Corporate Social Responsibility and Good

Governance

A Narrative Report on Principles of Corporate

Governance
Principles of Corporate Governance (part 2)

3. Accountability

• It is the responsibility of the board to produce an understandable and balanced

assessment of the company’s prospects and position. The board needs to maintain
a suitable relationship with the company’s auditor. Corporate reporting, risk
management and internal control principles need established formal and
transparent arrangements determined by the board.
• The board needs to establish the level of risk it is willing to take to achieve the
company’s strategic objectives.
• It is the board’s responsibility to maintain sound risk management and internal
control systems.

4. Remuneration

• No director should be in a position where they are involved in deciding their own
remuneration. Remuneration packages need to be sufficient to attract, retain and
motivate directors of the right quality to run the company successfully.
• A company should not pay more than is necessary for the services of directors.
• A significant proportion of executive directors’ remuneration needs to be linked to
corporate and individual performance.
• A formal and transparent policy needs to exist to develop executive remuneration
and fix the remuneration packages of individual directors.

5. Relation with shareholders

• The board has a responsibility to ensure that satisfactory dialogue with

shareholders takes place.
• This dialogue should ensure that shareholders have a mutual understanding of
company objectives.
• The AGM is a suitable mechanism to communicate with investors and encourage
their participation.
The relative merits of a framework approach to corporate governance
versus a regulatory approach

There are essentially two main approaches to corporate governance: a framework,

principles-based approach as in the United Kingdom; or a regulatory, rules-based
approach as in the United States. Most developed countries follow one of these two
systems, which are usually supported by the relevant stock exchanges that exist in a
country.
Whichever system is used, there is an element of required conformance. In the UK this
is through corporate governance codes developed from the initial work of Cadbury. In the
US the required corporate governance principles have been covered by legislation
introduced by the Sarbanes–Oxley Act of 2002. The ‘comply or explain’ concept is the
trademark of corporate governance in the UK. This approach has been in operation since
the Code’s beginnings and is at the core of its flexibility.
A rules-based approach instils the code into law with appropriate penalties for
transgression.
A principles-based approach requires the company to adhere to the spirit rather than
the letter of the code. The company must either comply with the code or explain why it
has not through reports to the appropriate body and its shareholders.

Regulatory Approach Principle-Based Approach

given set of corporate governance key principles need to be complied with

requirements to be adhered to
limited discretion on application and
interpretation
may not be flexible enough to deal with
new and changing circumtances and
business environments
narrower definition of rules
more of tick-box exercise
clear guidnace on what is appropriate
and what isn't
and explained
different organizations may interpret and
apply principles differently
flexibility to handle changing and
circumtances and business environment
broader definition of rules
less ot tick-box activity, more a set of
guidng practices
behavior is more open to interpretation
Arguments in favor of a rules-based approach (and against a
principles-based approach)

Organization's perspective:
• Clarity in terms of what the company must do - the rules are a legal requirement,
clarity should exist and hence no interpretation is required.
• Standardization for all companies - there is no choice as to complying or explaining
and this creates a standardized and possibly fairer approach for all businesses.
• Binding requirements - the criminal nature makes it very clear that the rules must
be complied with.

Wider stakeholder perspective:

• Standardization across all companies - a level playing field is created.
• Sanction - the sanction is criminal and therefore a greater deterrent to
transgression.
• Greater confidence in regulatory compliance.

Arguments against a rules-based approach (and in favor of a

principles-based approach)

Organization's perspective:
• Exploitation of loopholes - the exacting nature of the law lends itself to the seeking
of loopholes.
• Underlying belief - the belief is that you must only play by the rules set. There is
no suggestion that you should want to play by the rules (i.e. no 'buy-in' is required).
• Flexibility is lost - there is no choice in compliance to reflect the nature of the
organization, its size or stage of development.
• Checklist approach - this can arise as companies seek to comply with all aspects
of the rules and start 'box-ticking'.
Wider stakeholder perspective:
• Regulation overload' - the volume of rules and amount of legislation may give rise
to increasing costs for businesses and for the regulators.
• Legal costs - to enact new legislation to close loopholes.
• Limits - there is no room to improve, or go beyond the minimum level set.
• 'Box-ticking' rather than compliance - this does not lead to well governed
organizations.
 Good Governance Standards for
The OECD Principles of Generic Principles of Good
public Service 6. Core Principles of
Corporate Governance Governance
Good Governance
protect and facilitate the promote values for the whole develop the capacity and
exercise of shareholders organization and demonstrate good effectiveness of the governing
rights governnace through behavior body
agree and promote values
ensure strategic guidance
focus on the organization's purpose
of the company, the
and on outcomes for citizen and engage with stakeholders and
effective monitoring of
service use shareholders
management by the board

be fair and impartial protects

make timely and accurate people rights
take informed transparent decisions
disclosure on all amterial
and manage risk
matters behave ethically

set strategic purpose and

recognize the right of outcomes
stakeholders and engage with stakeholders and make
encourage active co- accountability real
identify and manage risk
operation

make informed and transparent

ensure equitable decisions
develop the capacity and capability
treatment of all
of the governing body to be effective
shareholders monitor performance

disclose everything that

promote transparent and accountability is effective
efficient markets , be perform effectively in clearly
consistent we the rule of defined roles
define roles and responsibilities
law