Question

You are required to consider a publicly listed company whose business performance has been criticised publicly and, using its annual report, reference documents about the company (e.g. analysts’ reports, in-depth interviews and articles, documents on company’s website) review its governance protocols and practices. (This could include independence of directors, length of tenure of directors, other responsibilities of directors, etc.).

  The report should include:

1. An outline of, and brief explanation of the importance of, the bases or criteria for the review of the organisation’s governance (e.g., refer to which standards or guiding principles are relevant for the review) and why you need to use them.
2. A brief overview of the concepts, principles, standards or other tools and techniques learnt during this subject, in conducting your review.
3. A list of recommendations for suggested improvement based on your review.

Answer 1

a.PUBLICLY LISTED COMPANY :  A company whose shares are traded on the stock market. Public limited company is a limited liability company that offers its securities for sale to the general public, typically through a stock exchange, or through market makers operating in over the counter markets.

There must be some issues with the underlying basic criterian of good governance in a publicly listed company whose performance has been critized publicly basis on its annual report, reference documents about the company and itd government protocols (The official procedure or system of rules governing affairs of state or diplomatic occasions) and practices.

Governance is the processes and structures implemented by the board to inform, direct, manage, and monitor the organization’s activities toward achieving its objectives. Strong governance systems increase the likelihood that organizations will meet their objectives and stakeholder expectations. The organization faces risks to achieving effective governance, and the board is responsible for implementing governance processes and structures. While the board remains accountable for governance, it may delegate certain governance responsibilities to management.

The internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives: • Promoting appropriate ethics and values within the organization; • Ensuring effective organizational performance management and accountability; • Communicating risk and control information to appropriate areas of the organization; and • Coordinating the activities of and communicating information among the board, external and internal auditors, and management.

Below are the basic criterian for review of organization's governance.

The Board

The board is the focal point for effective organizational governance. It is the link between the stakeholders and the organization’s executive management, and it bears primary responsibility for governance. The board: • Sets the organization’s strategic objectives and provides the leadership to put them into effect. • Directs and provides oversight of the executive leader and senior management. • Establishes appropriate risk levels. • Approves and monitors entitywide ethics, operational, and compliance standards and policies. • Institutes effective control systems. • Provides transparent, complete, clear, and timely communication to stakeholders. The board’s actions are subject to laws, regulations, and the needs of stakeholders. The board typically delegates significant authority for the day-to-day operations to an executive leader (CEO) and the executive leadership team. To be effective, the board should be independent, engaged, and committed.

Management

The organization’s executive leadership and senior management are accountable to the board. Top management is ultimately responsible for implementing the organization’s governance system, as directed by the board. The CEO sets the tone at the top for the integrity, ethics, and conduct that will contribute to an effective governance environment. This tone is imparted to the executive leadership team, which in turn cascades organizationwide. The CEO and executive management should “walk the walk” to ensure that a positive governance culture exists throughout the enterprise. In addition Executive leadership and senior management should ensure that governance policies, procedures, and programs exist and are followed, and that there is compliance with applicable laws, regulations, and codes.

AUDIT FUNCTION

The audit function can play numerous roles in assessing and contributing to the improvement of organizational governance. For example, auditors can: • Provide advice on ways to improve the organization’s governance practices if they are not mature. • Contribute to the organization’s governance structure through internal audits, even if those audits are not focused specifically on governance. • Act as facilitators, assisting the board in governance self-assessments. • Observe and either informally or formally assess governance, risk, and control structural design and operational effectiveness, while not being directly responsible for them. The appropriate role for the audit function and the resource commitment to each of these roles depends largely on the maturity of the governance system and the organization’s size and complexity. The CAE should discuss and reach an agreement with the board on the audit function’s role in assessing organizational governance.

b . Organizations striving to improve governance need to take a close look at their internal business structures, processes and projects. The following ten principles provide a useful starting point for corporations when considering what constitutes good governance:

