Let’s talk corporate governance – What is it and what is it’s significance

18 Jan 2021

Introduction

Corporate governance refers to the adoption of legal structures and practices that are not specifically connected to outcomes in the market for the products or services of corporations. Worth mentioning is the fact that the success of corporate governance is heavily dependent on unceasing innovation. Hence, these practices are adopted, amended, and created anew – as seen in the development of the structures of the boards of directors of corporations.

What is corporate governance?

Corporate governance has been an interest in the legal and business sector for a while. It is the survival tool for larger companies and is fast becoming the yardstick in measuring the standard for the best corporate practices in the world. Although companies essentially operate in different industries and markets, and are vastly characterised by diverse strategies, personalities, and motives for doing business, they share identical or similar internal structures. These internal structures refer to the composition of the hierarchy of the company, namely the board, shareholders, and management (amongst others). Likewise, they can be understood as having to confront the same challenge; that of ensuring that managers are devoted and trustworthy agents of their principals and the shareholders. Corporate governance practices can thus be used as a mechanism in realising the best form of operating and efficient business practices devoid of conflicts of interest.

The Companies Act

Corporate governance can be described as a system by which an entity is directed and controlled with the view of achieving its objectives in a sustainable manner while also taking into consideration the interests of its stakeholders. It is also aimed at the conduct of the directors of a company and includes the company’s responsibility to society in general as good corporate citizens. The purpose of corporate governance is also dealt with in terms of the Companies Act, section 7(d) where it states that the intention of the Act is to “reaffirm the concept of the company as a means to achieve economic and social benefit”. Stakeholder protection is contained in section 76(3) (b) and section 72(4) provides for establishment of a social and ethics committee in accordance with a company’s public interest score.

Why is corporate governance important?

Businessmen and women see good corporate governance as being connected to successful operational outcomes. It is believed that a company which is well-governed focuses on maximizing external cash flow, through successful competition in its market. Operational success is still an implied meaning of good governance and often traded on by professionals in the field.

In relation to who determines corporate governance compliance – In South Africa, a company’s board of directors, in their capacity as the governing body of the company, is responsible for determining whether the company operates in a manner constituting good corporate governance in accordance with the requirements of the Companies Act. Though the governing body may be entitled to delegate their responsibility to different board committees, they may not delegate accountability. Thus, the determination of whether the company acts according to the concept of good corporate governance is an internal matter. The company in its financial statements should include non-financial information and report on social and environmental issues, this is to ensure the company acts transparently in the exercise of its business.

Conclusion

Corporate governance is a phenomenon that is relatively a rather surprisingly, recent model. In the corporate world it is understood that good corporate governance is closely tied to successful operational outcomes which heavily depend on unceasing innovation. The Companies’ Act, in terms of corporate governance, intends to reaffirm the company as a means to achieve economic and social benefit. It also aims to protects large companies by providing stakeholder holder protection in section 76.

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See also:

• The role of directors in the age of cybercrime
• Checks and balances to avoid non-compliance
• The Removal of Directors and Delinquency Orders under the South African Companies Act
• Harmonising corporate governance framework for South African mining companies: King IV, companies act and the mining charter

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)