Whos the boss? Whos in charge? These are common questions that arise in the corporate governance context for small and medium size businesses. Lets begin with a working definition of corporate governance.
In broad terms, corporate governance refers to the mechanisms, processes and relations by which corporations are controlled and directed. The law treats corporations as persons with separate legal personality which can sue and be sued. The corporation is distinct from the individuals who own it (shareholders) and survives the death of its investors as shares can typically be transferred. Governance structures identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules and procedures for making decisions in corporate affairs. Corporate governance includes the processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies and decisions of corporations and their agents.
In the past decade, there has been a renewed interest in the corporate governance practices of large corporations in relation to accountability. The high profile collapse of a number of international companies such as Enron, Arthur Anderson, Tyco, WorldCom, and Global Crossing have dominated headlines across the world. Most of these instances involved accounting fraud. Wolf of Wall Street starring Leonardo DiCaprio was an excellent illustration of how a lack of corporate governance can lead to an excessive abuse of power and financial fraud. The demise of certain American corporations has resulted in the U.S. government passing the Sarbanes-Oxley Act in 2002 which was intended to restore public confidence in corporate governance. On the whole, we have been fortunate in Canada although there have been scandals. The largest stock scandal in Canadian history involved the public mining company; Bre-X which collapsed after its shares became worthless due in part to an elaborate set of lies, misinformation and cover-ups.
In any company, the shareholders own the corporation and they elect the Board of Directors who is authorized to manage and direct the affairs of the corporation. The Board appoints officers such as a C.E.O. or President, C.F.O. and Chief of Operations to handle important functions of management and to handle the day-to-day affairs and operations of the Company. At what point does the authority of the Board end and the scope of the Executive Management Team take over? What is the mandate of the Executive Management Team and what decisions or activities do they need to get blessed by the Board before they implement them? These are commonly misunderstood issues that every businessperson needs to possess clarity on.
The following principles are key to ensuring that proper corporate governance practices are complied with in the context of how decisions are made by companies:
- Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
- Interests of other stakeholders: Organizations should recognize that they have legal, contractual, social, and market driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
- Role and responsibilities of the Board: The Board requires its members to possess sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
- Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and Board members. Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision-making.
- Disclosure and transparency: Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.
Always consult an experienced legal professional to ensure that your corporate governance needs are properly looked after.
With this in mind, C2K Law Corporation provides timely legal advice in relation to all types of corporate/commercial and business law matters. We strive to deliver an affordable, value-added service to suit your individual needs. We recognize that you are concerned about the costs of legal services. We do our best to provide a low cost value added service by leveraging technology and reducing overhead expenses passing the savings on to you. We use our entrepreneurship in our creative problem-solving approach, which enables us to take immediate and decisive action.
*The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.