Importance of Strong

Enterprise Governance
Practices
GITAMSchool of
International Business
October 17-20, 2016

Principles of Enterprise Governance

Some commonly accepted principles
of enterprise governance including Integrity and Ethical Behavior
Disclosure and Transparency
Rights and Equitable Treatment of
Shareholders and Other Key
Stakeholders
Role and Responsibilities of the Board

Principles of Enterprise
Governance
Integrity and Ethical Behavior
important for public relations
a necessary element in risk management
and compliance activities.
develop a code of conduct for their directors/
executives and all other stakeholders to
promote ethical and responsible decision
making.
To support, enterprises should establish compliance
and ethics programs to minimize the risk that they
may step outside of ethical and legal boundaries.

Principles of Enterprise Governance

Disclosure and Transparency
make publicly known the roles and
responsibilities of board and
management to provide shareholders
and other stakeholders with a level of
accountability.
implement procedures to independently
verify and safeguard the integrity of the
enterprises financial reporting.
Disclosures should be timely and
balanced to ensure that all investors and
other interested stakeholders have
access to clear, factual information.

Principles of Enterprise Governance

Rights and Equitable Treatment of
Shareholders and Other Key Stakeholders
Respect the rights of shareholders and key stakeholders
help them to exercise those rights
by effectively communicating information that is
understandable and accessible
encouraging open communications
an enterprise should recognize that they have legal and
other obligations to all legitimate stakeholders.

Principles of Enterprise Governance

Role and Responsibilities of the
Board
The board needs a range of skills and
understanding to be able
to deal with various business issues and
have the ability to review and challenge
management performance.

It needs to be of sufficient size and have

an appropriate level of commitment to
fulfill its responsibilities and duties.
Have appropriate mix of executive and
nonexecutive directors.

Enterprise Governance: History from

the US perspective
Concepts started in the 19th century - when state
laws allowing boards to govern without the
unanimous consent of shareholders.
concept of appraisal rights that allows minority
stockholders the opportunity to sell their holdings or
withdraw
the rights of individual owners and shareholders have
been limited over time
more frequent calls for corporate governance
reforms.
The Wall Street crash of 1929 brought questions and
concerns about the changing roles and behaviors

Post WWII
Post World War II - the emergence of multinational
corporations and the establishment of a managerial
class.
agency theory model- an enterprise and its
operations are seen as a series of contracts
between managers or principals and their employee
agents.
concept of asymmetric information: one party has
more or better information than the other.
This creates an imbalance of power in transactions,
which can sometimes cause the transactions to go
awry.

FCPA
Began to be questioned in the 1970s following the
Watergate scandal.
19741977 was a time of extreme social and
political turmoil in the United States, and a series of
illegal acts were discovered at the time of the 1972
presidential election
result -passage of the 1977 Foreign Corrupt
Practices Act (FCPA).
The FCPA prohibited bribes to foreign officials and
contained provisions requiring the maintenance of
accurate books and records and systems of internal
accounting control.

FCPA
FCPA required that SEC-regulated enterprises must:
Make and keep books, records, and accounts, which, in
reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of the issuers.
Devise and maintain a system of internal accounting controls
sufficient to provide reasonable assurances that:
Transactions are executed in accordance with managements
authorization.
Transactions are recorded in conformity with GAAP or any other criteria
applicable to such statements, and also to maintain accountability for
assets.

Permit access to assets only with managements authorization.

Compare the recorded accountability for assets with the existing
assets at reasonable intervals, and take appropriate action

COSO & SOx

Since the late 1970s, corporate governance has been
the subject of significant debate leading up to the
release of the COSO internal controls framework.
Corporate governance became a major issue in the
early 2000s with the massive bankruptcies and
criminal malfeasance of such corporations as Enron
and WorldCom as well as a series of corporate
debacles at such now departed corporations including
Adelphia Communications and Global Crossing.
All of this led to the passage of the Sarbanes-Oxley
Act of 2002

Enterprise Integrity and Ethical

Behaviour
there must be strong and active programs at
all levelsfrom the board to staff employees
to promote the ethical behaviour and
integrity of the organization.
SOx mandates that corporate audit committees
must have their CFO sign an ethics statement,
but this is no guarantee that the CFO will
always follow ethical business practices.
enterprises will find greater value in having one
set of rules apply to all.

Enterprise Integrity and Ethical

Behaviour
An enterprise should establish an effective
ethics function, including a mission
statement and a code of conduct.
An effective ethics program requires a formal
commitment between the organization and its
employees and agents to do the right thing.
An effective enterprise-wide ethics program
starts with understanding the enterprises risk
environment to launching an effective code of
conduct.

