Setting the pace: Getting started in NGO corporate governance

by Lasford Flackson

  Corporate governance relates to organizational compliance with relevant laws and regulations and conformance to ethics, standards and codes of best practices. In Zimbabwe, the main laws that NGOs need to comply with include the PVO Act, the Labor Act, and the Finance Act.23Corporate governance encompasses commitment to values and to ethical business conduct to maximize shareholder values on a sustainable basis, while ensuring fairness to all stakeholders including customers, employees, and investors, Government and society at large.24

  The practice and adoption of corporate governance however, is not only as essential to public or government institutions but also to Non Governmental Organizations or Non Profit making companies or organizations.

  The vital need of success of any organization lingers on its ability to mobilize and employ all kinds of resources to meet the objectives clearly set as part of the planning process. Managing well depends on internal and external factors; the latter include availability, cost effectiveness, technological advancement.25Corporate governance can also be understood as a system whereby written regulations are reinforced by wider ethical standards of corporate behavior. In this context, corporate ethics programs provide an underpinning framework for the behavior expected of individuals within a company.26 Corporate social responsibility (CSR) programs, on the other hand, generally attempt to and implement the idea of corporate responsibility towards various stakeholder groups and in relation to issues of material relevance such as impacts on local communities, human rights and the environment. 27

  Corporate governance has also been described as the moral or ethical or value framework under which decisions are taken. 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 illegal or even illegal. There is also the possibility of grey areas where an act is not illegal but considered unethical.28Good corporate governance is best understood as a well-functioning system of corporate direction and control. The debate around corporate governance has quickly evolved due to several far-reaching incidents of corporate fraud and collapse.29 During the 1990s’ stock market fizz, corporate executives used accounting manipulation to inflate profits and enrich themselves by selling huge stock option packages. In recent years, several industrialized countries have also been rocked by scandals involving ‘donations’ by companies to political parties and public officials. In France, for example, the former chairman of oil giant Elf who was convicted of misappropriating EUR 180 million worth of company funds , admitted paying EUR 5 million a year to French political parties in order to buy their support.30

  Increasingly, revelations of deterioration in quality and transparency, have called for adoption of internationally accepted ‘Best Practices’. The recent growth in corporate governance literature has focused on ways that corporations work. Firm behavior was earlier modeled on the argument of the neo-classicists who asserted that firms are nothing more than production counters. All activities of the firm were geared so as to maximize profits31.

  Whether understood in a broad or narrow sense, improving corporate governance is ideal to countering corruption. By providing an effective system of corporate control, good corporate governance provides an essential mechanism for stemming the potential for corrupt practice involving private sector actors. Sound corporate governance is therefore critical to enhance and retain investors’ trust. Corporate governance is also understood in the context of conducting business ethically. Ethics is concerned with the code of values and principles that enables a person to choose between right and wrong, and therefore, select from alternative courses of action.32

  Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization.33 Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. What constitutes good corporate governance will evolve with the changing circumstances of the Organisation and must be tailored to meet these circumstances. There are a number of definitions and explanations that have been put forward. But however the focus does not diverge from different explanations. All explanations concentrate on the ethical considerations and running smoothly of an organization as well as practicing good leadership for the sustainability of the company or organization as well as accountability and transparency.

  Development of corporate governance

  Corporate governance developed as a result of a number of recommendations that have been tabled after the realization that companies had been facing financial crises. Committees were established to specify the obligations that should be recognized for good corporate governance. These reports are the Cadbury committee (1992) the Greenbury committee (1995), the Hampel committee (1998), the Turnbull committee (1999) , Sarbanes Oxley act (2002) the World Bank and the OECD principles were then tabled and revised in 2005.

  The Cadbury Committee on Corporate Governance of 1992, stated objective was "to help raise the standards of corporate governance and the level of confidence in financial reporting and auditing by setting out clearly what it sees as the respective responsibilities of those involved and what it believes is expected of them".34 This was followed by the Greenbury Committee, of 1995.This Committee was set up in January 1995 to identify good practices by the Confederation of British Industry (CBI) in determining directors' remuneration and to prepare a code of such practices for use by public limited companies of the United Kingdom.35 The Committee aimed to provide an answer to the general concerns about the accountability and level of directors' pay. It argued against constitutional control and for strengthening accountability by the proper allocation of responsibility for determining directors' remuneration, the proper reporting to shareholders, and greater transparency in the process.

