What is a corporate governance report?
Whenever a group of people comes together to work on something, there are bound to be disagreements and conflicts of interest. The notion of corporate governance became necessary because of conflicts of interest between stakeholders in corporations. Conflicts primarily occur between upper management and shareholders, but they can exist between other parties and individuals. Corporate governance reports provide the structures that ensure to stakeholders that corporations are committed to good corporate governance and that they're complying with all applicable laws and regulations.
The media and the public took a targeted interest in corporate governance practices in the United States after the high-profile collapses of multiple large corporations in 2001'2002. Investigations over time revealed that many of the corporations had engaged in various forms of accounting fraud. The focus on good corporate governance peaked during the financial crisis of 2008. Corporate scandals continue to garner public and political interest in regulating corporate governance.
The fall of Enron, MCI Inc. and other corporations led to the passage of the Sarbanes-Oxley Act of 2002, which is a federal law aimed at improving corporate governance in the United States.
Across the globe, failures of Australian corporations led to the passage of CLERP 9 reforms in that country, which also aim to improve corporate governance practices. Similar situations have come to light in Italy and in other countries.
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What Is Corporate Governance?
If you look diligently enough, you're sure to find multiple definitions of corporate governance. Essentially, corporate governance is a collection of processes, policies, structures and relationships that are implemented with the purpose of controlling and directing corporations and holding them to account. Corporate governance includes the rules and procedures that corporations rely on to make sound decisions in corporate affairs.
Corporate governance is a complex concept where the structures and principles delineate the rights and responsibilities among the many different individuals who are intrinsically involved in corporations including, but not limited to:
- Boards of directors
Governance processes include the processes that lead boards of directors to goal-setting and how they pursue goal-setting within the context of social, regulatory, and market concerns and conditions. Corporate governance reports reflect how corporations monitor the actions, policies, practices and decisions of the corporation, as well as the effect of their actions on their agents and affected stakeholders.
What Are the Pillars of Corporate Governance?
Corporate governance can be divided into six broad categories, including accountability, efficiency and effectiveness, fairness, responsibility, transparency and independence:
- A corporation's leadership, including the board and the senior managers, are individually and collectively accountable for their actions and decisions.
- Leadership needs to continually monitor their activities and operations to ensure that they're efficient and effective, and that they support the corporation's mission.
- Corporate governance requires a corporation's leaders to be honest, faithful, diligent and fair at all times, and be ever mindful of the importance of displaying ethical and virtuous behavior.
- Another pillar of good corporate governance requires leaders to be capable, responsible, and aware of their obligations and responsibilities.
- Openness and transparency are primary components of good corporate governance. Leadership must report information about the company accurately and in a timely manner.
- Finally, independence on the board is important to good corporate governance because it ensures that decision-making is objective and fair.
What the Corporate Governance Report Covers
A corporate governance report is also called the annual corporate report. It includes a statement of corporate governance procedures and compliance, information on board composition, statements on the company's performance, and information about compliance and conformance with best practices for good corporate governance.
Statements of Disclosure of Governance Procedures and Compliance
The corporate report should include a statement of disclosure of the company's governance procedures and compliance. It should also disclose the principles and codes that guide the company's procedures. Disclosure statements usually detail the distribution of powers between the board chair and the CEO. Best practices in today's marketplace discourage the same individual from serving as CEO and board chair.
The average size of corporate boards is 9.2 directors. The ideal size of corporate boards is seven to 11 members. Best practices for good corporate governance recommend that boards strive for a mix of board directors in terms of competencies, age, gender, profession, independence and diversity. There should also be a mix of executive and independent directors, with the majority being independent directors. Disclosure statements should disclose the regularity and frequency of board meetings.
The corporate governance report should contain a section that lists the powers, functions, roles and responsibilities of board directors. The report includes information about committees and sub-committees and any delegated powers and duties. This section of the report should include conformance and transformative functions.
Shareholders may be particularly interested in reading information about board directors in the corporate governance report. Such information may include the company's procedures for appointing directors, board development, succession planning and remuneration by shareholding members.
Disclosures often describe the corporation's mechanisms for monitoring the board's performance, as well as the performance of individual board directors. It also includes information about related party transactions, conflicts of interest and how the board handled them.
A section of the annual report details the overall organizational plan, and how it relates to business plans and budgets; operational and performance measures; and a description of risk management and internal control procedures. These reports provide evidence of accountability and transparency and support generally accepted accounting and auditing standards. Sections on accounting also specifically disclose the company's relationship with internal and external auditors.
Disclosure statements also cover such issues as communications with shareholders and stakeholders, legal compliance, and codes of conduct for the board, CEO, management and staff.
Finally, statements usually detail the nature of the business and its future prospects. Shareholders are interested in knowing the company's outlook for growth, sustainability and innovation, and how the corporation plans to factor future market trends into their strategic planning.
As an example of a good corporate governance report, take a look at this sample of a corporate governance report for Infosys Limited.