Corporate Governance: The role of the audit committee and the board of directors
Corporate Governance: The Roles of the Audit Committee and Board of Directors
Corporate Governance: A professional guide explaining the role of the Board of Directors and the Audit Committee, transparency principles, shareholder rights, and practical tools for sustainable institutional growth—Digital Salla.
- Fundamental definition of Corporate Governance.
- Primary responsibilities of the Board of Directors.
- The Audit Committee: Independence and oversight duties.
- Protecting Shareholder Rights and ensuring equity.
- Transparency, Disclosure, and ethical corporate culture.
- Checklist to evaluate your company’s governance maturity level.
1) The Concept of Corporate Governance
Corporate Governance is the framework of rules, relationships, and processes by which an organization is directed and controlled. Its primary purpose is to address the Agency Problem—the potential conflict of interest between management and owners.
2) The Core Pillars of Governance
Strong governance stands on four foundations:
- Fairness: Treating all shareholders (majority and minority) equally.
- Accountability: Management must answer for their decisions.
- Responsibility: The board’s duty to oversee the entity’s long-term health.
- Transparency: Timely and accurate disclosure of financial and operational facts.
3) Role of the Board of Directors
The Board is the bridge between owners and management. Its key duties include:
- Strategy Setting: Reviewing and approving long-term business plans.
- CEO Oversight: Hiring, evaluating, and—if necessary—replacing the CEO.
- Risk Appetite: Determining the level of risk the company is willing to take.
- Ethical Tone: Setting the “Tone at the Top” regarding integrity.
4) The Audit Committee: Power & Independence
The Audit Committee is a subcommittee of the board. For it to be effective, its members must be Independent (not employees) and Financially Literate.
Enterprise Risk Register - Excel Template
Primary Oversight Duties
- Monitoring the integrity of Financial Statements.
- Appointing and overseeing the External Auditor.
- Reviewing the effectiveness of the Internal Audit function.
- Approving “Related-Party Transactions” to prevent conflicts of interest.
5) The Governance Structure (Visual Logic)
How accountability flows through the organization?
6) Transparency and Public Disclosure
Transparency is the “Light” that keeps the entity healthy. Governance requires disclosure of:
- Annual and quarterly audited financial reports.
- Board member qualifications and their attendance at meetings.
- Executive compensation and remuneration packages.
- Major Conflict of Interest declarations.
7) Protecting Shareholder Rights
Governance isn’t just for majority owners. It must protect Minority Shareholders by:
- Ensuring the right to vote on fundamental changes (e.g., mergers).
- Providing clear dividend policies.
- Ensuring information reaches all shareholders at the same time.
8) Operational Controls & Readiness Checklist
To ensure your Corporate Governance is robust:
Governance Maturity Checklist
- Does the Board have a majority of Independent Members?
- Is there a formal “Charter” for the Audit Committee?
- Are internal audit reports sent directly to the board without management filtering?
- Is there a whistleblowing policy that protects employees from retaliation?
- Does the company disclose “Related-Party Transactions” in the financial notes?
9) Common Errors and How to Prevent Them
- CEO-Chairman Duality: Having the same person run the company and lead the board (Lack of Check & Balance).
- Passive Board: Board members who only attend meetings for the fees without challenging management’s assumptions.
- Lack of Technical Skills: An Audit Committee where no one understands accounting or IT security risks.
- Form Over Substance: Having all the manuals but ignoring them in real crises.
10) Frequently Asked Questions
What is Corporate Governance?
It is the system of rules and practices by which a company is directed, balancing the interests of stakeholders and ensuring ethical sustainability.
Why do we need an Audit Committee?
To provide independent oversight of the financial reports and internal controls, ensuring that management is not hiding losses or inflating profits.
Can a private small company use governance?
Yes. Governance for small firms might mean having an advisory board or clear separation between family and business money. It builds institutional value for future sales or IPOs.
11) Conclusion
Mastering Corporate Governance is the ultimate step in professionalizing an organization. By defining the roles of the Board of Directors and the Audit Committee, and fostering a culture of Transparency, you move beyond “Running a Business” to “Building an Institution.” This framework protects your entity from ethical shocks, attracts high-quality talent and investment, and ensures that your strategic vision is executed with integrity and accountability.
Action Step Now (30 minutes)
- Review your last Board or Management meeting minutes.
- Check: Did the discussion focus on “Operations” (Day-to-day) or “Governance” (Strategy/Oversight/Risk)?
- Draft a simple Audit Committee Charter if you don’t have one, listing its 3 most critical oversight areas.