CORPORATE GOVERNANCE

The media is awash with the Crane Bank saga and there are a lot of theories on what could have or could not have happened, who to point fingers at and what might have gone wrong. This series of discussions however, drive me to a topic that is seldom discussed but a very glaring issue in today's corporate world known as corporate governance. Many people relate this term to big multinational corporations and already established companies. Be that s it may, it affects our day to day living and business life around the world.

With the integration of the world economies and businesses cutting across borders, there is need to adhere to world acceptable principles and business guidelines. Many international investors and private equity firms are looking out for companies that have structures. They need companies where their interests are secured at all levels of the company. This therefore drives the idea of Corporate Governance.

Perhaps what accelerated the need for robust corporate governance were the new century’s financial scandals affecting major American firms, such as Enron, WorldCom and Arthur Andersen, and the resulting loss of confidence of the investing public in the stock market that caused substantial financial losses to millions of individual investors.

The United Kingdom’s 1992 Cadbury Report’s often quoted definition is: “Corporate governance is the system by which businesses are directed and controlled. In simpler terms however, corporate governance is simply about the interaction and relationship among the various stakeholders, in determining the direction and performance of a company.

It should be noted that the foundation of modern company law emanates from the famous “SALOMON’S CASE”. From this case, the veil of incorporation effectively segregates the owners from the management of the company. Therefore the company may be viewed as a conduit with two masters, namely, “the board of directors” deciding as a collective unit and “the members/Shareholders” deciding at a general meeting. The Directors are the directing mind and will of the Company and carry on day to day business of the company whereas the Shareholders own the company. In Uganda the roles of Director and Shareholder are usually married and enriched in one person.

In this view, the primary function of corporate governance law is to devise strategies and mechanisms to ensure that those in control of shareholders’ property apply it strictly for the benefit of shareholders. The separation of ownership and control together with the increasing involvement of other stakeholders who have an interest in the business of the company such as financiers, regulators, surrounding communities and employees has accordingly given rise to the need for a uniform and comprehensive system of control based on the predominant principles of transparency, fairness, responsibility and accountability.

The OECD principles of corporate governance, 2006 cover five areas: The rights of shareholders, the equitable treatment of shareholders, the role of stakeholders, disclosure and transparency, the responsibility of the board.

In Uganda, the 2012 Companies Act provides the primary framework for governance of companies and introduced a code of corporate governance that is voluntary for private companies and mandatory for new public companies. This code of Corporate Governance is enshrined under Table F of the Companies Act.

Corporate governance in Uganda is approached in two forms. The mandatory form, also called ‘comply or else’, and the voluntary one also known as ‘comply or explain’. “The former is where corporate governance standards are enshrined in legal enforceable instruments, with legal penalties for non-compliance, while the latter includes guidelines that contain best practices on particular governance issues such as treatment of shareholders, transparency and accountability among others. In Uganda industries such as Capital markets, Banking and Insurance have compulsory corporate governance requirements.

Corporate governance may sound a preserve for the big corporations in the private sector, but that is a misnomer because the principles also apply to non-governmental organisations, family-owned enterprises and public sector bodies among others.

A good corporate governance image enhances the reputation of the organization and makes it more attractive to customers, suppliers and investors.

It is often said that a good corporate governance is good business. Deciding to ignore the best practice is at your peril and more to both shareholders and stakeholders. 

 

Ian Mutibwa

Partner

Signum Advocates