Question

QUESTION 3 (20) Illustrate the concept of Corporate Governance and critically examine the role of the Board of Directors and Risk Management in line with the King II report on Corporate Governance (2002)

Answer 1

CORPORATE GOVERNANCE

Agency problems can be resolved by proper corporate governance. Corporate governance lays emphasis on shareholders rights and enhancement of shareholders' value.

The concept of corporate governance has gained increasing prominence.

Reasons for increased interest in corporate governance:

1)     Increasing corporate fixtures e.g. collapse of sugar factories, manufacturing institution etc

2)     Increasing fraudulent and corrupt behavior e.g. bribery, abuse of corporate power, bad debts arising from banking sector, fraudulent claims in insurance sector.

3)     A growing demand by stake holders for transparency, accountability as the world embraces wider issues of democratization with good governance. This has increased shareholders activism.

4)     Powerful and dominant BOD that manipulates shareholders and stakeholders of the firm. The BOD perceive most shareholders as illiterate to understand fully issues in the business sector.

5)     Structures that demand academic and professional gratification e.g. some boards never demand basic qualification of the board members, shareholders and influencing are used as a benchmark/ yardstick to get a seat in the board room.

6)     The growth of properly managed multinational and transnational firms.

7)     The global governance revolution resulting from globalization of firms and economic liberalization.

8)     Separation of ownership and control which creates agency problems.

Benefits/ Advantages of good corporate governance

i)                   Protection of investors signs

ii)                 Promote corporate growth. It enhances corporate performance, capital formulation and maximization of shareholders wealth.

iii)               It promotes standards of self regulation and control.

iv)               It creates greater investors confidence and access to capital

v)                 This is less risk of costly litigation and substantial compensation payouts.

vi)               It encourages efficient and responsible use of capital by companies

vii)             It encourages greater loyalty from customers, employees and suppliers

viii)           It creates a mechanism that selects, monitors and replaces the managers in timely manner.

ix)               It enhances good corporate image and public relations