Corporate Governance is important
Corporate Governance is important
Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place.
Directors and company officers play an essential role in establishing and maintaining the standard of a company's corporate governance. Being a Company Director is an onerous role and requires the director to be aware of a wide range of activities affecting the company, including:
Understanding Financial Statements and Position
This relates to:
- Understanding the profitability for each business unit within the business
- Understanding cashflow of the business (which can be very different to profit)
- Understanding the financial position of the business.
- Knowing relevant key Performance Indicators (KPIs) on the business units and understanding management feedback in relation to these
- Understanding the budgeting process and reporting thereon
- Being able to compare business performance to industry benchmarks
Understanding Budgets and Cashflow Forecasts
Directors should have a working knowledge of the components of budgets and cashflow forecasts. It is important to ensure that the underlying assumptions used in preparing the budget are reasonable, relevant and achievable. Historical trading results, the economic environment and industry knowledge is imperative to review when preparing budgets and Directors should have a good understanding of these key factors or make appropriate enquiries of management.
Board of Directors’ Meeting
Generally board meetings will be held at regular intervals (such as monthly) and typically at the same time each month. The Directors should ensure that an agenda and supporting information is circulated prior to the meeting to allow sufficient time for preparation and enquiries to be made of management if required.
It is good practice for the company to have appointed a Chair who approves the agenda and ensures that Board reports have been submitted to directors, for reading prior to the meeting. The Chair should also review the minutes of the previous Board of Directors’ meeting prepared by the Company Secretary and authorise the release of minutes, together with the action plans for each individual director.
Many companies will not have a full-time Company Secretary. A good Corporate Governance strategy would include appointing someone to perform the role of a Company Secretary. This would normally include:
- preparation of the agenda in conjunction with the Chair;
- notification of the date, time and place of the Board of Directors’ meeting;
- distribution of the agenda and the executive reports to the directors at least 72 hours prior to a meeting;
- attending to other duties that have been allocated by the Board of Directors to the Company Secretary.
The Company Secretary should also ensure that the minutes of the Board of Directors’ meetings are prepared accurately. They record the names of directors in attendance, the commencement time of the meeting and to record details of any director who left the meeting during the meeting’s proceedings (and the time). If a director has declared an interest in a matter being discussed at the Board of Directors’ meeting, it’s important that the director’s interest is noted in the minutes of the meeting.
Directors should carefully read the minutes of the Board of Directors’ meetings and, if they disagree with the minutes as distributed, the director should immediately contact the Chair and advise him/her that they disagree with the minutes as recorded and discuss. There have been a number of court cases that have resulted in company minutes being examined so it is important the minutes are prepared accurately in the first place.
An important convention of Board of Directors’ meetings is that the directors maintain confidentiality on matters discussed at the meeting.
Appointment of New Directors
The appointment of new directors is an opportunity for the Chair, in conjunction with the other directors, to consider the skills mix on the Board and to identify appropriate persons to be invited to become a director.
It is good corporate governance practice to recognise the desirability of the Chair assessing the performance of individual directors on an annual basis. This could be an informal meeting between the Chair and the director, to review the director’s perception on their performance and their understanding of the company’s activities, in particular, the director’s roles. This gives the Chair an opportunity to make comments relative to the director’s performance.
If a director is deemed not to be performing to a satisfactory level, the Chair will need to exercise consideration, care and empathy in advising the director he/she should be considering their position on the Board of Directors and he/she should resign. This is a far better way of handling these types of issues than going to a formal director’s vote to request a director to resign.
Director’s Personal Responsibility
- The Corporation’s Act basically applies with equal weight to a director of a major public company as it does to a director of a smaller company.
- Directors need to be aware that they need to keep themselves informed as to what’s happening in the company. It’s very important to read reports prior to the meetings, make notes and turn up at the meeting with pre-prepared questions.
- The key recommendation is that the director should be asking questions if they don’t understand something.
- If a director is unsure of the situation, whether it’s in a set of financial accounts or in an operating procedure within the company, the director should seek a better explanation from the accountant, auditor, lawyer or other technical experts prior to voting on a motion.
- The director should ensure that, if they or their immediate family are involved directly or indirectly, on any matter being considered by the Board of Directors, they should declare their interest.
- It’s important for directors to respect confidentiality of the director’s discussions.
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