First Steps: Mission

Statement
Developing a Mission Statement
Every enterprise needs a mission statement to describe
its overall objectives and values.
It should be a source of directiona compasswhat the
enterprise stands for and what it does not.
Provide an insight into the aspirations of companies,
businesses, and corporations.
These statements are generally short, clear, vivid,
inspiring, and concise without using corporate or
company jargon, complicated words or concepts.
A strong corporate mission statement is an important
element in any ethics and corporate governance initiative.

Mission statement
Southwest Airlines, once a regional short-haul passenger airline
that has beat many of its competitors through aggressive ticket
pricing and efficient, innovative customer service. Their mission
statement is the following:
Southwest Airlines is a company that is for anyone and everyone
that wants to get from point A to point B by flying. Our service
and philosophy is to fly safe, with high-frequency, low-cost flights
that can get passengers to their destinations on time and often
closer to their destination. We fly in 58 cities and 30 states and
are the worlds largest short-haul carrier and we make sure that it
is run efficiently and in an economical way.
To organizethe world's informationandmakeituniversally
accessible and useful.
Guess who?

US mission statement in 60s

Perhaps one of the best examples of a
mission statement was expressed by
the U.S. President John F. Kennedy in
the early 1960s:

This nation should dedicate itself to

achieving the goal, before this decade
is out, of landing a man on the moon
and returning him safely to Earth.

Codes of
Conduct
code of conduct provides the supporting rules for enterprise
stakeholders. It is a living document.
Sox requires that corporations must develop a code of ethics for
their senior financial officers to promote the honest and ethical
handling of any conflicts of interest and their
This code of ethics is disclosed in the enterprises periodic
financial reports.
A code of conduct should be a clear, unambiguous set of rules
or guidance that outlines rules or what is expected of them as
members of the enterprise, whether officers, employees,
contractors, vendors, or any other stakeholders.
The code should be based on the values and legal issues
surrounding an enterprise.

Communications to Stakeholders
and Assuring Compliance
Both Enron and WorldCom had adequate corporate
codes of conduct, but their top corporate officers did not
feel the rules applied to them.
The senior management group should formally
acknowledge that they have read, understand, and will
abide by their code of conduct.
With the management team standing behind it, the
enterprise should next deliver the code of conduct to all
stakeholders in the enterprise.
Rather than just including a copy of the code with
payroll documents, an enterprise should make a formal
effort to present the code in a manner that will gain
attention.

Disclosure and Transparency

In addition to legal requirements reporting, an
enterprise should put in place reporting and
disclosure mechanisms designed to ensure
compliance with its listing requirements such
that:

All investors have equal and timely

access to material information
concerning the enterprise
Announcements are factual and
presented in a clear and balanced
way.
The communications and
information should be transparent
and presented in a manner that is

Disclosures
provide information about their operations in a
balanced manner with both positive and
negative information.
an enterprise should develop board of directors
approved written policies designed
to ensure compliance
to ensure accountability
When faced with gray area questions about
whether or not, enterprise stakeholders can look
at this policy and take appropriate actions in a
forthright manner.

Rights and Equitable Treatment of

Shareholders and key Stakeholders
Enterprises should empower their
shareholders
by communicating effectively with them,
by giving them ready access to balanced and
understandable information

As part of effective governance practices,

an enterprise should design a policy for
promoting effective communication with
shareholders and promote participation at
annual shareholder meetings.

Governance Role and

Responsibilities of the Board
The primary responsibility of the board of
directors is to protect the shareholders
assets and ensure they receive a decent
return on their investment.
The board of directors is appointed to act
on behalf of the shareholders and are
directly accountable to the shareholders
In discharging this obligation, directors rely
on, officers, outside advisors, and auditors.

Roles of Directors
1. Establish vision, mission, and values for the enterprise.
Establish and monitor the enterprises vision and mission to guide
and set the pace for current operations and future developments.
Determine the values to be promoted throughout the enterprise.
Determine and review enterprise goals and key policies.

2. Set strategy and structure.

Review and evaluate present and future opportunities, threats, and
risks in the external environment and current and future strengths,
weaknesses, and risks relating to the enterprise.
Determine strategic options, select those to be pursued, and decide
the means to implement and support them.
Determine the business strategies and plans that underpin the
overall enterprise strategy.
Ensure that the enterprises organizational structure and capabilites
are appropriate for implementing its chosen strategies.

Roles of Directors
3. Delegate to management.
Delegate authority to management, and monitor and evaluate the
implementation of policies, strategies, and business plans.
Determine monitoring criteria to be used by the board.
Ensure that internal controls are effective.
Manage and supervise the internal audit function, including the selection of
the chief audit officer (CAO).
Communicate with senior management.

4. Exercise accountability to shareholders and be responsible to

relevant stakeholders.
Ensure that communications both to and from shareholders and relevant
stakeholders are effective.
Understand and take into account the interests of shareholders and relevant
stakeholders.
Monitor relations with shareholders and relevant stakeholders by gathering
and evaluating appropriate information.
Promote the goodwill and support of shareholders and relevant stakeholders.

Questions?