MUNHUMUTAPA SCHOOL OF COMMERCE
DEPARTMENT OF ACCOUNTING AND INFORMATION SYSTEMS
Master of Commerce in Professional Accounting and Corporate Governance
NAME:
TAPIWA MAHAKA MHLANGA
REG NO:
M185314
COURSE TITLE:
APPLIED CORPORATE GOVERNANCE
COURSE CODE:
MAAC 521
LEVEL:
1: 2
FACILITATOR:
Dr CHAVHUNDUKA
There are a number of reports that have been published to assist companies in their quest
for good corporate governance. Discuss / Evaluate this statement with reference to Cadbury
Report, Turnbull Report, Kings Report and OECD Principles.
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The growing complexity of businesses increased the desire to access management processes by
standardized procedures. There have been many corporate scandals in large firms resulting from
poor corporate governance with Steinhoff being the latest, this has given rise to the development
of a number of reports being published in pursue of good corporate governance. This write up
seeks to discuss this latter statement in reference to published reports including Turnbull, Kings
Report, Cadbury among others.
(Oman, 2001)defines corporate governance as referring to the private and public institutions,
including laws regulations and accepted business practices, which in a market economy govern
the relationship between managers and entrepreneurs on the hand and those who invested resources
in corporations, on the other hand.
Corporate governance in firms sets structure for internal operations as well as external affairs. It
also impacts behavior and conduct at all levels of organizational operations, making it a key device
for guiding actions of interns, entry level workers and top management. Corporate governance
outlines policies and practices designed to balance the needs and interest of all stakeholders. In
addition, guiding the actions and behaviors of employees and behind the scenes operations,
corporate governance establishes a public image (Dyck, 2001). Most firms strive for high levels
of good corporate governance, which includes efforts to improve community relationships, good
credit ratings and engage in environmentally sound practices. These organizations express good
corporate citizenship, including providing transparency into their operations and promoting good
ethical practices. There are number of reports that have been published to assist companies in their
quest for good practices, these include the Cadbury Report, Turnbull Report, Kings Report and
OECD Principles.
The Cadbury report has contributed to strong governance culture among the listed companies on
the London Stock Exchange, thus assuring investors on the information they receive from the
board being fair, balanced and understandable. The original committee chaired by Sir Adrian
Cadbury was concerned primarily with protecting weak and widely dispersed shareholders against
self-interested directors and managers, and the report was developed based on what was considered
as good corporate practices. This report reviewed corporate governance with specific reference to
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Role of directors
The board should meet regularly, retain full and effective control over the company and monitor
the executive management. There should be a clearly accepted division of responsibilities at the
head of a company, which will ensure a balance of power and authority, such that no one individual
has unfettered powers of decision. Where the chairman is also the chief executive, it is essential
that there should be a strong and independent element on the board, with a recognized senior
member. Besides, all directors should have access to the advice and services of the company
secretary, who is responsible to the Board for ensuring that board procedures are followed and that
applicable rules and regulations are complied with (Cadbury, 1992)
Dealing with the Rights and Responsibilities of Shareholders
The shareholders, as owners of the company, elect the directors to run the business on their behalf
and hold them accountable for its progress. They appoint the auditors to provide an external check
on the directors’ financial statements. The Committee's report places particular emphasis on the
need for fair and accurate reporting of a company's progress to its shareholders, which is
the responsibility of the board. It is encouraged that the institutional investors/shareholders to
make greater use of their voting rights and take positive interest in the board functioning. Both
shareholders and boards of directors should consider how the effectiveness of general meetings
could be increased as well as how to strengthen the accountability of boards of directors to
shareholders (Cadbury, 1992).
Considering the role of Auditors and addressing a number of recommendations to the
Accountancy Profession
The annual audit is one of the cornerstones of corporate governance. It provides an external and
objective check on the way in which the financial statements have been prepared and presented by
the directors of the company. The Cadbury Committee recommended that a professional and
objective relationship between the board of directors and auditors should be maintained, so as to
provide to all a true and fair view of company's financial statements. Auditors' role is to design
audit in such a manner so that it provides a reasonable assurance that the financial statements are
free of material misstatements. Further, there is a need to develop more effective accounting
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standards, which provide important reference points against which auditors exercise their
professional judgement. Secondly, every listed company should form an audit (Cadbury, 2002)
The turnbull Report was chaired by Sir Nigel Turnbull, a group was set to pursue Cadbury ideas
on internal control and risk management. A company’s system of internal control has a key role in
management of risk that are significant to the fulfilment of its business objectives. A sound system
of internal control contributes to safeguarding the shareholder’s investment and company assets.
The report include issues as :

Assigns a strategic importance to the areas in the context of corporate governance

Shows directors how these areas are to be integrated into corporate governance model