• Roles & Responsibilities - There should be clarity regarding individual responsibilities, organizational expectations of executives and the role of executive and steering committees
• Structure & Composition – An executive committee needs to have the right group of people, having particular regard to each individual’s background, skills and experience, and how the addition of an individual builds the collective capability and effective functioning of the committee
• Purpose & Strategy – The executive committee plays an important role in setting the vision, purpose and strategies of the organization, helping the organization understand these and adapting the plans to implement them.
• Risk Management - By putting in place an appropriate system of risk oversight and internal controls, executive committees can help increase the likelihood that their organizations will deliver on their purpose
• Organizational Performance - The executive committee determines and assesses appropriate performance categories and indicators for the organization.
• Committee Effectiveness – An executive committees effectiveness may be greatly enhanced through: careful forward planning of board-related activities; committee meetings being run in an efficient manner; regular assessments of organizational performance; having an executive succession plan; and the effective use of sub-committees, where appropriate
• Accountability - It is important that the executive committee ensures there is a flow of information to the board that aids decision-making; there is transparency and accountability to external stakeholders and to employees throughout the enterprise; and the integrity of financial statements and other key information is safeguarded
• Organizational Maturity - The executive committee has a role to play in enhancing the capacity and capabilities of the organization they serve
• Culture & Ethics - The executive committee sets the tone for ethical and responsible decision-making throughout the organization.
• Engagement - The executive committee helps an organization to engage effectively with stakeholders and employees.

c.An organization that is structured properly is able to make efficient decisions and adapt to changes in the business world much easier. Confused structure, or a structure that creates bottlenecks in the decision-making process, can be counter-productive and have a negative effect on revenue, Below are the suggested recommendations.

1. Increase Diversity

Corporate boards suffer from a serious lack of diversity. In 2008, the board composition of Fortune 100 companies was approximately 71 percent white men and 29 percent women and minorities. Women make up only 16 percent of the directors of the Fortune 500 companies. This lack of diversity has been pervasive even though there are many studies which show that diversity in the boardroom improves company performance.A recent study issued by Credit-Suisse which examined companies around the globe concluded that greater gender diversity results in improved financial performance. Companies with one or more women on the board outperformed companies with no women by 4 percent in net income growth. United States companies lead the world in having one or two women or minority board members. European companies lead the world in having three or more women or minority members.

2.  Appoint Competent Board Members

The Nominating Committee should devote adequate time to identify board members who have the skills and industry knowledge to assist the board. That does not mean that there is only one type of board member who would qualify. There should be a balance between those board members who know the organization, those board members who have a helpful expertise and those that offer a fresh perspective. What is important for a board is that it has a good understanding of what skills it has and those skills it requires. A board candidate should also be evaluated on his or her interpersonal skills since board interactions and relationships will be important to overall board performance.

3.  Ensure Timely Information

Timely information results in better decision-making. Senior management has to provide timely information to ensure proper board supervision and direction. Board members, however, should not be overwhelmed with information. There is a balance which needs to be achieved between necessary information and irrelevant information. Interactions between senior managers and the board are critical to ensuring that adequate information is provided to the board. If a board member requests information, senior managers must respond promptly to the request.

4.  Prioritize Risk Management

Every board should establish an effective system for risk oversight and management. “Risk” is not confined to compliance risks. It is a broader term which incorporates all of the risks to the company – e.g. financial risks, global warming, cyber-security, and other risks outside the compliance with law and policy requirements. Effective risk management leads to better decision-making and accurate cost-benefit or risk-reward decisions.

5.  Evaluate Board Performance

Boards must be willing to examine their own strengths and weaknesses. On a regular basis, the board should conduct a self-evaluation process, including the performance of individual directors. The evaluation process should be used to identify weaknesses in board performance, and adopt reforms needed to improve board performance. The evaluation should be broad, cut across all issues and personnel and include senior management interactions with board members.

6. Board’s role should be clearly defined in every strategy

We all know that the Board plays a significant role in the formulation and adoption of the organisation’s strategic direction. When the company has the backing of Board along with management, it can reach new heights. Each board must determine what role is appropriate for it to undertake and clarify this understanding with management to avoid miscommunication and hassles.

7. Need of an effective governance infrastructure

Policies and procedures which guide ethical behavior should form the base of any organizational behavior. Ensure delineation of the line of responsibility between board and management. It is particularly important for the board to develop policies in relation to segregation of duties. Poor internal processes and procedures can lead to inadequate access to information, poor communication and uninformed decision making, resulting in a high level of dissatisfaction among directors. Also, tools like VComply help the company to have a robust governance structure.

9. Focus on skills of the Board members

The Board members represent an appropriate balance between of experience and knowledge of the organisation. The directors with specialist expertise or fresh perspective should also be prevalent. Directors should also be seen for the additional qualities they possess, their “behavioral competencies”. Moreover, these qualities will influence the relationships around the boardroom table, between the board and management, and between directors and key stakeholders.

10. Evaluation of the Board for its performance to enable continuous improvement

The Board must be aware of their own strengths and weaknesses to improve when needed. For this, the assesses their own performance on a regular basis. It should be highly critical of itself and take immediate actions that come out of the evaluation. Also, the Board should consider addressing weaknesses uncovered in board evaluations through director development programs and enhancing their governance processes.