Khairunnisa Rahinaningtyas Corporate Governance

16/397035/EK/20991

Internal Governance Mechanisms: Corporate Accountability

Corporate governance consists of internal and external mechanisms. Internal mechanisms has three
major segments: board of directors, executive management, and independent control functions that is
reinforced by code of conduct. These mechanisms need to achieve an appropriate balance to have the
most effective and efficient business process. The basic elements of this process is:

The Board of Directors

Board of directors usually oversight the overall business process of a company. Although it is not
present in daily management matters, effective governance depends on a board that is capable of
dealing with management firmly and decisively. Directors in 1950s through the 1970s were
essentially part of the chief executive’s team. The value of board directors was often in status rather
than leadership or oversight, due to them being the extension of management. This situation changed
in 1980s. In some cases regulators and courts found that board directors were not performing their
duties properly, and called for greater accountability.
The structure of board of directors is usually distinguished into two types: ​single board system ​and
dual board system. ​Under a single board system, the board of directors acts as an independent
monitor of company management. This system is applied as a common practice in countries such as
United States, Canada and the UK. The CEO, usually also acts as the chairperson. While in dual board
system, which can be found easily in countries such as Germany, and Indonesia, has a different
structure as it segregate between ​supervisory board ​and ​management board. ​In Indonesia,
supervisory board is called board of commissioners, while management board is called board of
directors (in single board system, they are considered the executives). So, there are two chairpersons
with different responsibilities and duties. There is no better practices that is already proven by studies,
and it depends significantly on the company’s culture.
Essential duties include the following:
- Represent, with a view towards advancing and protecting, the interests of shareholders and
other stakeholders.
- Create an ethical environment; codify ethical principles and ensure that they are followed.
Khairunnisa Rahinaningtyas Corporate Governance
16/397035/EK/20991

- Establish and run specialized committees as needed (e.g. audit, compensation, nomination) to
provide additional support and expertise.
Executive Management
The role of executive management in promoting strong internal governance, good leadership, and
undoubted behavior is critical. To prevent the pursuit of “self-interest” – which might lead ultimately
to abusive practices – executive management must remain under the general supervision of directors
and be constrained by certain structural parameters. In order to be effective in working toward the best
interests of the company, a proper compensation package must be established that allows executives
to benefit as they create shareholder value. Essential duties of executive management include:
- Manage the firm’s operating, financing, and corporate activities on a daily basis, remaining
accountable to the board of directors for progress and performance.
- Create tactical business plans and operating strategy in conjunction with the board of
directors. Manage the results and adjust them as necessary.
- Define and monitor financial and operating risk exposures in conjunction with the board.
Internal Control Groups
Firms often feature a variety of groups, but it usually have the following two characteristics:
independent ​and ​possess technical process. ​To be effective, it has to promote cross-group
communication and cooperation. It also has to undergo regular review, to adapt with rapid changes of
technology and globalization. Five departments and/ experts that are mostly essential to enhance the
responsibility of internal control groups are:
1. Financial control/accounting 4. Internal audit
2. Risk management 5. Operations and technology
3. Legal compliance
Code of Conduct
Code of ethics generally aim to ensure a clear understanding of basic ethical principles, including
proper treatment of stakeholders. In addition to specifically declaring such ethical parameters. It is
drafted by board of directors, and promulgated by executive management. This is not to say that code
of ethics merely a written statement, it needs to construct culture and belief system of the company for
it to sustain.
Implementation of Internal Governance Measures
These may be implemented in two forms:
- Under the ​prescriptive approach​ a company adheres to certain standard governance
practices and formally discloses to shareholders that it is in compliance.
- Under a​ non-prescriptive approach​ a company can select the practices it chooses, but must
disclose exactly what standards it has selected