Importance of Corporate Governance For Finance Professional

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Importance of Corporate Governance for Finance Professional

Corporate Governance facilitates the ability of institutional and individual shareholders to better govern corporations, enhancing both corporate accountability and the creation of wealth, as well as factoring other “extra-financial” issues into the analysis of risks and opportunities.

Corporate governance the key to survival for finance professionals

Continued vigilance and good corporate governance are vital to accountants and financial advisors in the current economic climate according to the Head of Corporate Governance and Risk Management at the Association of Chartered Certified Accountants (ACCA).

There were many factors that contributed to the global economic downturn. These, he said, include a combination of poor oversight, complacency, short-term thinking, interconnectedness, misalignment of interests, lack of accountability and no influence or power for risk management advisors. “In short, we have seen major corporate governance problems play a major part in an economic downturn. Moving forward, the key to survival for those in the accounting and finance sectors will be in observing the fundamental principles of good business and good governance.”

“There needs to be a shared common understanding among boards, shareholders and stakeholders of the purpose and scope of corporate governance with boards leading by example to ensure the continuing ethical health of their organisations and setting clear goals, accountabilities, appropriate structures, delegated authorities and policies. Directors need to promote the success of their company and be aware of what is required of them by law. There should also be an alignment of remuneration with individual performance in a way that promotes organisational performance. Boards must be accountable to shareholders and, where appropriate, other stakeholders.”

“The role of the finance professional,” he said, “is fundamental to good corporate governance in terms of their responsibility for how accounts are used, how cash is reported, for showing risk and for auditing and there is an increased expectation of professional and ethical conduct, particularly given the increased supervision of regulations for those in the finance sectors.”

Importance of Corporate Governance

Banks are a critical component of the economy while providing financing for commercial enterprises, basic financial services to a broad segment of the population and access to payment systems. The importance of banks to national economies is underscored by the fact that banking is, almost universally, a regulated industry and that banks have access to government safety nets. It is of crucial importance therefore that banks have strong corporate governance practices.
From a banking industry perspective, corporate governance involves the manner in which the business and affairs of individual institutions are governed by their Supervisory Boards and senior management, affecting how banks:
– Set corporate objectives to generate sustainable economic returns to owners;
– Run day-to-day operations of the business;
– Protect the interests of depositors;
– Consider the interests of other recognized stakeholders; and,
– Align corporate activities and behaviors with the expectation that banks will operate in a sound manner and in compliance with applicable laws and regulations.

Banks are also important catalysts for economic reforms, including corporate governance practices. Because of the systemic function of banks, the incorporation of corporate governance practices in the assessment of credit risks pertaining to lending process will encourage the corporate sector in turn to improve their internal corporate governance practices.

Importance of implementing modern corporate governance standards is conditioned by the global tendency to consolidation in the banking sector and a need in further capitalization.

Best corporate governance practices will enable banks to:

  • Increase efficiency of their activities and minimize risks;
  • Get an easier access to capital markets and decrease the cost of capital;
  • Increase growth rate;
  • Attract strategic investors;
  • Improve the standards of lending;
  • Protect the rights of minority shareholder and other counterparts;
  • Strengthen their reputation and raise the level of investors and clients’ trust.

The regulatory and supervisory practices are effective in promoting good performance and stability in the banking sector are those that force accurate information disclosure, regulate capital adequacy, stringency of loan classification; provisioning standards as well as a corporation’s own governance and control systems to identify, assess, manage and control risk.

The issue of the governance and accountability of corporations has recently come to the fore following a wave of high profile corporate scandals and collapses. Corporate governance is about the accountability mechanisms that govern the relations among shareholders, the board of directors, senior management, the workers and other stakeholders (creditors, suppliers, local communities, etc.). Enron, Worldcom, Parmalat, to name but a few of the corporate scandals in the US and Europe, all have in common blatant failures in assuring the integrity of those accountability mechanisms.

Good governance is crucial to the ability of a business to protect the interests of its stakeholders. These interests may extend beyond the purely financial to the stakeholders’ ethical, religious, or other values. In the case of an institution offering Islamic financial services, stakeholders expect its operations to be carried out in compliance with the principles of Shariah. A corporate structure that enables such an institution to implement good governance through Shariah-compliant operations is therefore essential. (Corporate Governance in Institutions Offering Islamic Financial Services Issues and Options, Wafik Grais and Matteo Pellegrini)

Since the late 1990s the Islamic banking world has stepped up efforts to standardise regulation and supervision. The Islamic Development Bank is playing a role in developing internationally acceptable standards and procedures and strengthening the sector’s architecture in different countries. Several other international institutions are working to set Shari’ah-compliant standards and harmonise them across countries. These include the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), the Islamic Finance Service Board (IFSB), the International Islamic Financial Market, the Liquidity Management Center and the International Islamic Rating Agency.

Corporate governance is defined as “systems and processes for ensuring proper accountability, probity and openness in the conduct of an organisation’s business.”

Corporate governance is a term used to also describe the formal system of accountability of senior management to shareholders. Together with transparency and risk management, it is a key issue in ensuring that financial institutions reach their full potential.

In a wider sense, corporate governance extends to cover the entire network of formal and informal relationships involving an entity and their consequences for society in general.

Corporate governance may be regarded as the moral or ethical or value framework under which corporate decisions are taken. Corporate managements generally have been concerned with using the physical, financial and human resources available with the management to get the best possible results in the interests of the stakeholders and, particularly, shareholders. It is quite possible that in the effort at arriving the best possible financial results or business results there could be attempts at doing things which are verging on the unlawful or even unlawful. There is also the possibility of grey areas where an act is not unlawful but considered unethical. These raise moral issues.

The basic issue of what will be the ethical issues in corporate governance requires absolute integrity in all operations. Integrity in the wider sense covers:

Financial integrity

Moral integrity

Intellectual integrity

In corporate governance financial integrity that assumes greatest importance. This would mean that the directors and all concerned should be open and straight about issues where there is conflict of interest involved in financial decision making. When it comes to even the purchase procedures, there is need for greater transparency.

Corporate governance and ethical behaviour have a number of advantages. Firstly, they help to build good brand image for the organisation. Once there is a brand image, there is greater loyalty, once there is greater loyalty, there is greater commitment to the employees, and when there is a commitment to employees, the employees will become have more incentive which drives creativity. In a competitive environment, creativity is vital to get a competitive edge.

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