  The Hampel Committee followed in November 1995 to protect investors and preserve and enhance the reputation of companies listed on the London Stock Exchange. The Committee developed further the Cadbury Report, produced the Combined Code and it Recommended that the auditors should report on internal control privately to the directors, the directors maintain and review all (and not just financial) controls and that companies that do not already have an internal audit function should from time to time review their need for one.36

  The year 1999 saw the establishment of the Turnbull Committee. This was set up by the Institute of Chartered Accountants in England and Wales (ICAEW) in 1999. The committee provided guidance to assist companies in implementing the requirements of the Combined Code relating to internal control. It recommended that where companies do not have an internal audit function, the board should consider the need for carrying out an internal audit annually. Further recommendations were that boards of directors validate the existence of procedures for evaluating and managing key risks. 37

  The World Bank, both as an international development bank and as an institution interested and involved in equitable and sustainable economic development worldwide, became one of the earliest international organizations to study the issue of corporate governance. It viewed corporate governance in the context of openness. It noted that openness is the basis of public confidence in the corporate system and funds will flow to those centers of economic activity, which inspire trust. The World Bank Report points the way to the establishment of trust and the encouragement of enterprise. It marks an important milestone in the development of corporate governance.38

  The major influencing committee which emphasized the need for good corporate governance is the OECD. The Organisation for Economic Cooperation and Development (OECD) spelt out the principles and practices that should govern corporations in their goal to attain long-term shareholder value.39 The Sarbanes-Oxley Act, of 2002, (SOX Act), was a stern attempt to address all the issues associated with corporate failures to achieve quality governance and to restore investor confidence
. The Act contains a number of provisions that transforms the reporting and corporate directors’ governance obligations of public companies, the directors and officers.40

  Approaches to corporate governance

  There are a number of approaches put forth on corporate governance. The approaches however can be divided into three major categories and these include the Shareholder value approach, the enlightened shareholder approach and the stakeholder or pluralist approach.

  The shareholders approach propounds that the board of directors should govern their company or organization in the best interest of its owners. This means that the main objective of a company should be to maximize the wealth of its shareholders, in the form of share price growth and dividend payments, subject to conforming to the rules of the society as embodied in laws and customs.41 The directors should be accountable to their shareholders, who should have the power to remove them from office if their performance is inadequate. Thus successful companies are perceived as those paying dividends to shareholders and whose share price goes up. Within the broad objective of maximizing shareholder values, the board of directors will also act fairly in the interest of employees, customers, suppliers and others with an interest in the company affairs.42 However, this approach is particularly relevant in profit making organizations as the major players in NGOs are stakeholders and not shareholders.

  Another approach is that of stakeholders, the stakeholders approach. According to this approach, the directors should be permitted to run the company or organization in a way that balances the interests of the equity shareholders with those of other stakeholders, particularly the employees. According to this approach, the aim of corporate governance is not just to meet the objectives of shareholders, but also to have regard for the interests of other individuals and groups with a stake in the company, including the public.

  The OECD argues that there is a public policy perspective towards corporate governance as well as a corporate perspective. From a public policy perspective, corporate governance is about nurturing enterprise while ensuring accountability in the exercise of power and patronage by firms.43 The role of the public policy is to provide firms with the incentives and discipline to minimize the divergence between private and social returns and to protect the interest of stakeholders.

  On the other view, the stakeholder view, notes that corporate governance is concerned with achieving a balance between economic and social goals between individual and collective goals. Therefore following this framework, the aim should be to recognize the interest of other individuals, companies and the society at large in the decisions of the organization or company.

  The dilemma with the approach is that the company law gives certain rights to shareholders, and there are some legal duties on the board of directors towards their company. The interests of other stakeholders are not reinforced by company law.44

  The enlightened shareholder approach is another view on corporate governance. The approach propounds that the directors should run the company in the interest of the equity shareholders, but taking into consideration of other stakeholders groups. The approach is that the directors of a company should pursue the interest of their shareholders, but in an enlightened and comprehensive manner. The directors should look at the long term not the short term, and they should have regard to the interest of other stakeholders in the company, not just the shareholders45

  A criticism of the enlightened shareholder view is that most shareholders do not fit the image of enlightened investors. Most shares in public companies are owned by institutional investors, who are relatively unaccountable to their beneficiaries. However, the role of institutional investors in corporate governance is likely to evolve in the future, with institutions expected to be more pro active in promoting the rights and interest of shareholders.46

  Furthermore there is an integrated approach to corporate governance. This takes the connotations as laid out in the King Report. The report took a view that a company has a wide range of stakeholders whose views should be considered, and there should be a participative corporate governance system, applied with integrity.47The King Report argued in favor of a balance in corporate governance between allowing the directors to run the company in the way they considered best for the stakeholders, while providing stakeholders with some protection against a board of directors that ignores its responsibilities and is not held properly accountable.

