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Board of directors Essay

Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the shareholders, management, and the board of directors. Other stakeholders include labor(employees), customers, creditors (e. g. , banks, bond holders), suppliers, regulators, and the community at large.

These are some definitions given under the Corporate governance; The simple meaning of the Corporate governance is the relationship between corporate managers, directors and the providers of equity, people and institutions who save and invest their capital to earn a return. It ensures that the board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations. – International Chamber of Commerce “Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals.

The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations

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and society “ “-(Sir Adrian Cadbury in ‘Global Corporate Governance Forum’, World Bank, 2000) Company’s financial statement is very important for the external users especially investors to make a decision and understand the business.

Figures in the financial statement may not be very helpful, therefore, most of this investors will rely more on the disclosures or notes provided in the financial statement. Basically, SLFRS promote corporate governance through this additional information by providing relevant and reliable information. In the notes, only information that is material to the investors only will be put in because company cannot disclose everything. Generally, these notes will explained details those figure reported, so that when it comes to the investors, they may understand better.

Unfortunately, is the management prepared to disclose all the sensitive matter to investors which they know it will affect the investors to make some decision in investment? This would be one of the aspects in corporate governance. Good corporate governance practices are not a new phenomenon in the world although recent collapses of several companies which were considered successful, have emphasized the need for good business practices and governance structures. These structures and processes are especially important for the success of business as it brings in better risk management practices through enhanced accountability and transparency.

It also promotes the development of the community, the economy of the country and ensures a better relationship between the company, its shareholders, employees and the community. Throughout this assignment we had planned to gather a broader knowledge about the Corporate governance best practices which can be implemented in Sri Lankan context and to had take Two major companies in Sri Lanka to examine there Corporate governance best practices and to check whether those practices are comply with the best practices which are introduced by Institute of Chartered Accountants of Sri Lanka.

Best Practices on Corporate Governance and Their Importance 1. Developing a Compliance Mentality As the executive director, or chief executive officer, of a company, you have the responsibility to your shareholders, creditors and to the public to comply with all government rules and regulations, and to express to your subordinates, whether junior management or employees, that compliance is not a mere option but a requirement. You must send a message to the company that all its members must transact the business of the company with the highest morals and ethics.

You must express to them that you and your lower levels of management will work together to enforce the rules, and that there will be zero tolerance for even a seeming conflict of interest. As the Global Best Practices sources point out, this will save your company money in the long run, which you would otherwise spend recruiting, hiring and training replacement employees because of the high employee turnover rate. Better-quality, more ethical employees tend to eventually leave to find work with other companies because of recurring concerns about the ethical conduct

of management. 2. Promoting an Ethics-based Culture It is not merely enough to enforce rules governing ethical matters. According to Global Best Practices, you must also promote an ethics culture. One way of accomplishing this task is to encourage your employees–or fellow board members–to report any ethics violations they know or suspect. You do this best by stressing that such reports will remain anonymous, and that you will enforce and live by all laws against retaliation against whistleblowers. 3. Disclosure of Financial Matters

As the United Nations Conference on Trade and Development website points out, you must develop the practice within your company of disclosing all financial transactions within the company. This would include any inflow and outflow of funds. The treasurer should oversee the keeping of all the financial records of such transactions–be they receipts or other computer-generated reports. These should be available on demand. This becomes especially important when it comes to transactions between related parties, as some sources point out.

You must disclose any transactions between relatives of board members, especially when a relationship exists where one party has a degree of control over the other. This could lead to a conflict of interest. The mere appearance of this could make stakeholders of the business uncomfortable. 4. Independence of Board of Directors A good corporate governance policy is multifaceted but individual to each company. For instance, corporations may elect to have an independent board of directors rather than a board filled with insiders. There have been numerous studies suggesting that “outside-dominated” boards are more preferable.

Corporations with independent boards are more likely to replace poorly performing CEOs, make better acquisition decisions and bargain more effectively when the company is the subject of a takeover bid. Large corporations are better equipped to recruit and compensate an independent board of directors; however, a small- to medium-sized corporation can opt to have a mix of outside directors and company management. Other board-related issues include whether the CEO should also be chairman of the board, how board committees should be structured, how often the board should meet, and

board member and executive compensation. 5. Compensation Tying executive compensation including stock awards based on performance benchmarks is easier to justify than paying executives on an arbitrary basis. Compensation is a hot-button issue given the staggering compensation packages sometimes doled out to executives of poor-performing companies even as they were being ushered out the door. According to the Economic Policy Institute, the ratio of average CEO pay compared to the average production worker was 185:1 in 2009.

A good practice is to tie pay to performance goals such as sales, cost reductions, profit and other business-specific metrics. 6. Accountability How a corporation develops its network is vital to good corporate governance. A corporation’s network includes its shareholders, suppliers, creditors, customers, government and public at large. Management must put in place policies that address how the company interacts with the various parties that can affect its operations. This means holding the board of directors, executives and employees accountable for actions that relate to how the company does business.

For example, following Title III, Corporate Responsibility, of the Sarbanes-Oxley Act, senior executives assume individual responsibility for the accuracy and completeness of financial reports. The section defines interaction between external auditors and corporate audit committees. 7. Meetings A board of directors should hold regular meetings, and may also hold special meetings if warranted by events affecting the company. At the meeting (or without a meeting if the directors give written, signed consent), directors discuss and vote on decisions affecting the company’s future.

Each director is supposed to review the available information and make the decision that will best advance the interests of the shareholders. Importance of meetings in corporate governance can be discoursed as especially regular and frequent governance meetings often help companies stay better attuned to business needs, and aid a spirit of teamwork as each member feels more involved. Some global sayings note that frequent meetings can appear less burdensome if kept to two hours or less. 8. Whistle Blowing System A sound whistle blowing system is a critical component of good corporate governance.

While public companies are required to meet SOX whiste blowing standards, private organizations, as well as small businesses, have also followed suit. Features of a firm whistle blowing system include clear methods for reporting claims, confidentiality assurance and protection against retaliation. In addition to being good corporate governance, whistle blowing is in an organization’s financial interest. Tips from employees and vendors catch 34 percent of fraudulent activity and 48 percent of owner or executive fraud, according to a 2006 report from the Association of Certified Fraud Examiners.

9. Code of Ethics A code of ethics, which clarifies and stipulates adherence to some of more abstract ideals of trust and accountability, is another indicator of good corporate governance. Effective codes of ethics spell out who must adhere to the rules, division of power between company leadership and its board of directors and guidance on other gray areas such as political contributions, conduct and compensation. While the SOX requires public companies to have a code of ethics, creation and adoption of an ethics code is a best practice for those organizations not covered under the legislation.

10. Separation of Duties Splitting the roles of Chief Executive Officer and Chairman of the Board of Directors is a popular but controversial recommendation toward good corporate governance. Those who support separating the roles that splitting the roles prevents conflicts of interests and ensures that board members remain vigilant and involved. On the other hand, those who disagree, claim that there is no evidence that splitting the roles improve performance or guarantees good corporate governance.

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