What is corporate governance?
Corporate governance is the system by which companies are directed and controlled. It is the set of rules, processes, and practices that ensure that companies are run in a fair, transparent, and accountable manner.
Corporate governance is important for a number of reasons. First, it helps to protect shareholders' interests. By ensuring that companies are well-managed and that their assets are properly protected, corporate governance helps to ensure that shareholders get a fair return on their investment.
Second, corporate governance helps to promote economic growth. Well-governed companies are more likely to be successful and to create jobs. This is because good corporate governance helps to reduce the risk of fraud and other corporate scandals, which can damage the economy.
Third, corporate governance helps to maintain public confidence in the business community. Well-governed companies are more likely to be trusted by consumers and investors. This can lead to increased investment and economic activity.
Why is corporate governance important?
There are a number of reasons why corporate governance is important for businesses and non-profits of all sizes in Ontario.
First, good corporate governance can help to reduce the risk of fraud and other financial irregularities. By having a strong system of checks and balances in place, businesses and non-profits can make it more difficult for individuals to misappropriate funds or engage in other forms of misconduct.
Second, good corporate governance can help to improve decision-making. By having a diverse and independent board of directors, businesses and non-profits can benefit from a wider range of perspectives and expertise. This can lead to more informed and well-thought-out decisions.
Third, good corporate governance can help to build trust with stakeholders. By being transparent and accountable, businesses and non-profits can show their stakeholders that they are committed to acting in their best interests. This can lead to stronger relationships with customers, employees, investors, and other stakeholders.
Examples:
Here are a few examples of how good corporate governance can benefit businesses and non-profits:
- A well-governed company is more likely to attract and retain top talent. Employees are more likely to want to work for a company that they believe is well-managed and that treats its employees fairly.
- A well-governed company is more likely to be successful in raising capital. Investors are more likely to invest in a company that they believe is well-managed and has a strong track record.
- A well-governed company is more likely to be able to manage risk effectively. By having a strong system of risk management in place, businesses can minimize the impact of unexpected events.
Corporate governance in Ontario
The primary legislation governing corporate governance in Ontario is the Business Corporations Act (Ontario) (OBCA). The OBCA sets out the minimum requirements for corporate governance in Ontario, but companies are encouraged to go above and beyond these requirements.
In addition to the OBCA, public companies in Ontario must also comply with the rules and policies established under provincial securities legislation and with applicable stock exchange rules. These rules and policies contain corporate governance guidelines and related disclosure requirements.
The Canadian Securities Administrators (CSA) has also published National Policy 58-201, Corporate Governance Guidelines (NP 58-201). NP 58-201 is a set of non-binding guidelines that are designed to help companies improve their corporate governance practices.
Best practices for corporate governance in Ontario
Here are a number of best practices for corporate governance in Ontario:
Board composition:
- The board of directors should be composed of a majority of independent directors. This helps to ensure that the board is able to act in the best interests of the company without being unduly influenced by management or other stakeholders.
- The board of directors should be diverse in terms of gender, race, ethnicity, age, and experience. This helps to ensure that the board has a wide range of perspectives and expertise to draw from when making decisions.
- The board of directors should meet regularly and have a well-defined set of roles and responsibilities. The board should also have a clear process for evaluating its own performance.
Board procedures:
- The board of directors should have a well-defined set of procedures for conducting its meetings and making decisions. These procedures should be designed to ensure that all directors have an equal opportunity to participate and that decisions are made in a fair and transparent manner.
- The board of directors should have a conflict of interest policy in place. This policy should require directors to disclose any potential conflicts of interest and to refrain from participating in any decisions where they have a conflict.
- The board of directors should have a whistleblower policy in place. This policy should encourage employees to report any concerns they have about illegal or unethical activity within the company.
Risk management and oversight:
- The board of directors should have a system in place to identify, assess, and manage risk. This system should be designed to minimize the impact of unexpected events on the company.
- The board of directors should regularly review the company's risk management system and make adjustments as needed.
Internal controls:
- The company should have a system of internal controls in place to ensure that its assets are properly protected and that its financial reporting is accurate.
- The internal controls should be regularly tested and updated to ensure that they are effective.
Financial reporting and disclosure:
- The company should prepare and disclose its financial statements in accordance with applicable accounting standards.
- The company should also disclose other information that is material to investors, such as information about its risk management system and internal controls.
Examples of good corporate governance
Here are a few examples of good corporate governance:
- A company that has a board of directors that is composed of a majority of independent directors and that has a diversity of gender, race, ethnicity, age, and experience.
- A company that has a well-defined set of board procedures and that has a conflict of interest policy and a whistleblower policy in place.
- A company that has a system in place to identify, assess, and manage risk and that regularly reviews its risk management system.
- A company that has a system of internal controls in place and that regularly tests and updates its internal controls.
- A company that prepares and discloses its financial statements in accordance with applicable accounting standards and that discloses other information that is material to investors.
Examples of poor corporate governance
Here are a few examples of poor corporate governance:
- A company that has a board of directors that is controlled by management or by a few large shareholders.
- A company that has a board of directors that is not diverse in terms of gender, race, ethnicity, age, and experience.
- A company that does not have a well-defined set of board procedures or that does not have a conflict of interest policy or a whistleblower policy in place.
- A company that does not have a system in place to identify, assess, and manage risk or that does not regularly review its risk management system.
- A company that does not have a system of internal controls in place or that does not regularly test and update its internal controls.
- A company that does not prepare and disclose its financial statements in accordance with applicable accounting standards or that does not disclose other information that is material to investors.
Conclusion
Good corporate governance is essential for businesses and non-profits of all sizes in Ontario. By following the best practices outlined in this blog post, businesses and non-profits can improve their corporate governance practices and reap the many benefits that come with good governance.
