BWRR3123/ CORPORATE

1
GORVERNANCE

CHAPTER 1
INTRODUCTION TO
CORPORATE GOVERNANCE
 Lecture Outline
2

 Introduction
 Definition
 Important Features of Corporate Governance
 Concepts of Sound CG
 Management vs Governance
 Code of Corporate Governance
 Benefits of Good Corporate Governance
 1. Introduction
3

Stage 1: Equity
Voting Rights

Company founded (owned and managed) by individual,

family, partnership, government or company.

Stage 2: Equity New Equity Debt

Voting Rights Voting Rights

Company expands by issuing more equity and debt.

New equity holders also get voting rights as to who
manages the company.
 Ownership matters
4

 Most companies are created by

entrepreneurs who are either individuals
or a small set of partners. In either case,
they can be members of a family
 Over time, however, some firms may
choose to go public via an initial public
offering or IPO.
 Introduction
5

Company founder must now choose between keeping

control of the company or allowing the company to be
managed by professional managers.
Equity New Equity Debt
Voting Rights 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.
Who Owns the Business?

[Insert Exhibit 2.1]

Forms of business and conflicts
7
of interest
Characteristic Sole Partnership Corporation
Proprietorsh
ip
Ownership Sole owner Multiple Unlimited
owners ownership
Legal requirements Few; entity Few; entity Numerous legal
and regulation easily formed easily formed requirements
Legal distinction None None Legal
between owner separation
and business between
owners and
business
Liability Unlimited Unlimited but Limited
shared among
partners
Ability to raise Very limited Limited Nearly
capital unlimited
Transferability of Non- Non- Easily
ownership transferable transferable transferable
(except by
 2. Definition: Governance
8

 The concept of ’governance’ has been

formatted from the word ‘gubernare’, which
means ‘to rule or to direct, guide’. Earlier the
term was to be related to the exercise of
power with acceptance of responsibility, by
and accountability for running of kingdom.
However over the years the term assumed
greater importance in wider sense and scope
for business entities to corporate world.
 Governance is a term that refers to the way
in which and enterprise or body of people is
 Definition: Corporate Governance
9

• Corporate governance is the system is the system of

rules, practices and processes by which business
corporations are directed and controlled.
• Boards of directors are responsible for the governance
of their companies. The boards actions are subject to
laws, regulations and the shareholders in general
meeting.
• The shareholders’ role in governance is to appoint the
directors and the auditors and to satisfy themselves
that an appropriate governance structure is in place.
(Cadburry report, 1992)
 Definition: Corporate Governance
10

“Corporate governance is defined as the

process and structure used to direct and
manage the business and affairs of the
company towards promoting business
prosperity and corporate accountability with
the ultimate objective of realising long-term
shareholder value while taking into account
the interest of other” (MCCG, 2017).
Corporations: Corporate
Governance
 Private and Public
Corporations
 Separation of Ownership Owners / Shareholders

(Shareholders) and
Management Board of Directors

 Corporate Governance is Corporate Officers

the relationship
between: Middle and Lower Management
 Shareholders (owners)
 Board of Directors
 Corporate Officers
 3. Important Features of CG
12

 Adequate and appropriate system of internal

controls in place.
 No single individual should have too much
power.
 Relationship between company’s management,
the board of directors, shareholders and other
stakeholders
 Company managed in best interests of
shareholders and other stakeholders
 Encourages transparency and accountability
13
 4. Pillars of Corporate Governance
14

The overall CG practices show the following

pillars:
1.Accountability
2.Transparency
3.Ethical behavior
4.Sustainability
Companies that embrace these principles
are more likely to produce long term value
than those that are lacking in one or all.
 Accountability
15

• Accountability means answerability or liability.

• Accountability can have a negative connotation because many
people associate it with blame. “Who’s responsible for when
something goes wrong?” is just one of the many questions that
accountability seeks to answer. But accountability is more than
that. It’s about having ownership over one’s actions whether
the consequences of those actions are good or bad.
• Individuals who make decision in a company and take actions
on behalf of a company on specific issues should be
accountable for the decisions they make and the actions they
take.
• Ensure that management is accountable to the Board and the
Board is accountable to shareholders
• Shareholders are deeply interested in who will take the blame
when something goes wrong in one of a company’s many
processes. And even when everything goes smoothly as
expected, knowing that someone will be held accountable for
future mishaps increases shareholders’ confidence, which in
turn increases their desire to invest more
Accountability
 Transparency
17

