Governance for Performance

[caption id="attachment_78851" align="alignright" width="225"] Olufemi Mosaku-johnson[/caption] By Olufemi Mosaku-Johnson Much has been written in recent times regarding the prospect of Corporate Governance as a balm needed to heal the nations of her woes, cure the organisation of its malaise and redeem the institutions of its misgovernance. There is the need to strengthen governance in the banks, corporations and financial institutions and to entrench the role of corporate governance in representing a rigorous challenge in organisation performance and to encourage building of institutions rather than personalities. Worryingly, however, there has been too little debate – written or otherwise – regarding corporate governance as a panacea for organisation performance. The continued creditability of this approach, however, depends on there being a consensus that the contents of the governance structure and framework in organisations are congenial to best practice; to organisations disclosing their governance procedures in an open and transparent way; and to investors interpreting governance disclosures in an enlightened and objective manner. Another grey area is that of corruption which appears intractible in our body politic. Further, it is of critical importance that there are both sufficient institutional and organisation must be willing to seek an informed external perspective on their performance issue. Performance questions to be asked are: Are board balance and with right composition; what is the frequency of director re-election; do the organisation conduct board evaluation at intervals; is ther comprehensive risk management and internal control mechanism inplace? The following are also issues relevant tothis debate: The Combined Code on Corporate Governance sets out standards of good practice in relation to matters such as: · board composition · remuneration · accountability · relations with shareholders Indeed, the problem is not with the substantive contents of the Combined Code, but with the way they are applied. Good governance is a complex mix, but its essence can be distilled into two factors. The first is boardroom behaviour: are the difficult questions being asked? Moreover, is there effective challenge, or simply an over dependence on the management’s view? We heard a Chairman of a Council of a prominent membership body in Nigeria saying, I rely on CEO for everything. The second is ensuring that the board has a clear line of sight. If the directors cannot see what is happening inside the business, and are thus not receiving the necessary information, they will not know what questions to ask. Invariably, if the risk management processes are not organised in a clear and methodical way, then a small number of part-time executives do not stand much chance of overseeing them. There is also this issue of Chairman of the Board usurping the role of the CEO. This ugly trend, I have witnessed in my previous employments. Another variables are – boardroom behaviour and connectedness to the organisation – are necessarily interdependent. Therefore, there will be no real challenge for the boardroom unless the company makes it possible, which means that the management needs to want it to happen. Practical aspects of performance engendered by governance: · good interpersonal skills and the ability to manage conflict · sound judgment · the ability to influence through clear communication · integrity the pillar of sustainabibility. · the conviction to say things that need saying and, as a last resort, to vote with your feet · to be commercially aware. Performance challenges: Providing knowledge, insight and experience Raising standards of governance A good board should help to raise the standards of corporate governance within a company. This helps to ensure that executives understand their obligations in this respect and thus comply with the Code. Advising on strategy A business without a strategy is like a good soup without salt. Board can assist the executive team in articulating the strategy. Challenging business plans Executives can often produce business plans with goals that are comfortable rather than stretching. Boards can push, interrogate and raise the performance bar. They can also challenge ambitions that they believe are simply unrealistic or goal that suffers from Grandio Delusion.. Key Performance Issues What is Corporate Governace and how does it bring about the desired performance improvement in organisation: “Viewed at a high level, corporate governance is all about accountability and stewardship” -Report of Royal Commission into HIH Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. Corporate governance has both strategic and ethical implications. Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. Corporate governance has both strategic and ethical implications Simply put, bad corporate governance leads to bad strategy formulation and implementation. If strategy is about matching the firm’s internal resources and capabilities with opportunities from the external environment, then corporate governance should ask the following sorts of questions… I must add that Corporate Governance is about alignment- aligning personal interest with the larger goal of the organisation. A system of checks and balances between the board, management andinvestors to produce an efficiently functioning corporation, ideallygeared to produce long-term value- The Conference Board Current Challenges in Corporate Governance: Ø Insistence on forms and structures Ø Overarching regulations Ø Regulatory overkill Ø Lack of adequate number of strong, independent directors Ø Large liabilities for companies and officers Ø Has the pendulum swung too far? Governance and Performance:Good governance leads to good performance Ø It creates an open and transparent system Ø It improves communication and breaks down systematic barriers to flow of information Ø Good governance allows decision making based on data. It reduces risk Ø Good governance helps in creating a brand and creates comfort for all stakeholders and society Governance and Performance measurement – issues Ø Is governance behavior motivated by legislation? o Do standards vary with jurisdictions or do you adopt the best option? o Do you choose the right thing to do irrespective of whether it’s mandatory or not? Ø Is performance evaluation limited to valuation metrics? o Is it only ROE, Net margin, growth, shareholder wealth creation? Ø Do performance measures need to be holistic? o We need to encompass all stakeholders o Governance is an enabler for holistic performance Ø How do managers better understand governance requirements? o Do we need market research for governance requirements? Companies need to invest in good governance Ø Corporate governance has a direct bearing on business performance and thereby ROI Ø Leverage the power of IT Ø On average, businesses with superior governance practices generate 20 percent greater profits than other companies- A study based on 256 companies conducted at the MIT Sloan School of Management Ø Companies must emphasise ethics rather than figures Strategic implications of corporate governance • Simply put, bad corporate governance leads to bad strategy formulation and implementation. • If strategy is about matching the firm’s internal resources and capabilities with opportunities from the external environment, then corporate governance should ask the following sorts of questions… Ø Do we have the right strategy, given what we do well? Ø Is our strategy matched to the external environment (economy, social expectations, etc.)? Ø Are we capable of executing the strategy? Ø Do we have the right top management team? Ø If the answer to one or more of these questions is “no,” what do we need to change? Bad strategy makes it harder for firms to fulfill their economic and ethical responsibilities to stakeholders, including shareholders and employees! • Ethical issues in corporate governance There are several key strategic and ethical issues in corporate governance, including • how to align the interests of top managers and shareholders, • the proper level and function of executive compensation, • who monitors the top management team and how that monitoring occurs, and • Inclusion of shareholders and non-shareholder stakeholders. • The issue of conflct of interest [caption id="attachment_78851" align="alignright" width="225"] Olufemi Mosaku-johnson[/caption] 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.