GOVERNANCE – Why and Where to start?

Businesses have seen major evolution along the years; from barter trading up to major multi-billion-dollar corporation. One thing that remain unchanged is the expectation and the need to ensure that each business transaction is conducted in a fair and transparent manner. In today’s day and age, this expectation has been reflected in the form of Governance.

 

 What is Corporate Governance? It is defined in the Securities Commission’s High Level Finance Committee Report (1999) as “the process and structure used to direct and manage the business and affairs of the company towards promoting business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value while taking into account the interest of other stakeholders.”

 

The key words in the definition given above are process and structure. These are needed in any company irrespective of its size or stature. A strong Corporate Governance requires framework of control mechanisms that support the company in achieving its goals and objectives, while preventing unnecessary issues / problems. These are achieved through the implementation and enforcement of effective and efficient policies and procedures, strong internal control and robust risk management framework. With this in place, not only the interests of shareholders can be protected, interests of other stakeholders, i.e. suppliers, customers, employees and the communities can be safeguarded.

 

The Securities Commission (SC) recently issued an updated Malaysian Code of Corporate Governance (MCCG2017) which has extended the encouragement for adoption by non-listed companies, such as:

  • State-owned Companies;
  • Small and Medium Enterprises; and
  • Licensed Intermediaries.

 

This extension is in line with Paragraph 4.1.1 “The Business Case for Good Corporate Governance” of MCCG 2017 which states, “…..the key principles of corporate governance such as effective controls, corporate culture grounded on ethical behaviour and transparency can reduce risk, corruption and mismanagement.” Adoption of the code would see an enhancement to their accountability, transparency and ultimately, their business sustainability.

To start the culture of Corporate Governance in a company, the understanding, implementation and enforcement of the Three-Lines of Defense, as expounded by the Institute of Internal Auditors (IIA), is a basic requirement that is necessary to be undertaken. Below are the Three-Lines of Defense Model:

 

1st Line of Defense

  • Emphasised on Management Controls and Internal Control Measures, to be embedded in the Organisation;
  • The tone at the top must be consistent in wanting strong control mechanism to be put in place; and
  • Operational management is aware of the importance and necessity of the controls.

 

2nd Line of Defense

  • Ensure that the controls implemented are working as they are intended to be;
  • Help build and / or monitor the controls set by the first-line of defense; and
  • Level of assurance that the controls implemented are to be working as planned is increased.

 

3rd Line of Defense

  • Provide an independent assurance that the controls are in place and working as it is designed to be;
  • Provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization; and
  • Internal audit provides reasonable assurance on the effectiveness of governance, risk management, and internal controls, including the manner in which the first and second lines of defense achieve risk management and control objectives.

 

The development, implementation and enforcement of the Three Lines of Defense, either wholly or partially, is a start towards embracing the Corporate Governance culture that all companies should be looking at. With this in place, companies can look forward to operating successfully and achieving sustained growth that will benefit all relevant stakeholders.

Do get in touch with Q3 Management Solutions for the management & governance support, and this could be the beginning of a long-term business relationship.

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