Olufemi Mosaku-johnson

One of the primary issues in corporate governance is how to align the interests of shareholders and managers.
– While most people don’t object to high levels of pay for top managers (such as CEOs and CFOs), they expect pay to be connected to performance.
Why do we need to align the interests of shareholders and managers?

• Managers have day-to-day control of the company. The top management team, for example, is in charge of things such as strategy, hiring and firing employees, and so on.
Shareholders don’t “own” the corporation in the same way that you own your house: they don’t have physical possession of a part of the corporation. Rather, what they own is a limited set of decision rights, the right to share financially in the company’s success, and a pro-rata share of the company after all of its debts are paid if the company is liquidated

The separation of ownership and control leads to a principal-agent relationship. The root of corporate governance as propounded by Montesquie in 1709 is the doctrine of Separation of power.
• The principal directs the activities of the agent.
• The agent acts on behalf of the principal, based on the principal’s direction. The agent owes a duty of loyalty to the principal.

For public corporations, shareholders are principals and managers are agents; an agency problem exists when agents have incentives to act in ways that are contrary to the interests of their principals.

Performance Audit
Performance auditing is a way to ‘execute control’ and to obtain insight into the running and outcome of different organisational activities.
Legitimacy and trust are essential values in all business undertakings, and performance auditing may contribute to strengthening these values by producing public and reliable information on the economy, efficiency, and effectiveness of organisational activities in a transparent manner.

Performance audit – definition
a) Audit of the economy of administrative activities in accordance with sound administrative principles and practices, and management policies;
b) Audit of the efficiency of utilization of human, financial and other resources, including examination of information systems, performance measures and monitoring arrangements;
c) S7s7Audit of the effectiveness of performance in relation to achievement of the objectiveness of the audited entity, and audit of the actual impact of activities compared with the intended impact.

And it is intended to improve the “performance” of the organization!
Ultimately, a board is responsible for representing the interests of the
company’s shareholders and stakeholders, while monitoring the overall health,
compliance, and performance of the business.

Performance audit – a driver for re&forms and a challenge for auditors
The audit universe is based on the strategy of the organization!
Audit engagements result from a risk-oriented and comprehensive approach!
1. positioning directly under the highest management level;
2. strategy of the KPI linked to the administration and its dynamic development;
3. team-oriented organisation;
4. human resource development and knowledge management;
5. excellent networking, also with the professional – and scientific community
6. internal and external quality assurance;
7. measures to safeguard the results

Performance audit – how and what?
Ø Organizations – objectives, what they are supposed to accomplish;
Ø Valid measures of performance need to exist;
Ø Accurate measures of cost need to be developed;
Ø Cost and performance information should be brought together;
Ø Staff need to have incentives to use the information;
Ø Basic questions: Are things being done in the right way – Are the right things being done?
Ø Evaluating

o Performance investigatory work requires flexibility, imagination and analytical skills.
Ø Strategy and objectives – defining outcome/output?
Ø Developing effective measurement mechanisms?
Ø Defining adequate standards?
Ø Defining responsibility?
Ø This should turn public servants/ employees into managers, who are made accountable for the performance of their organisation.

Performance Crisis:
Ø Domination by Managing Director
Ø Board’s failure to direct and control management
Ø Board accepted poor and voluminous reports
Ø Internal audit not well directed by Audit Committe
Ø Chairman’s failure to lead
Ø No monitoring of board’s performance
Ø Inadequate information, systems, and procedures;
Ø Board over-relied on mangement and auditors

The hallmark of perfromance is when An organisation clearly define WHAT it will achieve and how it will create value while addressing the uncertainty ,protecting value, building brand and progress steadily.

Reference:
Performance Audit in the Public Sector ,Johann Rieser Senior Auditor, Ministry of Finance, Vienna, 2016
www.cameronralph.com.au, 2016
Mark Wallace | Executive Director CIMA | April 2015

Femi Mosaku-Johnson is the Registrar/CEO of the Association of Corporate Governance Professionals of Nigeria. He regularly writes, consults and speaks on leveraging the power of governance for social good, corporate governance, leadership, and performace. During his time at IoD Nigeria, Femi has designed and managed series of programmes that helps hundreds of directors and executives on their journey to master the Art & Science of the Boardroom. When he’s not in the office Femi can be found on mission feilds around around Nigeria.