Good corporate governance improves a company's growth by enhancing investor confidence
Good corporate governance is one of the cornerstones of a strong and efficient business. It promotes responsible decision making and a healthy respect for business risks. Often in the good economic times, however, corporate governance is one of those areas that gets left behind in the rush to build business while the going is good.
In fact, the history of laws regulating corporate governance matches the major economic downturns over the last 100 years. The first major overhaul of corporate governance practices occurred in the wake of the great depression of the 1930s.
The most recent example of this is the Sarbanes-Oxley law changes made in wake of the Enron collapse and the demise of Arthur Anderson (which have been reflected in new laws passed in many jurisdictions). Oman is no exception to those trends. Following the market downturn in 1997, the regulators here have issued a number of laws and codes of practice, which are intended to promote better corporate governance.
Good corporate governance improves a company's growth by enhancing investor confidence, lowering the cost of capital and encouraging an efficient use of resources. It also promotes a responsible attitude to managing risk that protects businesses when prosperous times slow.
The OECD Principles of Corporate Governance, an international benchmark for corporate governance, states that good corporate governance is one of the key elements in improving economic efficiency and growth. It is therefore worthwhile to pause occasionally to reflect upon the way our businesses are managed and whether our own corporate governance is all it should be.
Corporate governance issues generally revolve around balancing the various rights and duties of three key participants in a company its shareholders, its board of directors and its managers. Set out below is a consideration of the key areas of corporate governance relevant to each of these groups.
Directors
Of these three groups, the most heavily regulated tends to be the board of directors and, in particular, their duties to the company. As a general rule of thumb, directors must always act in the best interests of a company and exercise a proper level of care in doing so.
The primary liability of directors of joint stock companies is found in article 109 of the Commercial Companies Law (Royal Decree 4 of 1974 as amended) (CCL). Under that provision, directors can be held liable to shareholders, the company as well as third parties for their failure to act prudently in the circumstances.
Actions under that provision can be started at any time within five years of the act or omission, which forms the basis of the claim. This means that a director will continue to be liable for their action as a director, even after he has resigned. The powers of directors in running a company are also limited and they must take care not to exceed their authority.
General powers of the board are specified in CCL and ancillary laws. They can also be specified in a company's Articles of Association. A director who exceeds that authority may attract personal liability for doing so.
Directors of publicly listed companies are also bound by duties set out in a number of subordinate laws and the Code of Corporate Governance issued by the Capital Market Authority (The Code). The Code provides specific guidance as to the duties of directors of public companies as well as prescribes measures such as regular board meetings, establishing an audit committee and conducting an annual review of the company's internal controls.
Management
Corporate governance rules impacting the management tend to focus on the appointment and review of senior management. It also focuses on ensuring that there is a well defined division of duties between the directors and management. This later point is a key issue that constantly arises in corporate governance.
Directors need to check their natural desire to become overly engaged in the operational side of the business.
Managers need to ensure that they do not abdicate responsibility for day to day matters and escalate matters to the board appropriately. This approach calls for a strategic level of control by the board of directors, rather than concerning itself with day-to-day matters.
This is reflected, for example, in Ministerial Decision 137/2002, which requires the board of directors to supervise executive management to ensure that work proceeds in a manner which achieves the company's objectives. The Code similarly requires directors to review a company's performance and assess whether it is properly managed. The day to day management of the company should remain the responsibility of the executive management.
Shareholders
Good corporate governance in the context of shareholders revolves around issues of transparency and fairness. Transparency for shareholders means ensuring that shareholders are properly informed of matters affecting the company, so that they may exercise their judgment as investors in the company. Fairness, in the context of shareholders, means ensuring minority shareholders are adequately protected and all shareholders are on a level playing field when it comes to information about the company.
Typical corporate governance laws protecting shareholders include:
prohibitions against insider trading
disclosure by directors and key executives of related party transactions, and protections of minority shareholders against abusive acts by controlling share holders.
The quality of corporate governance is affected by the relationships between the key participants in a company. Companies need to take care to ensure that the rights and duties of the various participants are clearly understood by all and that corporate governance practices are regularly monitored and enforced.
Good corporate governance is beneficial not only to individual companies but also to the economy as a whole.
Key players
Shareholders
Main issues are transparency and fairness
Directors
CMA code provides specific guidance on this
Management
Focus is on the appointment and review of senior management
By Charles Schofield
businesstoday 2006
