BWRR3123/ CORPORATE

GORVERNANCE

CHAPTER 1
INTRODUCTION

Lecture Outline
Introduction
Definition and Structure of Corporate
Governance
Governance and Responsibility
Four Pillars of Corporate Governance
Code of Corporate Governance
Benefits of Good Corporate Governance

1. Introduction
Stage 1:

Equity
Voting Rights

Company founded (owned and managed) by

individual, family, partnership, government
or company.
Stage 2:

Equity
Voting Rights

New Equity

Debt

Voting Rights

Company expands by issuing more equity

and debt. New equity holders also get
voting rights as to who manages the
company.

Introduction
Company founder must now choose
between keeping control of the company or
allowing the company to be managed by
professional managers.
Equity
Voting Rights

New Equity

Debt

Voting Rights

If they keep control there is a potential

conflict between the founders and other
shareholders.
If they pass management to professional
managers there is a potential conflict
between owners and managers.

Introduction
Corporate governance generally refers to
the set of mechanisms that influence the
decisions made by managers when there is
a separation of ownership and control.

Important features of corporate

governance
Adequate and appropriate system of internal
controls in place.
No single individual should have too much
power.
Relationship between companys
management, the board of directors,
shareholders and other stakeholders
Company managed in best interests of
shareholders and other stakeholders
Encourages transparency and accountability
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2. What is Corporate Governance?

Corporate governance is a process which is
concerned about how corporations are
managed, how managers are governed, what
questions face boards of directors and the
accountability a corporation has to
shareholders (Mobius, 2002, p.40).
Corporate governance addresses the elements
of organisational control systems and
processes; relationships between the board,
shareholders, and other stakeholders;
shareholder interest; and emphasised on
transparency and accountability
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2. What is Corporate Governance?

Corporate governance is about minimizing
the loss of value that results from the
separation of ownership and control.
It deals with the ways in which suppliers of
finance to corporations assure themselves
of getting a return on their investment.
While corporate governance has been a hot
issue in recent years (Enron, Worldcomm,
HIH and One.Tel) it is a problem that has
been around for hundreds of years Adam
Smith (1776).
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2. What is Corporate Governance?

Good corporate governance practices involve:
The corporate governance framework should
protect shareholders rights.
The corporate governance framework should
ensure the equitable treatment of all
shareholders.
Stakeholders should be involved in corporate
governance.
Disclosure and transparency is critical.
The board of directors should be monitored and
held accountable for what guidance it gives.

Definition
A definition by the Finance Committee on
Corporate Governance in Malaysia in the Report
on Corporate Governance (2002) stated that:
Corporate governance is the process and structure
used to direct and manage the business and affairs
of the company towards enhancing business
prosperity and corporate accountability with the
ultimate objective of realizing long term
shareholder value, whilst taking account the
interests of other stakeholders.

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3. Governance and Responsibilities

Shareholders those that own the
company
Directors Guardians of the Companys
assets for the Shareholders
Managers who use the Companys assets

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12

Internal Mechanisms
Board of Directors
Board Size & Independence
Chairman/CEO Positions
Board Committees

Executive Compensation
Ownership Structure
Concentrated versus Dispersed Ownership
Identity of Owners
Other Blockholders

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External Mechanisms
External Auditors
Debt & Equity Markets
Monitoring by debt holders
Analysts
Mergers & Acquisitions

Legal/Regulatory System
Common versus Civil Law
Extent of Law Enforcement
Recent Regulations Sarbanes Oxley Act,
ASX Good Corporate Governance Principles
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Ownership Structure
The identity of the controlling owner can also
have corporate governance implications.
Family-controlled companies use crossholdings and pyramidal structures to gain
effective control of the company with the
least cash ownership. The market recognizes
this and prices the increased risk of
expropriation into the share price.
Government-owned and widely-held
companies are more likely to follow the rules.

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Ownership Structure
The presence of an non-management
related blockholder of shares can increase
monitoring of the firm.
A blockholder usually holds at least 5% of
the outstanding shares, therefore has a
significant interest in the future
performance of the company.
Blockholders can be governments,
financial institutions, individuals or other
companies.
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4. Four Pillars of Corporate

Governance
Accountability
Fairness
Transparency
Independence
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Accountability
Ensure that management is
accountable to the Board
Ensure that the Board is
accountable to shareholders

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Fairness
Protect Shareholders rights
Treat all shareholders including
minorities, equitably
Provide effective redress for
violations

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Transparency
Ensure timely, accurate disclosure on
all material matters, including the
financial situation, performance,
ownership and corporate
governance

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Independence
Procedures and structures are in
place so as to minimise, or avoid
completely conflicts of interest
Independent Directors and Advisers
i.e. free from the influence of others

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5. Code of Corporate Governance

Following major corporate collapses in various
developed stock markets in the last two decades,
efforts to enhance the efficacy of governance
structures have been undertaken by many
countries via the establishment of Corporate
Governance Guidelines (e.g. the Cadbury, Hampel
and Higgs Reports in the UK, the Bosch Report in
Australia and the Business Roundtable in the US).
Similarly, the economic crisis of 19971998 that hit
South East Asian stock markets, which was to a
certain extent attributed to weak corporate
governance prompted the governments in the
region to seriously consider ways of improving the
governance structures in their respective countries.
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5. Code of Corporate Governance

Most of the countries in the region have each now
established a Code of Corporate Governance to
ensure the continuous flow of funds and to boost
the confidence of investors in their capital
markets.
However, the principles outlined in most of the
Codes in these countries are largely derived from
recommendations in developed countries and may
not necessarily be applicable to developing
countries. Every nation has its own national
character as well as social and economic priorities
and as such, what is desirable in one country may
not be so in another.
Likewise, every corporation has its own unique
history, culture and business goals. Hence, efforts
to reform corporate governance should take into
account all of these factors.
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6. Benefits of Good Governance

Researchers have shown that companies
with good corporate governance practices
are valued more highly and run more
effectively.
So the benefits of good governance
include:
Higher share price
Lower cost of funds
Greater international following
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6. Benefits of Good Governance

Better access to external finance
Lower costs of capital interest rates on
loans
Improved company performance
sustainability
Higher firm valuation and share
performance
Reduced risk of corporate crisis and
scandals
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Some key points

Corporate governance is an essential
mechanism to help the company
attain its corporate objectives and
monitoring performance is a key
element in achieving the objectives.
Corporate governance is
fundamental to well-managed
companies and to ensuring that they
operate at maximum efficiency.