Explain and assess the major areas of organizational life affected by issues in CG.

Duties of directors and functions of the board (including performance measurement).

Directors have a fiduciary duty to act in the best interest of the company. They need to use their
powers for proper purpose avoid conflicts of interest and exercise a duty of care.
The composition and balance of the board (and board committees)
Boards must be balanced in terms of skill and talents from several specialisms relevant to the
organizations situation and also in terms of age (to ensure senior directors are brining on newer
ones to help succession planning).
Reliability of financial reporting and external auditing
The reliability of the financial reports is crucial to ensuring that management is held
accountable. External auditors need to make sure that they are getting the right information in
order to verify the reliability of the financial reports. External auditors cannot be fearful of
asking awkward questions because of fear of losing the audit.
Directors remuneration and rewards
Directors remuneration has to be seen as being fair. Excessive salaries and bonuses has been
seen as one of the major corporate abuses for a number of years.
Responsibility of the board for risk management systems and internalcontrol
Boards should meet regularly as to provide proper oversight for risk management and internal
control systems. Without proper oversight, the organization may have inadequate systems in
place for measuring and reporting on risks.
The rights and responsibilities of shareholders, including institutional investors
Shareholders should have the right to receive all material information that may affect the value
of their investment and to vote on measures affecting the organizations governance.
Corporate social responsibility and business ethics
Corporate social responsibility and business ethics is an important part of the CG debate. At this
point, there is not any real consensus about these issues.
The South African King report commented that The relationship between acompany and its
stakeholders should be mutually beneficial. This inclusive approach is the way to create
sustained business success and steady long-term growth in corporate value.
However, the Hampel report emphasized responsibility towards shareholders and states that it
is impractical for boards to be given lots of responsibilities towards the wider stakeholder
community.

Benefits to having GOOD corporate

governance processes
The company will have improved risk
management system.
There will be clear accountability for
executive decision making.
It focuses management attention on
introducing appropriate systems of internal
control.
It encourages ethical behavior and a CSR

Downside to governance
- It could develop an excessively risk adverse
culture amongst mangers.
- There could be too much reporting and not
enough time to seek and pursue profit
making activities.
- It could damper entrepreneurial activities.
- There could be too much excessive
supervision, red tape and bureaucracy.

(Corporate Social Responsibility)perspective.

- It can help safeguard the organization from
the misuse of assets and possible fraud.
- It can help to attract new investment into a
company.

- The cost of operating internal controls

exceeds any possible benefits.
- There is the possibility that the focus on
meeting different stakeholderexpectations
will confuse management as to their
corporate responsibilities

Explain the importance of sound CG by assessing the consequences of the CG failures. (Q.63)
This question is essentially probing the main purpose of corporate governance: without sound
corporate governance, companies go bust, employees lose their jobs, investors lose their
investments and can be financially ruined, and a number of other terrible outcomes. So the
'consequences of CG failure' was often overlooked by candidates, which meant that they failed
to gain those marks.
I believe that what happened in ZPT demonstrates the importance of better corporate
governance to prevent the damage caused by management recklessness and incompetence,
The case for stricter regulation can be made by examining in detail the consequences of
governance failure at ZPT.
Shareholders
Firstly, ZPT demonstrates that a lack of control over arrogant and negligent directors results in a
loss of shareholder investment. The shareholders in ZPT received no payments when the
company was liquidated. I would remind you that many who lost out were not rich people and
big corporations. Instead they were small investors who placed their money in good faith with
pension funds and insurance companies, institutional investors, who invested significantly in
ZPT. These small investors have seen their potential future income significantly reduced as a
result of the collapse. Better governance legislation is needed to protect them.
Employees
Secondly, it will be obvious how much ZPT's and also JJC's employees have lost as a result of the
company's collapse. Not only have they lost their jobs without termination payments. ZPT's
employees have also seen the value of their income in old age depleted because they invested
in a pension fund that has proved to be vulnerable to the directors' poor decision-making. We
will need to consider stronger protection for employees' pension funds. However for now not
only are many of these employees suffering the problems of unemployment, the burden on our
taxpayers is higher, in terms of unemployment benefit and perhaps future old age support.
Suppliers and customers
Thirdly, those have done business with ZPT have also suffered significant losses. Suppliers who
provided goods and services have gone unpaid. In the current economic climate this may have
threatened their future existence. The lack of money left to repay legitimate business debts
indicates that excessive risks were taken, and that stricter governance requirements are
necessary to force directors to focus on effective risk management. Customers too are no longer
receiving the services and support for which they have paid, causing personal inconvenience
and difficulties to businesses. Again, it is unacceptable that excessive risk-taking has meant that
customers have not received value in return for their payment.
Impact on wider economy

I would also like to remind you of several broader impacts on our economy. Confidence in other
telecommunications providers as sound investments has been damaged. JJC's failure to report
the problems with ZPT may also have caused a loss of confidence in the audit profession. This
undermines one of the supports to investors being able to deal in shares confidently. Investors
need to be sure that the financial information they are using as a basis for their decisions is
reliable. A key source of reassurance is that the information has been effectively and
independently verified by strong audit firms. Is an audit firm that also provides lucrative
consulting services to its client truly independent? The collapse of JJC has also caused short to
medium-term disruption in the audit profession. JJC's former clients have needed to find other
accountants, and other major firms have struggled to cope. With one fewer major firm, the
audit industry has also become less competitive.
Dishonest culture
Supporting better corporate governance will also send out a message that we support a
business culture based on honesty and trust. The lax governance arrangements in ZPT placed
employees in impossible positions. Although we may deplore Ms Lo's conduct in accepting a
bribe, we should condemn all the more a system where it was considered best for directors to
offer her an inducement. We should also ask ourselves why there were no internal mechanisms
for Ms Lo to report concerns with impunity, rather than being forced to talk to the media to
express her worries. Better corporate mechanisms, such an audit committee, will ensure
channels exist for honest employees to report their concerns in the knowledge that they will
receive a fair hearing and not be victimised.
Purposes and benefits of CG
Performance management
+ Risk control
+ Asset safeguarding
+ Accountability
= Enhanced market value