Whenever Enron, the Parmalat and FTX are mentioned, the thought of their stunning and rapid collapse cannot escape our minds. These were corporate giants whose dramatic collapse resulted from weak systems of corporate governance, internationally awakening the need to improve and reform corporate governance in institutions.

Meaning of corporate governance

Corporate governance is the system by which companies are directed and controlled. It is based on a set of rules, laws, policies, and procedures to ensure company accountability. The CMA Code of Corporate Governance Practices for Issuers of Securities to the Public, 2015 has defined corporate governance as the process and structure used to direct and manage business affairs of the company towards enhancing prosperity and corporate accounting with the ultimate objective of realising long-term shareholder value while taking into account the interest of other stakeholders.

Origin and role of corporate governance

Corporate governance as a concept emerged in the 20^th Century, following the stock market crash in 1929, to put in place mechanisms that would allow shareholders to keep companies in check. The primary purpose of corporate governance is to make directors accountable to shareholders and stakeholders and facilitate effective, entrepreneurial, and prudent management that can deliver the long-term success of the company.  

Components of effective Corporate Governance

1. Properly constituted and effective functioning Board of Directors to provide Oversight, Foresight and Insight.
2. Proper Leadership to provide clear strategic direction.
3. Right Policies and procedures in place
4. Overall business strategy
5. Effective internal controls, systems and processes
6. Ideal Human Resource with the correct skill set
7. Effective corporate culture that values integrity, accountability, and ethical behavior
8. Compliance and Legal Framework with applicable laws and regulations.

Governance audit as a tool for assurance of good governance

For assurance that entities are compliant with the principles of good governance, a governance assessment or audit must be carried out. A governance audit is an independent assessment of an organisation with a view to expressing an opinion on the adequacy and effectiveness of the organisation’s policies, systems, practices and processes within the legal and regulatory framework and in line with global best practices on corporate governance for the interest of its stakeholders. Governance audits provide Boards and Management with an objective assurance as to the governance standing of the organisation with the intention of adding value by introducing a systematic, disciplined approach to evaluating and improving risk management, control and governance processes.

A governance audit exercise provides an effective mechanism to check compliance with legislation, regulations and codes of best practices and therefore helps to detect cases of non-compliance and facilitate taking corrective measures.

Types of governance audits

Governance audits can either be independent or self-assessed.

Self-assessment governance audits are carried out by the management and the board with the aim of assessing the adequacy and effectiveness of the organisation’s governance structures.

Independent governance audits are carried out by a governance auditor and it can either be voluntary or statutory (mandatory under the law/regulations).

Governance audit parameters

In conducting a governance audit, the auditor examines the existence and effectiveness of governance instruments, policies, structures, systems and practices in an organisation within the legal and regulatory framework and in accordance with best governance practices.

The assessment focuses on the following parameters:

1. The Board of Directors
2. Transparency and Disclosure
3. Accountability, Risk Management, and Internal Controls
4. Ethical Leadership and Corporate Citizenship
5. Shareholders Rights and Obligations
6. Stakeholders Relationships
7. Sustainability Performance Management
8. Compliance with Laws and Regulations

Governance audit report

Following the completion of an audit, the governance auditor should prepare an objective, comprehensive and actionable report that helps to measure how best the organisation is governed and the overall performance. The audit report helps identify governance gaps which if promptly addressed lead to improved standards of governance practice, mitigation of governance risks and enhanced compliance with relevant laws and regulations.

How we can help At Imperial Registrars, we have a team of Accredited Governance Auditors with the Institute of Certified Secretaries, who will conduct the Governance Audit exercise in your company, examine the existence and effectiveness of governance instruments, policies, structures, systems and practices in the organization within the legal and regulatory framework, in as far as good corporate governance is concerned. Kindly get in touch with us for further assistance on the above. (info@imperialregistrars.co.ke).