In future may be seen as seminal report

Focus on principles rather than rules
The report put emphasis on successful risk management as means of adding value, internal control
only possible if embedded in internal processes, role of board in reviewing and implementing goals
and key risks to be identified and managed. Turnbull’s guidance is based upon the adoption by a
company’s board of a risk-based approach to establishing a sound system of internal control and
on accountability, transparency, corporate social responsibility: a new mantra for a new
millennium, reviewing its effectiveness.
The turnbull states that a company’s internal control has a key role in management of risks that
are significant to the fulfilment of its business objectives. A sound system of internal control
contributes to safeguarding the shareholder’s investment and company assets. Internal control
facilitates the effectiveness and efficiency of operations, helps ensure the reliability of internal and
external reporting and assist compliance with laws and regulations (Turnbull, 1997).
Effective financial control
Effective financial controls, including the maintenance of proper accounting records, are an
important element of internal control. They help ensure that the company is not unnecessarily
exposed to avoidable financial risks and that financial information used within the business and
for publication is reliable. They also contribute to safeguarding of assets, including the prevention
and detection of fraud.
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A sound system of internal control therefore depends on a thorough and regular evaluation of the
nature and extent of the risks to which the company is exposed. Since profits are in part, the reward
for successful risk taking in business, the purpose of internal control is to help manage and control
risk appropriately rather than to eliminate it (Turnbull, 1997).
The king report on corporate governance (King 1) was published in 1994. The report’s objective
was promoting highest standard of corporate governance in South Africa. The first King Report
advocated an integrated approach to good governance in the interests of a wide range of
stakeholders. It also acknowledged that there was a move away from the single bottom line to
triple bottom line, which embraces the economic, environmental and social aspects of company’s
activities.
The report stated that firms must be open to institutional activities and there must be greater
emphasis on the sustainable or non-sustainable aspects of its performance. Boards must apply the
test of fairness, accountability, responsibility and transparency to all acts or omissions’ and be
accountable to the company but also responsive and responsible towards the firm’s key
stakeholders.
The OECD standards recognize that international investment that international investment is of
major importance to the world economy at large and that multinational enterprises play an
important role in investment process. Countries of third world stand to stand to benefit greatly
from foreign direct investment and in particular from investment that is sensitive to the economic,
social, and environmental development needs of local communities (OECD, 1999).
Disclosures
Disclosures concerns issues of transparency in the activities that the enterprise is involved in as
well as being accountable for the results of its activities to the employees, the government and the
communities that are affected by the activities of the firm. Specifically, firms should ensure that
timely, regular, reliable and relevant information is disclosed regarding their activities, structure,
financial situation and performance.
(Dyck, 2001) argues that OECD standards encourage enterprises to disclose material information
on :
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
Company objectives

Major share ownership and voting rights

The financial and operating results of the firm

Material risk factors

Material issues regarding employees and other stakeholders

Governance structures and policies
Employment and industrial Relations
Enterprises should, within the framework of applicable law, regulations and prevailing labour
relations and employment practices and applicable international labour standards:

Respect the right of workers to establish or join trade unions and representative
organizations of their own choosing.

Respect the right of workers to have trade unions and representative organizations of their
own choosing recognized for the purpose of collective bargaining, and engage in
constructive negotiations, either individually or through employers' associations, with such
representatives with a view to reaching agreements on terms and conditions of
employment.

Contribute to the effective abolition of child labour, and take immediate and effective
measures to secure the prohibition and elimination of the worst forms of child labour as a
matter of urgency.

Contribute to the elimination of all forms of forced or compulsory labour and take adequate
steps to ensure that forced or compulsory labour does not exist in their operations.

Be guided throughout their operations by the principle of equality of opportunity and
treatment in employment and not discriminate against their workers with respect to
employment or occupation on such grounds as race, colour, sex, religion, political opinion,
national extraction or social origin, or other status, unless selectivity concerning worker
characteristics furthers established governmental policies which specifically promote
greater equality of employment opportunity or relates to the inherent requirements of a job.

Provide such facilities to workers’ representatives as may be necessary to assist in the
development of effective collective agreements.
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
Promote consultation and co-operation between employers and workers and their
representatives on matters of mutual concern.

Observe standards of employment and industrial relations not less favorable than those
observed by comparable employers in the host country.

