to exercise objectivity in the role(s) they play in the direction and control of the companies. For hostile acquirers, analysts, credit rating agencies, accounting firms and outside lenders, access to and exercise of objectivity may mean the difference between success and failure.

As a result of high profile fraud cases (such as the ones highlighted above) and the massive number of people depending on financial information, the accounting profession has introduced a number of regulations and codes of best proactive to enhance objectivity. For instance, objectivity is one of the fundamental principles of the International Federation of Accountants (IFAC) code of ethics. It is usually used synonymously with the word independence.

HOW IS OBJECTIVITY EXERCISED IN CORPORATE GOVERNANCE?

Answering this question completely can lead to a large volume of information as for each field that exists; accounting, marketing, economics, finance, engineering etc, various ways are used to enhance objectivity. However some few ways stand out as necessary in all these fields. For instance; the presence of the audit committee and internal and external auditors in the governance structure are needed everywhere. Controls to enhance the independence of the aforesaid are also necessary in any type of firm in order for the accounting functions to be carried out objectively. To enhance independence, various controls are used to prevent threats to objectivity such as self review, self interest, advocacy, familiarity and intimidation threats. Some of the controls include; what are known as Chinese walls, quarantines, declaration of interest (s) – financial or otherwise, rotation of manpower and so on.

CONCLUSION

As a result of it’s importance, Objectivity/independence must be exercised at every level; organisational, departmental and individual levels. Diagnosis of Impairments to independence and implementation of appropriate mitigation/prevention methods have to be undertaken frequently.

REFERENCES

ACCA “Corporate Reporting-Course notes” ACP2CN07 (INT)

Concise Oxford English Dictionary

TRANSPARENCY IN CORPORATE GOVERNANCE

2 Mar

TRANSPARENCY IN CORPORATE GOVERNANCE

WHAT IS TRANSPARENCY?

“Transparency can be defined as a principle that allows those affected by administrative decisions, business transactions or charitable work to know not only the basic facts and figures but also the mechanisms and processes. It is the duty of civil servants, managers and trustees to act visibly, predictably and understandably.”-Transparency international

If something is transparent, it allows light to pass through thereby enabling people to see through it. Using the same concept, an entity is transparent if it enables others to see through it. Transparency works hand in hand with integrity. The more the integrity, the more transparent an entity or person will be. Because of the aforesaid closeness, many people even tend to think transparency is integrity.

IMPORTANCE OF TRANSPARENCY

If a company is transparent enough and reports material facts in real time, stakeholders will have more confidence in the management. Consequently, they will be more willing to invest in the company, thereby reducing the cost of capital. Transparency also helps those in charge to avoid fraud and put measures in place against it. All these factors put together enable the firm’s productive capacity and productivity to improve.

MECHANISMS FOR ENHANCING TRANSPARENCY

From time in memorial, corporate governance chains have undergone various overhauls in order to increase transparency. There is increased regulation on how financial reporting should be done and who should do it. International Accounting Standards (IASs) and other regulations are continually being improved so that what is measured, recognised, disclosed and reported is true and fair. Simultaneously, various trends are occurring in the area of auditing. This is in order for an independent knowledgeable entity to pass an opinion on the truth and fairness of the reports made by the corporations. Apart from these, regulations such as Acts of parliament and codes of best practice are also playing a critical role in enhancing openness. Most of the parliamentary Acts relate to securities exchange, companies in general (Companies’ Acts) and even those that directly target corporate governance such as Sarbanes.

The strife for transparency does not however come without costs. For a small firm, the cost of reporting transactions and the related audit fees can be too much to bear. For this reason, governments around the world exempt certain ‘small’ firms from some of these reporting requirements. However, it is advisable for any entity, no matter what the size to prepare it’s own reports as a management or performance measurement tool.

REFERENCES
http://www.transparency.org/news_room/faq/corruption_faq Retrieved 02/03/2011

FAIRNESS IN CORPORATE GOVERNANCE

1 Mar

FAIRNESS IN CORPORATE GOVERNANCE

Earlier, we established that, a corporate governance system has the main aim of entrenching the principles of fairness, transparency, objectivity, decency, responsibility, accountability, status, judgment and integrity among those charged with the governance of companies. Today we will begin looking at the first of these principles- fairness.

WHAT IS FAIRNESS?

To begin with, one may ask, what is fairness? Fairness means treating people with equality. It entails avoiding of bias towards one or more entities as compared to the other(s).

HOW UNFAIR CAN FAIRNESS GET: IMPORTANCE OF FAIRNESS

In economic development terminology, we usually meet the word fair several times. For instance there are phrases such as the fair distribution of the national wealth, fair value, fair play and so on. Fairness has in the recent past been a controversial issue in corporate governance. For instance, a lot has been said so far with respect to fairness and the governance of Ghana Airways. Although not publicly debated or talked about often, fairness in corporate governance is a matter of national interest for many other state owned companies such as ZESCO, ZSIC and ZNBC among others in Zambia and Africa. As a result of most strategic positions being filled by political appointments, the managers of these firms are split between impressing the people responsible for the appointment and achieving corporate goals and other stakeholder’s interests. Indeed, fairness is an important principle all over Africa and the world.

If you know the contentions that a bad decision as a result of bias in any of the above named companies can bring, then you already know just how critical it is that fairness is practiced in the way companies are directed and controlled.

Fairness is usually considered with various stakeholders of a company in mind. The choice as to what is fair and will most likely be made by taking into account the stakeholder’s position on the power-interest matrix. Some of the stakeholders of a company include; shareholders (including institutional investors), suppliers (creditors), employees, customers and the community at large.

WHAT DO FIRMS DO TO ENHANCE FAIRNESS IN CORPORATE GOVERNANCE

For many company boards, being fair is a very difficult thing. There are big decisions to be made on which a normal person or group with some interest (financial or otherwise) cannot just be fair. In transactions such as mergers or acquisitions for instance, it is very hard to be as fair as possible if you are on the board. For this reason, many companies are turning to what is known as fairness opinions. This involves calling in an independent knowledgeable entity to assess a particular transaction and give their opinion on it’s fairness.

Another way that is being used as a tool to increase fairness is known as corporate governance rating. Here, various companies are assessed on aspects of their corporate governance and the results are published in order to help the firm(s) improve performance on fairness. This is however not a widespread practice and is most likely un-heard of in many developing countries.

CONCLUSION

Various solutions to the problem of unfairness are being developed. This is as a result of the realisation by many firms that fairness is important in the way the companies are directed and controlled. Simple misconceptions on how fair a transaction is can raise serious public debate as in the case of the sale of Zamtel Libya’s Lap green. The fairer the entity appears to stakeholders, the more likely it is that it can survive the pressure of these interested parties.

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