 Transparency “means having nothing to hide” . Refers

to the ease with which an outsider is able to make a
meaningful analysis of a company and its actions. This
means it allows its processes and transactions
observable to outsiders. It also makes necessary
disclosures, informs everyone affected about its
decisions, and complies with legal requirements.
 Transparency is a critical component of corporate
governance because it ensures that all of a company’s
actions can be checked at any given time by an
outside observer.
 Transparency is no longer just an option, but a legal
requirement that a company has to comply with.
Transparency
 Ethical Behaviour
19

 Ethics is a concept used to pass judgement on human

behaviour. Ethics can be defined as the discipline
dealing with moral duties and obligation, and
explanation what is good or not good for others
 Ethics in these situations is to ensure consistency in
decision making involving conflicting values,
accountability , honesty and reflective judgements.
 Ethics is the first line of defence against corruption
while law enforcement id remedial and reactive. Good
corporate governance goes beyond rules and
regulations that the government can put in place.
Dilemmas on whether to pursue self-interest or
company interest often leads to corporate misconduct
Ethical Behaviour
 Sustainability
21

 Both corporate governance and

sustainability is essential for the continuous
operation for any corporation. These two
concepts are fundamentally related to each
other.
 Good corporate governance is generally
expected to have a positive impact on the
sustainability performance and disclosure
 Through sustainability disclosures,
organizations are demonstrating their
sustainability governance and performance
Sustainability
5. MANAGEMENT vs GOVERNANCE

 Governance refers to oversight and decision-making

related to strategic direction, financial planning, and
bylaws- the set of core policies that outline the
organization’s purpose, values, and structure.
 Management refers to the routine decisions and
administrative work related to the daily operations of
the organization. Management decisions should
support or implement goals and values defined by
governing bodies
 Separating governance and management promotes
accountability at all levels. It also provides a
mechanism for good enterprise governance that
focuses on stakeholder value by balancing
performance and conformance.
MANAGEMENT vs GOVERNANCE

Responsible for Relates to governing

ensuring that the of an organisation at
operational functions the top.
of corporate are
effective and efficient.
Concentrates on the Denotes the system by
implementation of which companies are
systems directed and
controlled
To ensure that the Concerned with
processes of decision structures and process
making and control are associated with
adhered to management, decision
making and control
MANAGEMENT vs GOVERNANCE
Coordinates business Strives to protect
in a most efficient way owner's interest
while striving to attain
goals and execute
policies set by
governing organ
Focus on performance Focuses on overall
and results control
Translates into Represents a
practice the view of collection of board
governing organ about principles and
strategies direction practices
Recommends goals Approves high level
and polices supported organisational goal
MANAGEMENT vs GOVERNANCE

Management is ‘hands Governance be

on’ described as ‘hand off’
Good management is Good corporate
the means to make the governance is the
corporation means of ensuring due
operationally effective and adequate control
over the strategy and
direction of an
organisation in
achieving its key
objective for the
interest of
stakeholders.
MANAGEMENT vs GOVERNANCE
 6. Code of Corporate Governance
28

 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 1997–1998 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.
 6. Code of Corporate Governance
29

 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.
 6. Benefits of Good Governance
30
 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:
 Increases trust - providing clear and accurate
information to their stakeholders on a regular basis
 Encourages positive behaviours - Having
clearly defined policies and processes and a board
of directors and executive managers who take an
interest and responsibility for such matters can help
to prevent future failures whilst setting the
organisations cultural expectations.
 7. Benefits of Good Governance
31

 Lower the costs of capital – An organisation that

is seen to be stable, reliable and able to mitigate
potential risks will be able to borrow funds at a
lower rate than those with no, or weak governance
systems. 

 Enhances Sustainability (Improved company

performance)  - A company committed to good
governance is more able to quickly identify and
resolve any systemic issues thus reducing the
likelihood of costly corporate crises and
scandals. Higher share price
 7. Benefits of Good Governance
32

 Minimises waste, risks, corruption and

mismanagement -  Companies committed to
implementing and maintaining good governance
practices will likely find that certain risks are
drastically minimised. This is because strong
governance practices typically increase levels of
transparency, trust and integrity, all of which
create an environment conducive to reducing risks,
opportunities for corruption and any source of
mismanagement.

 Greater international following

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.
 VIDEOS
 The Governance Problem: How it
Started
https://www.youtube.com/watch?
v=V0zemSfMWSQ

The importance of corporate

governance
https://www.youtube.com/watch?
v=bEKumcUERtE