Analysis of Current Governance Best Practice Trends
Corporate governance is a moving target, and one size, definitely, does not fit for all. However, there are current best practice trends. It is true that there is convergence on the best practices of corporate governance. On the other hand, the corporate governance climate of the country also highly affects the corporate governance practices of the companies. There is always a threat of corporate governance practices remaining only as box-ticking exercises especially in the emerging countries.
Therefore, it is highly important to question the applicability of the best corporate governance practices. One way of doing it is, for example, to look at the developments in corporate governance both in the country and also in the company for the last decade.
Under this heading the statement of corporate governance of the company, memorandum and articles of association, board and committees, code of ethics, internal control reports according to SOX 404 issued by SEC, annual report are analyzed. While going through the corporate governance practices of the company; Code of Corporate Governance for Listed Companies, as issued by the Securities and Regulatory Commission, Mandatory Provisions for the Articles of Association of Companies to be listed Overseas, Guidelines for the Articles of Association of listed Companies and Standards of Corporate Governance of Listed Companies are taken under consideration and reviewed.
CGS Center analyze the current governance structure of the company and examine the applicability of the best corporate governance practices to the company.
Establishment of the Corporate Governance Infrastructure of the Company
In the OECD principles of Corporate Governance, with respect to the responsibilities of the board, it says: “The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board's accountability and loyalty to the company and the shareholders”.
The board has a fiduciary duty to act in the best interests of shareholders. This encompasses duty of care and duty of loyalty that invokes boards to ensure the equitable treatment of shareholders, monitor management and related party transactions, establish compensation policy and develop succession planning.
In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information. To be effective in management oversight, information disclosed on the members of the board and senior executives and their compensation should be transparent.
There are six key areas that boards should focus on as they fulfill their responsibilities for overall governance and company performance
- Boards have supervisory functions. They contribute and guide the strategic and operational development of the companies.
- Boards have the responsibility for constructive oversight. They have to see the company is managed in the best way that serves the owners’ interest.
- Boards have to secure risk management is assessed. Strategic decisions which inherit risk should be taken by the CEO with support from the board. Those who determine the risk policy and monitor the risk should be separate from those who run the business.
- Boards should look at what kind of compensation systems are in place. Are the incentives tied to driving up the stock price in the short term or are they focused on enhancing long-term shareholder value (in case Turkey compensation systems are based on largely honorarium, salary, bonus, premium and a portion of the annual profit- dividend).
- Boards, together with the CEO, have to assume the responsibility to be a tone at the top. They must stipulate sound business management, and they have the duty to act reasonably and in good faith.
- A board’s involvement with investors is limited to the annual general meeting. Boards ought to communicate their own governance standards to investors
examines the corporate governance structure of the company within the context of the corporate governance principles of the relevant institutions and globally accepted best principles. CGS Center
scrutinizes the formation of the board, which is the core of the corporate governance, in the light of the above mentioned activities that are essential for an efficient and a productive board.
Assessing Board Effectiveness
The purpose of the board self-evaluation is to identify areas of board functioning that are working well and those that may need improvement. It is an opportunity for an open and candid discussion about board and trustee responsibilities, and trustees’ interests and desires for the college(s). Exploring these areas fosters communication among the members and leads to more cohesive board teams.
Assessing board performance involves looking at the board as a unit. While individual trustee behavior contributes to effective board functioning, the focus of a board self-evaluation is not on individuals, but on how they work together to govern the district. The evaluation focuses on board policies and practices and the role of the board in representing the community, setting policy direction, working with the CEO, and monitoring institutional effectiveness.
The desired outcomes of a board self-evaluation include:
- a summary of what the board does well and its accomplishments;
- a better understanding of what is needed from each trustee and
- the CEO to be an effective board and board/CEO team;
- an assessment of progress on the prior year’s goals and identify
- what needs to be completed; and
- goals and tasks for the coming year related to board performance and its leadership for district goals.
CGS Center provide an independent, non-biased influence on board evaluation process by the help of informal discussions to formal, structured assessment surveys or interviews.
Analyzing and Improving Eligibility of Board Members
In order to have powerful and efficient board, it should have an adequate number and appropriate composition of board members. Unless required otherwise by law, the board should identify and nominate candidates and ensure appropriate succession planning. Board perspective and ability to exercise objective judgment, independent of both the views of executives and of inappropriate political or personal interests can be enhanced by recruiting members from a sufficiently broad population of candidates, to the extent possible and practicable size of the company, complexity and geographic scope.
