Governance and

Responsibility
BAC 4201 PROFESSIONAL ACCOUNTANT
MOHD HANIFF ZAINULDIN

Is governance relevant to all

companies?
Large listed
company

Private company

Not-for-profit org

Primary
accountability

Shareholders and
regulators

Shareholders

Fund providers,
regulators, general
public, members

Principal stakeholders

Shareholders

Shareholders

Donors, grant
providers, regulators,
general public,
members

Main method of
monitoring
performance

Financial statements

Financial statements

Financial statements,
other financial and
non-financial
measures

Governance/board
structure

Executives and NEDs.

Appointment through
formal process in line
with governance
requirements

Executive Directors.
Appointment may be
the result of
shareholding or other
recruitment process

Volunteer trustees
paid and unpaid
management team.
Appointment through
recruitment,
recommendations or

Is governance relevant to all

companies?
CG is more important for large public companies where
the separation of ownership and control is much wider
compared to small private companies
Any doubt of integrity of management n public
companies, the value of companys shares will be affected
The scope of CG for private and not-for-profit org much
reduced compared to public company because of less
regulatory requirements to comply with
In not-for-profit firms a key governance focus will be to
demonstrate to fund providers that money is being spent
in appropriate manners in line with organization
objectives

Internal stakeholders and

corporate governance
Stakeholder

Operational role

Corporate
governance role

Main interests in
company

Directors

Responsible for the

actions of the
corporation

Control company in
best interest of
shareholders

Company secretary

Ensure compliance
with company
legislation and keep
board members
informed of their
responsibilities

Advise board on
corporate governance
matters

Sub-board
management

Run business
operations.
Implement board
policies

Identify and evaluate

risks, enforce
controls, monitor
success & report
concerns

Carry out orders of

management

Comply with internal

control, report
breaches

Employees

Pay
Performance-linked
bonuses
Share options
Status
Reputation
Power

Pay
Performance-linked
bonuses
Job stability
Career progression
Working conditions
Status

External stakeholders and

corporate governance
External party

Main role

Interests and claims in

company

Auditors

Independent review of companys

reported financial position

Fees
Reputation
Quality of relationship
Compliance with audit
requirements

Regulators

Implementing and monitoring

regulations

Compliance with regulations

Effectiveness of regulations

Government

Implementing and maintaining laws

with which all companies must
comply

Compliance with laws

Payment of taxes
Level of employment
Levels of import/exports

Stock exchange

Implementing and maintaining rules

and regulations for companies listed
on the exchange

Compliance with rules and

regulations
Fees

Small investors

Limited power with use of vote

Maximisation of shareholders value

Institutional
investors

Through considered use of their

votes can beneficially influence

Value of shares and dividend

payments

Agency theory
Definition: A group of concepts describing the nature of
the agency relationship deriving from the separation
between ownership and control
Key concepts
Agent: employed by principal to carry out task on their
behalf
Agency: relationship between principal and agent
Agency costs: incurred by principals in monitoring agency
behavior because of lack of trust in the good faith of agents
Accountability: by accepting to undertake a task on their
behalf, an agent becomes accountable to principal
Fiduciary responsibility: Agents have the fiduciary duty to
act in the best interests of principals

Agency costs
Monitoring costs
As a results of principals monitoring activities of agents.
May be viewed in monetary terms, resources consumed or time
taken in monitoring
Costs borne by principals but may be indirectly incurred as the
agent spends time and resources on certain activities. Examples

Incentives schemes and remuneration packages

Costs of preparing annual reports
Costs of establishing management audit procedures
Costs of meeting with financial analysts and primary shareholders

Residual loss
Relates to directors furnishing themselves expensive cars and
planes
These costs are above and beyond the remuneration package

Agency problem resolution

measures

Meeting with directors and key institutional

shareholders
Voting rights at the AGM in support of or against the
resolution
Proposing resolutions for vote by shareholders at
AGM
Accepting takeovers
Divestment of shares is the ultimate threat

Need for corporate governance

The market mechanisms and shareholder activities
are not enough to monitor the company
There are a number of code of corporate
governance issued by governments and regulators.
Although the compliance is voluntary, the fear of
damage to reputation arising from governance
weaknesses and the threat of delisting renders it
difficult to not comply

Transaction cost theory

Definition: It describes governance frameworks as being
based on the net effects of internal and external
transactions rather than contractual relationship outside
the firm
It is based on the principle that costs will arise when you
get someone else to do something for you
Transaction costs that occur when dealing with external
parties:
Search and information costs
Bargaining and decision costs
Policing and enforcement costs

Management will try to internalize transactions as much

as possible

Transaction cost theory

Transaction costs can be further impacted by
Bounded rationality: limited capacity to understand
business situations which limits the factors we consider in
the decision
Opportunism: actions taken in an individuals best
interests which create uncertainty in dealings and
mistrust between parties

The significance and impact of these criteria will

allow the company to decide whether to expand
internally or deal with external parties

Transaction cost theory vs.

agency theory
Both theories deal with same issues and problems.
Agency theory focuses on individual agent and
transaction cost theory focuses on individual
transaction
Agency theory looks at the tendency of agents act
in their own best interests but transaction cost
theory considers that agents may arrange
transactions in an opportunistic way
The CG problem of transaction cost theory is not the
protection of ownership rights of shareholders but
the effective and efficient accomplishment of
transactions by firm

Stakeholder theory
The basis: companies are so large and their impacts
on society are so pervasive that they should
discharge accountability to many more sectors of
society than solely their shareholders
Stakeholder theory is the necessary outcome of
agency theory given that there is business case in
considering the needs of stakeholders
Agency theory is a narrow form of stakeholder
theory

Influences on corporate
governance
Agency theory leads to shareholders pressure and
shareholders activism
Stakeholder theory leads to stakeholder lobbying
and concerns over social responsibility
Company laws provides framework within which
operations occur
Audit and auditors impact on governance
Code of corporate governance

Reasons for developing a code

It should reduce instances of fraud and corruption,
improving shareholders perception and market
confidence
There are statistical evidences that poor
governance leads to poor performance
Global investors were willing to pay a significant
premiums for companies that are well governed
The decision factor for institutional investors
If it does not add value, will increase risks and
exposes huge potential losses to shareholders

Problems with code

The process is reactionary rather than proactive;
responding to a major failures in governance rather
than setting the agenda
The impact varies depending of the nature of
company and the global viewpoint
It adds red tape and bureaucracy in the use of
committees and disclosure requirements
Adherence to governance requirements harms
competitiveness and does not add value
It cannot stop fraud