When multinational enterprises operate in developing countries, where comparable
employers may not exist, provide the best possible wages, benefits and conditions of work,
within the framework of government policies. These should be related to the economic
position of the enterprise, but should be at least adequate to satisfy the basic needs of the
workers and their families.
Environment
With respect to environmental issues, the OECD’s general expectation is that enterprises should,
within the framework of laws and regulations take due account of the need to protect the
environment and public health and safety and generally to conduct their activities in a manner that
contributes to the broader goal of sustainable development. In particular, these firms are expected
to establish and maintain a system of environmental management appropriate to the firm, including
periodically reviewing the continuing relevance of these objectives. It also provide the public and
employees with adequate and timely information on the potential environmental, health and safety
impacts of the activities of the enterprise, which could include reporting on progress in improving
environmental, health and safety impacts of the activities of the firm, which could include
reporting on progress in improving environmental performance and engaging in adequate and
timely communication and consultation with stakeholders directly affected by the policies set by
the firm and by their implementation (OECD, 1999).
The King II Report has outlined specific governance standards starting from the board to the
auditing function. Specifically, it outlines
The functions of the board
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It states that all companies should be headed by an effective board, which can both lead and control
the company. It should have balanced executive and non-executive directors to the extent
appropriate. It also recommends concept of a unitary board, consisting of executive directors, with
their intimate knowledge of the business and non-executive directors who can bring a broader view
to the company’s activities, remains the favoured board structure for companies. The board should
be able to exercise objective judgment on the corporate affairs of the business enterprise,
independent from management but with sufficient management information to enable a proper and
objective assessment to be made by the directors collectively.
Distinction between the board chairperson and the chief executive officer
The King II Report separates the role of a board chairperson and the chief executive officer. It
states that the chairperson presides over the company shareholders meetings, providing overall
leadership of the board, participates in the selection of board member, maintains relations with the
company’s shareholders and formulates annual plans for the board and the chief executive officer’s
task is to implement the decisions of the board. And if for any reason, the two roles have to be
combined, then the deputy chairperson must be a non-executive director and there should be a
strong presence of non-executive director on the board. All this is done to protect minority
shareholder interests (Deloitte, 2002).
Roles of both the executive and the non-executive directors
The King II Report defines the roles of both executive and non-executive directors. It states that
both executive and non-executive directors, are bound by fiduciary duties and duties of care and
skill. Non-executive directors perform such duties intermittently and have less regular access to
the books and records of the company than do executive directors. Executive directors, on the other
hand, must always manage the conflict between their management responsibilities and their
fiduciary duties as a director in the best interests of the company. It also recommends restricting
directors and employees from dealing in company securities prior to any formal announcement in
respect of its financial results or any other period where such dealings may be considered sensitive.
The dealing s of directors should be regulated and monitored (Deloitte, 2002).
Risk management
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The firm’s assessment of risk should address:

Technical risk

Human resource risk

Business continuity and disaster recovery

Compliance risk

Credit and market risks

Physical and operational risks
Considers the functions of internal audit
Institute of internal auditors defines internal audit as an independent, objective assurance and
consulting activity designed to add value and improve an organization’s operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of risk management, control and governance processes. is an integral
part of the company, and functions under the policies established by executive management and
the board (Deloitte, 2002). Internal audit is responsible to both the board and executive
management, providing them with reasonable assurance regarding the effectiveness of the
company’s corporate governance, risk management processes and system of internal control. The
report urges that companies must have an effective internal audit function that has respect and
cooperation of both the board and management. The internal audit function should assist the
directors and management to achieve the goals of the company by evaluating and recommending
improvements to the process through which:

goals and values are established and communicated

the accomplishment of goals is monitored;

accountability is ensured; and

corporate values are preserved
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Integrated Sustainable Reporting
The King II Report also deals with issues of societal transformation, which include promotion of
equal opportunities, especially for the previously disadvantaged, corporate training initiatives and
employee development
From this discourse, it is important to note that the King II report drew attention to the importance
of a properly functioning board of directors as a key issue of good practices. The king report was
distinguished by its integrated approach to good governance with regard to social, ethical and
environmental practices to serve the interest of wide range of stakeholders.
The Cadbury report has contributed to the strong governance culture among the listed companies
on the London Stock Exchange, thus assuring investors on the information they receive from the
board being fair, balanced and understandable.
In conclusion, this framework has highlighted the importance of understanding the fact that forces
outside the firm also influence corporate governance standards. These include global pressures and
other local pressures which may emanate from political land scape or economic environment. In
this regard, the discussion has outlined the corporate governance standards established by
Cadbury, Turnbull, OECD and the King report. The influence of these standards on the operation
of other corporate bodies in the sub region are apparent, even though a lot of work needs to be
done. However, work needs to be done to strengthen the corporate laws in most countries so that
firms can be compelled to conform to internationally accepted corporate governance standards.
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References
Cadbury, 1992. The Financial Aspects of Corporate Governance. London: s.n.
Cadbury, 2002. Corporate Governance and Chairmanship. London: Oxford University Press.
Deloitte, 2002. King II Report. Capetown: Deloitte.
Dyck, A., 2001. Privatisation and Corporate Governance: Principles, Evidence and Future Challenges. The
World Bank Research Obsever, 16(1), pp. 59-84.
OECD, 1999. OECD Principles of Corporate Governance. Paris: s.n.
Oman, c., 2001. Corporate Governance and National Development. Technical paper 180 ed. Paris: OECD
Development Centre.
Turnbull, 1997. Corporate Governance: its Scope, Concerns and Theories. London: s.n.
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