The concept of corporate governance

A company is a juristic person in terms of the Companies Act. In South Africa, two types of companies may be formed and incorporated: profit companies and non-profit companies. What these companies have in common is the need to implement a corporate governance system to ensure its overall continuity, profitability, and sustainability.

Corporate governance is the system by which a company is directed and controlled to ensure long-term business sustainability and success. It involves the establishment of structures, rules, practices, and processes used by directors and key individuals to effectively manage the company and discharge their legal duties and responsibilities. Corporate governance is a system of checks and balances and encompasses every aspect of leadership, namely:

  • ethics;
  • board composition;
  • board administration;
  • strategy;
  • accounting;
  • risk management;
  • internal controls;
  • internal audit;
  • external audit;
  • compliance;
  • information technology;
  • sustainability;
  • stakeholder relations;
  • performance measurement; and
  • corporate disclosure.

 

In South Africa, the King IV Code on Corporate Governance™ serves as the best practice guideline and takes an “apply and explain” approach to help stakeholders to make informed decisions as to whether a company is achieving the good governance outcomes or not. The Code consists of 17 basic principles, of which the company can apply 16, and all principles are required to substantiate a claim that the company is practising good governance.

 

Good corporate governance relies on a corporate governance structure composed of four key role players: the shareholders, the board, the company secretary, and management.

 

  1. The shareholders are the owners of a company who invest financially in return for potential dividends declared by the company. Shareholders are not involved in the day-to-day management of business operations. They do, however, have voting rights on company decisions and corporate matters, such as voting in directors and members of the audit committee, appointing auditors and the designated audit partner, and approving company remuneration policy and implementation reports, among others. They can exercise their voting rights in person or by proxy if they cannot attend a meeting.

 

  1. The shareholders elect the board of directors to oversee the strategic management of the company. A board structure exists with an established board and committees that meet regularly. The board will set the ethical tone and the strategic direction for the business among other duties, delegate implementation to management and oversee its implementation through a structured, well-documented process. The board ensures that the corporate governance system in the company complies with the law and adheres to corporate governance best practices.

 

  1. The company secretary is accountable to the company’s board and plays a pivotal role in corporate governance as the facilitator of communication between the shareholders, the board, and management. The role includes providing the directors individually and collectively with guidance regarding their duties and responsibilities, drawing their attention to laws affecting the company and reporting failures in compliance by a director or the company. The company secretary also meticulously documents the company records through registers, minutes, resolutions, meeting packs, reports, and the like.

 

  1. Management’s role is to ensure that:
  • all legal responsibilities are discharged;
  • corporate governance systems and processes are developed and documented; and
  • policies and procedures are drafted, approved, implemented, effectively communicated, lived throughout the company, and reported.

 

The implementation of corporate governance will reduce the risk of unethical behaviour, fraud and corruption, and increase accountability, fairness, transparency, and responsibility.

 

I hope this provides some guidance and clarity on the concept of corporate governance and inspires you to implement best practices in your company.