by Joshua Asiimwe, ABM Associate Attorney

 

 

Ugandan law does not mandate private companies to adopt corporate governance principles under the Company Act. This is because corporate governance is a new creature to Uganda, having been introduced by the Companies Act of 2012. However, everyone who is involved in the operation of a company or is considering starting a new company should know that application of the principles of corporate governance is very important to the life of company, especially in the following ways:

 

  1. Good corporate governance ensures corporate success and economic growth;
  2. Strong corporate governance maintains investors’ confidence, as a result of which, the company will be able to raise capital efficiently and effectively;
  3. Good corporate governance lowers the capital cost;
  4. When a corporation follows corporate formalities, there is a positive impact on the share price;
  5. Corporate formalities provide proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization;
  6. Good corporate governance also minimizes waste, corruption, risks and mismanagement.
  7. Good corporate governance helps in brand formation and development; and
  8. It ensures management that fits the best interests of all.
Corporate governance is the mechanisms, processes and relations by which corporations are controlled and directed. Governance structures and principles identify the distribution of rights and responsibilities among different participants in the corporation (such as the board of directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and include the rules and procedures for making decisions in corporate affairs.

 

Corporate governance includes the processes through which corporations' objectives are set and pursued in the context of the social, regulatory and market environment. Governance mechanisms include monitoring the actions, policies, practices, and decisions of corporations, their agents, and affected stakeholders. Corporate governance practices are affected by attempts to align the interests of stakeholders.

 

In modern times, principles of responsible corporate governance have become more universal and less regional. In 2001–02, several high-profile U.S. corporations collapsed after massive accounting frauds were discovered. The whole world suddenly focused on corporate governance practices, particularly in relation to accountability. In the U.S., Congress responded with the passing of the Sarbanes-Oxley Act of 2002 (“SOX Act”). The SOX Act was an attempt to legislate several of the principles recommended in the Cadbury Report (UK, 1992) and the “Principles of Corporate Governance” from the Organization for Economic Co-operation and Development (“OECD”), 1999, 2004, and 2015).

 

These three documents present general principles around which all companies, regardless of the country of their incorporation, are expected to operate to assure proper governance. These are some of those principles:

 

  1. Rights and equitable treatment of shareholders: Corporations should respect the rights of shareholders and help shareholders to exercise those rights. Corporations can help shareholders exercise their rights by openly and effectively communicating information and by encouraging shareholders to participate in general meetings.
  2. Interests of other stakeholders: Corporations should recognize that they have legal, contractual, social, and market-driven obligations to non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities, customers, and policy makers.
  3. Role and responsibilities of the board: The board of a corporation needs sufficient relevant skills and understanding to review and challenge management performance. It also needs adequate size and appropriate levels of independence and commitment.
  4. Integrity and ethical behavior: Integrity should be a fundamental requirement in choosing corporate officers and board members. Corporations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision-making.
  5. Disclosure and transparency: Corporations should clarify and make publicly known the roles and responsibilities of board and management to provide stakeholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.

 

Uganda’s corporate governance principles were, at least in part, founded on documents such as the SOX Act, the UK Code of Corporate Governance, and, later, the OECD reports. And, even though the law in Uganda does not require mandatory application of corporate principles for private businesses, it is equally important that they adopt them so that they can enjoy the benefits discussed above.