top of page
Search

The Four main principles of Corporate Governance

Updated: May 28, 2022



When I worked at my corporate job some years ago, I remember being asked in a Board meeting to give an account for a responsibility I had no idea I even had. Further, I believed that to assume the responsibility would equate to an unfair usurpation of the authority actually vested in another office. It was very important for me to establish clear boundaries within my work environment and I remember explaining to the Board that it was important that I be aware of this responsibility given that it is inextricably linked to accountability. Long and short of it is that an employee cannot be held accountable for anything he/she does not have the authority to do.


That experience got me thinking about the main principles of Corporate Governance. While there may be different definitions and opinions about what Corporate Governance really is, there has been consistent agreement among theorists that the following four main principles underlie the development of Corporate Governance, in different types of organizations.


PRINCIPLE #1 – RESPONSIBILITY


To have responsibility for something signifies that the person or group of persons is vested with the authority to do that thing. A Board of Directors, in whose jurisdiction Corporate Governance squarely falls, has the ultimate authority to direct the affairs of the company and in so doing may delegate that power to a Chief Executive Officer or a Sub-Committee for example. Usually, monthly Board meetings are held in which the CEO will give an account to the Board as to how he/she has utilized the power entrusted to his Office. It follows therefore, that there must be a willingness to accept the responsibility. An officer, not even the CEO, can be required to accept responsibility for a task that he/she is unaware of or has justifiable reason to believe that it was not within his/her power to do.


It is important to properly document roles and responsibilities to ensure that they are made clear. At the highest levels, it can be done through the Articles of Incorporation for private companies or through legislation establishing State Enterprises. Such instruments can contain provisions that restrict the powers of the Board for example. On another level, roles and responsibilities can be made clear through the contracts of the CEO and other members of senior management or through Sub-Committee charters or Terms of Reference.


There is a prevailing opinion that one should never say "That's not my responsibility" at work. It is viewed as an indication of laziness or unwillingness to be a team player. However, each situation must be assessed within its proper context. Such a view, if not properly managed, can lead to a vicious cycle where boundaries are not respected, employee burnout occurs and potential organizational leaders are lost.





PRINCIPLE #2 – ACCOUNTABILITY


As I mentioned before, accountability is intimately linked to responsibility. Those vested with power and authority are required to account for the exercise of their authority. It is through this principle that Boards can determine whether or not their respective delegates are functioning as they should and that shareholders can determine whether their agents (directors and managers) are functioning as they should. Ultimately, everybody has a boss. Accountable persons must act always with honesty and integrity and must be willing to accept any consequences of their failure to exercise that authority in the best interest of the organization. Even the very word suggests it "Account - ability" or the ability to account for one's actions.


Far too often in Board rooms I have seen others being thrown “under the bus” in attempts to hold on to positions of authority that they have continually abused. As a matter of fact, that very unwillingness to accept responsibility for a task of which they are fully aware, is a huge red flag that suggests unsuitability for a seat of power and position.




PRINCIPLE #3 – TRANSPARENCY


Stakeholders, both internal and external, are supposed to be able to make meaningful assessments of an organization in order to make informed decisions when dealing with it. Therefore, a company should be willing to and in some cases are statutorily required to release information about financial and non-financial matters. In Trinidad and Tobago, the Freedom of Information Act 1999, Chap. 22:02 has allowed the general public access to certain pieces of information from companies and the Securities Act 2012, Chap. 83:02 mandates the disclosure of key corporate information from companies required to report to the Trinidad and Tobago Securities & Exchange Commission.


Of course there are limits to transparency. I mean a company, particularly a public company ought not to arbitrarily release information that could be damaging to the company itself. However, where there is excessive secrecy, chances are there is something to hide. Companies should be open in all their actions and should ensure that information is accurate and timely so as not to give misleading information about its current state.





PRINCIPLE #4 – FAIRNESS


Oh this is a big one! All stakeholders ought to be treated fairly when decisions are made or when actions are taken by the organization. Companies may take different approaches to corporate governance, but regardless of the approach, fairness remains a key underlying principle of corporate governance. The truth of the matter is that organizations are ultimately run by human beings, who unfortunately, may bring their individual prejudices and bias into the running of the organization. This often leads to gross injustice being perpetrated onto stakeholder groups attached to the organization. Companies with a genuine interest in fairness ought to establish policies and procedures that give effective redress for unfair practices. Policies such as Complaints and Whistle-blower policies and Codes of Ethics can be effective in enforcing this principle.





I must say that I am very happy to see us in Trinidad and Tobago taking positive strides in matters of corporate governance. In 2013, the Caribbean Corporate Governance Institute, the Trinidad and Tobago Chamber of Industry and Commerce and the Trinidad and Tobago Stock Exchange Limited came together in a collaborative effort to produce the Trinidad and Tobago Corporate Governance Code 2013. While it is not mandated through legislation that Codes such as these be adopted, it is worth reviewing by any company that seeks to improve its Corporate Governance framework.


Further in March 2021, the Central Bank of Trinidad and Tobago gave Corporate Governance guidelines “…to financial institutions and persons on their collective oversight" to emphasize the Role of the Board of Directors and Senior Management, to give guidance on the expected experience, expertise and character of those that should serve on Boards, to assist Boards in establishing a sound structure and good governance practices and to suggest methods by which companies can improve its risk management framework and internal control processes.


Corporate Governance is too central to an organization to be treated scantily. The apple rots from the head, so let’s get on board the governance train and move our organizations from strength to strength.

122 views0 comments

Comments


bottom of page