Board members should be and remain qualified, including through training, for their positions. They should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the affairs of the company.
The board should possess, both as individual board members and collectively, appropriate experience, competencies and personal qualities, including professionalism and personal integrity.
The board collectively should have adequate knowledge and experience relevant to each of the material financial activities the bank intends to pursue in order to enable effective governance and oversight. Examples of areas where the board should seek to have, or have access to, appropriate experience or expertise include finance, accounting, lending, bank operations and payment systems, strategic planning, communications, governance, risk management, internal controls, auditing and compliance. The board collectively should also have a reasonable understanding of local, regional and, if appropriate, global economic and market forces and of the legal and regulatory environment.
CGS Center analyzes the competence, representing organizations, sectorial experiences, etc. of the existing board members and shall propose competency qualifications of board members for a powerful board.
Strategy consists of competitive moves and business approaches used by managers to run the company. It is the management’s “action plan” to grow the business, attract and please customers, compete successfully and achieve target levels of organizational performance.
In strategic planning among all the many different business approaches and ways of competing it should have determined the particular combination of competitive and operating approaches in moving the company in the intended direction, strengthening its market position, and competitiveness, and boosting performance.
Picture: Strategy Executing Process
Therefore, for a company’s strategy to be well-conceived, it must be
- Matched to its resource strengths and weaknesses
- Aimed at capturing its best market opportunities and erecting defenses against external threats to its well-being
carries advisory services on especially operational restructuring and strategic restructuring and adds value to the company.
Risk Management and Performing Internal Control Activities
An effective internal audit function provides independent assurance to the board of directors and senior management on the quality and effectiveness of financial institutions’ internal control, risk management and governance systems and processes, thereby helping the board and senior management protect their organization and its reputation.
Risk management generally encompasses the process of:
- Identifying key risks to the institution,
- Assessing these risks and measuring the institution’s exposures to them;
- Monitoring the risk exposures and determining the corresponding capital needs (i.e. capital planning) on an ongoing basis,
- Monitoring and assessing decisions to accept particular risks, risk mitigation measures and whether risk decisions are in line with the board-approved risk tolerance/appetite and risk policy;
- Reporting to senior management and the board
Internal controls are designed, among other things, to ensure that each key risk has a policy, process or other measure, as well as a control to ensure that such policy, process or other measure is being applied and works as intended. As such, internal controls help ensure process integrity, compliance and effectiveness. Internal controls help provide comfort that financial and management information is reliable, timely and complete and that the institution is in compliance with its various obligations, including applicable laws and regulations. In order to avoid actions beyond the authority of the individual or even fraud, internal controls also place reasonable checks on managerial and employee discretion. Even in very small financial institution, for example, key management decisions should be made by more than one person. Internal control reviews should also determine the extent of an institution’s compliance with company policies and procedures, as well as with legal and regulatory policies.CGS Center
scrutinizes the risk management, internal control and internal auditing functions of the company.
Restructuring management is always to ensure the survival of the company in the short term and to reestablish competitiveness.
The goal of the status assessment is to obtain a clear picture of the actual situation of the company. Effective measures can only be based on transparency. To achieve the latter, internal and external data is consolidated and analyzed. It is highly important for the status assessment to apply an adequate measure of precision and completeness, especially considering the time constraints that drive most crisis situations.
Based on this status assessment a rough draft of the restructuring concept is generated.
It consists of three elements:
The first objective of financial restructuring is to take measures that avert the impending insolvency and that ensure the short-term survival of the business. This is the prerequisite for a sustainable restructuring process. The medium and long term goal of financial restructuring is reestablishment of a healthy and solid capital structure.
In the course of operational restructuring measures required to improve the earnings and liquidity situation along the value chain are defined.
In addition to strategic reorientation of the company, strategic restructuring includes the structural and process-relevant (re)organization of the corporate units.
All of the effects of the measures planned in the restructuring concept are simultaneously consolidated in an integrated business plan with a time window. The business plan provides the linkage between the three concept elements (financial and operational restructuring, as well as strategic reorientation) and serves as the basis for implementation monitoring. CGS Center
carries advisory services on especially operational restructuring and strategic restructuring and adds value to the company.