  Importance of Corporate Governance

  There is a general recognition that the reasons for underdevelopment and misgovernment are sometimes attributable to” weak institutions, lack of an adequate legal framework, damaging discretionary interventions, uncertain and variable policy frameworks and a closed decision-making process, which increases risks of corruption and waste”.48 Governance matters profoundly. A scrutiny of sustained success of organizations reveals boards have governed the affairs of the business effectively. On the other hand, with organizations that have performed poorly, it is rather common place to track the problems to the board that has not addressed the issues confronting their business effectively49. Thus an effective board ensures success whilst a weak board poses a survival dilemma. While boards play a variety of roles, effective organizations acknowledge the board’s role in advising on and consenting to the selection of businesses and policies, and overseeing results. The test of effectiveness of governance is the degree to which any Organisation is achieving its purpose. 50

  Although a company or not for profit organization exists as a legal entity in reality it is the organized , collective effort of many different individuals .It is controlled by a board of directors , shareholders or stakeholders in the case of not for profit organizations . The interests of the board and the shareholders and the stakeholders ought to coincide, but in practice they may be at odds with each other. The challenge of good corporate governance is to find a way in which the interests of shareholders or stakeholders, directors and other interest groups can all be sufficiently satisfied.

  Public companies raise capital on the stock markets, and institutional investors hold vast portfolios of shares and other investments. Non profit organizations also raise their income by writing proposals to donors or development partners who have interests in the running of the not for profit organizations. Investors and donors need to know that their money is reasonably safe. Should there be any doubts about the integrity or intentions of the individuals in charge of a grant will have difficulty raising any new capital should it wish to do so.

  In the absence of the protections that good governance supplies, asymmetries of information and difficulties of monitoring mean that capital providers who lack control over the corporation will find it risky and costly to protect themselves from the opportunistic behaviors of the managers and controlling shareholders or stakeholders.51 The relationship between the shareholders and board of directors is at the centre of many problems that arise in corporate governance. Many of the guidelines in the codes of conduct for corporate governance and the codes of best practice are directed towards reducing the potential for the conflict, by seeking to put some restraints on the individual directors. Corporate governance is made necessary because interests of those who have effective control over the firm can differ from the interest of those who supply the firm with external finance. The problem is commonly known as the principal-agent problem, and it grows out of the separation of ownership and control of corporate outsiders and insiders.52

  Conclusion

  The chapter gave an overview of corporate governance issues. There have been a number of committees that have led to the development of corporate governance, which include the Cadbury, Hampel, Green bury, Turn bull and the Organisation for economic development committees. They gave recommendations at different levels of good corporate governance. It is through these committees that corporate governance has been given much attention. The importance of corporate governance should be taken seriously if there is need to pursue excellence through the board
and provide laudable and professional services to the public

  Chapter two

  Adaptation and Adoption of corporate governance by NGOs

  The adaptation and adoption of corporate governance by NGOs has taken a significant stride. Some NGOs have come to the realization that without set rules of governance, there is no hope for future existence. Due to the different sizes of NGOs in Zimbabwe, the process of adaptation and adoption is different. Some NGOs have seen , the move to good corporate governance as preferable to good business practice , whilst others are still ignorant about the importance of good corporate governance and they continue to run their organizations like “tuck shops “ . There are number of measures and requirements that are necessary for an NGO to be able to adopt and finally adapt to good corporate governance practices. There are a set of rules and principles that need to be taken into play before an NGO could acclimatize to good corporate governance principles.

  NGO sector in Zimbabwe

  The 21st century has witnessed the proliferation of NGOs in a number of areas stemming from relief organizations, human rights, HIV and AIDS, women and gender, disability, youth and development, poverty alleviation and children and the elderly. The need for corporate governance systems arises in relation to the separation of ownership and management of corporations.53 Public companies are characterized by a separation of roles between those who own the company i.e. shareholders or investors and those who direct its economic fortunes i.e. managers. The main aim of corporate governance systems in public companies is to create a balance of power between owners and managers.54 Corporate governance standards can and should also apply to private small- and medium-sized companies, not least in order to increase their ability to attract external capital. This is a case in point that all sectors even the non profit making sector practices good corporate governance in order to attract donor funding for its sustainability.