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Defining and analysing the concept of corporate governance
There are few definitions for corporate governance. For example, according to Cadbury Report, 1992, corporate governance is the system which companies are directed and controlled. But the Organization for Economic Co-Operation & Development (OECD) (2004) described corporate governance as involving a set of relationship between a company’s management, its board, its shareholders and other stakeholder, and provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
On the other hand, Monk and Minow (2001) defined corporate governance as the relationship among various participants in determining the direction and performance of corporation. The primary participants are the shareholders, the management led by chief executive officer, and the board of directors, whilst other participants include the employees, customers, suppliers, creditors and the community. But for the Malaysian code on Corporate Governance (2000), it defined Corporate Governance as the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realizing long-term shareholders value, whilst taking into account the interests of other stakeholders.
The principles of governance include many parts such as directors, directors’ remuneration, shareholders and accountability and audit. Every listed company needs to leaded and controlled by the effective board. Besides, the board should include a balance of executive and non-executive directors and also independent non-executive so that the board’s decision making will not be dominated by individual or small group of individual. The board should be supplied in a timely fashion with information in a form and of a quality appropriate to enable it to discharge its duties. The new directors to the board should have a formal and transparent procedure for the appointment. Besides, there will be a re-election at least every three years and all directors should be required to submit themselves.
Besides, the directors will run the company successfully through the levels of remuneration should be sufficient to attract and retain the directors needed. For the case of executive directors, the remuneration should be structure and link rewards to corporate and individual performance. But for the case of non-executive directors, the experience and level of responsibility undertaken by the particular non-executive bothered will be a sign of the level of remuneration. A formal and transparent procedure for developing policy on executive remuneration should be established by the companies for fixing the remuneration packages of individual directors. In addition, details of the remuneration of each director should be contained in the company’s annual report.
Not only that, companies and institutional shareholders should always ready and practicable to enter into a dialogue based on the mutual understanding of objectives. Besides, companies should use AGM to communicate with private investors and encourage them to participate.
For the financial reporting, the board should present a balanced and understandable assessment on the company’s position and prospects. Moreover, the board should safeguard shareholders’ investment and the company’s assets by maintain a sound system of internal control. The board also needs to set up proper and transparent arrangements for maintaining an appropriate relationship with the company’s auditors.
The board have six specific responsibilities such as board need to review and adopt a strategic plan for the company; need to oversee the conduct of the company’s business to evaluate whether the business is being properly managed; also need to identify principal risks and ensure the implementation of appropriate systems to manage these risks; need to have succession planning. It includes appointing, training, fixing the compensation of and where appropriate and also replacing senior management; develop and implement an investor relations program or shareholder communications policy for the company and review the adequacy and the integrity of the company’s internal control systems and management information systems including systems for compliance with applicable laws, regulations, rules, directives and guidelines.
The board provides an important corporate governance function. Because the board is a part of the firm’s organizational structure at the top of the corporate hierarchy it might be considered the firm’s most important internal monitor. The Model Business Corporation Act provides a guideline that states, “All corporate powers shall be exercised by or under authority of, and the business affairs of a corporation shall be managed under the direction of a board of directors." Directors are required to act in good faith and with sincere belief that their actions are in the corporation’s and shareholders’ best interests. Directors have a fiduciary duty to conduct activities to enhance the firm’s profitability and share value. In other words, the directors must act in furtherance of the shareholders’ financial interests at all times. Directors also have a duty of loyalty and fair dealing where they must put the interests of shareholders before their own individual interests. In addition, directors must also exercise a duty of care by doing what an ordinary prudent person would do under the same position and circumstances. Exercising the duty involves being informed and making rational decisions. The board of directors has a duty of supervision, in which they should establish rules of ethics and ensure disclosure. In this regard the board should hold regular meetings to review the firm’s performance, operations, and management, and it must make sure that accurate financial reporting and objective auditing are taking place.