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The costly impact of poor corporate governance

Updated: Feb 2

SCANDAL!!! While some of us love a good drama, scandals can be career suicide for the businesses and people involved in them. Remember CL Financial or HCU on the local front or Enron, Worldcom and Parmalat on the international market? How about the increasing number of sexual harassment allegations against Board Chairmen both on the local and international front? A closer look into many corporate scandals will reveal poor judgment from those on the Board, failure of non-executive directors to speak up and/or the silencing of non-executive directors, failure to maintain effective shareholder and stakeholder relationships, failure to adhere to internal policies and procedures particularly those governing procurement, failure to comply with national laws and regulations regarding disclosure of material changes and the list goes on and on. This in turn leads to fraud and other such unethical business practices which will threaten the company’s future.

Corporate governance is the system by which organizations are …yes you said it…governed or directed. This is actually different from the full time day-to-day management of a company. As Bob Tricker said:

“If management is about running business, governance is about seeing that it is run properly”

It follows therefore, that Corporate Governance rests squarely in the laps of the Board of Directors.

In this article, we explore three pertinent principles of corporate governance and how failure to adhere to them can create a scandal from which there is little to no recovery for those involved. While the job of a successful Board is fraught with numerous tasks and activities, we have selected the three main principles out of which many of the Board’s responsibilities will emanate.

Principle #1

Establish clear roles and responsibilities

The Board of Directors have the responsibility of directing the affairs of the entire organization, as opposed to managing it on an operational level. Every day management should be left for the management team, which is put in place and directed by the Board. While this dual role is understandable for start-ups, this ought not be the case for larger, more established organizations. This is where delegation and trust play a crucial role. In many large companies, directors tend to cross this pivotal boundary, reducing senior management to mere figureheads and creating dissention between these two critical arms at the head of the organization. This leads to a toxic work environment in which egos, as opposed to the company’s interests, reign supreme. Power struggles to maintain position and decisions that could erode the company’s strength and worth are typical in this environment. As the saying goes “The fish rots from the head”. The Board therefore, should establish clear roles and responsibilities for itself, the Sub-Committees of the Board and its key support offices namely the Corporate Secretary, Internal Auditor and Chief Executive Officer.

Principle #2

Pay attention to the composition of the Board

Members of the Board ought to be uniquely qualified in their relevant field, demonstrate a track record of integrity and have a sound moral compass. In this regard, a rigorous selection and recruitment process should be undertaken. Given that the Board is responsible for the long-term success of the company, the gravity of this principle cannot be overstated. Long-term success requires attention to so much more than maximising shareholders’ wealth. While profits are important to the company’s operation as a going concern, gone are the days in which this is considered the Board’s only priority. Stakeholders, such as employees, regulatory bodies, suppliers and customers are now claiming their position at the forefront of the Board’s agenda. Effective management of these relationships requires a certain type of individual, i.e. one that is human centred, selfless and that operates out of genuine passion for the company and its welfare. Non-executive directors ought not to be silenced and feel intimidated and controlled by an Executive Chairman and other executive Directors. “Square pegs in round holes” lead to organizational inertia, low employee morale, high employee and management turnover, and the company’s failure to realize its goals and objectives; all of which are symptoms of an organization in distress.

Principle #3

Promote Accountability and Transparency

The Board should, through its Annual Report, and other relevant disclosure tools, provide timely, accurate and balanced disclosures of all matters that are material to the operations of the company. Companies incorporated under the Companies Act, Chap 81:01, must disclose, on an annual basis, details concerning the composition of the Board, its Corporate Secretary, shares issued as well as its shareholders and beneficial owners of its shares. The Board should also reveal the financial statements of the company and statements attesting to the company’s financial viability. A code of ethics for both Board and employees should also be developed with explicit consequences for breach of the code. In the case of state enterprises, the confirmed minutes of Board meetings must be shared with the relevant Line Ministry as well as the Investment Division of the Ministry of Finance. A closer look into public corporate scandals will show a breakdown in accountability and transparency. The role of regulatory bodies such as the Trinidad and Tobago Securities and Exchange Commission or where applicable, overseeing Government Ministries, is critical to the accomplishment of this principle.

So there you have it. In this current time, when so many are choosing the entrepreneurial journey, it is so important to do it right from the beginning. As we say at Bayley’s Consulting Services “Do it right! Do it now!”

Stay tuned for more!

Ceronne Bayley LLB MBA is the Lead Corporate Governance Consultant of her own consulting firm, Ceronne Bayley’s Consulting Services. She is a Corporate Secretary by profession and has fifteen years’ experience working with and advising Boards of Directors of State Enterprises as well as profit and non-profit companies in the private sector.

The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information contained herein are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to this article do not create any professional relationship between the reader and Ceronne Bayley’s Consulting Services.

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