DEFINITION
CORPORATE GOVERNANCE
Is a system by which organizations are directed and controlled.
-Cadbury Report
Is a set of relationships between a company’s directors, its
shareholders, and other stakeholders. It provides the structure
through which the objectives of the company are set, and the
means of achieving those objectives and monitoring performance
are determined.
-OECD
MANAGEMENT VS GOVERNANCE
Management
Concerned with running the
day to day business
operations of a company.
Concerned
with
business decisions.
Governance
Concerned with leading the
company, and monitoring
and controlling the decisions
of management to ensure
that the business meets its
objectives.
making Concerned with monitoring
and controlling decisions, as
well as providing leadership
and direction.
• Using the USJR structure, identify who you
think are members of management and of
governance.
The separation of ownership and control creates
problems for good corporate governance,
because the directors of a company might be
able to run the company in a way that is not in
the best interests of the shareholders, but the
shareholder might not be able to prevent the
directors from doing this, because the directors
have most of the powers to control what the
company does.
• What do you propose in order to solve this
problem?
• Will the presence of a majority shareholder
change this problem? How?
• It has been said the governance is more of a
concern for publicly listed corporations,
rather than small family owned ones. Why do
you think this is the case?
CORPORATE GOVERNANCE ISSUES
The role and responsibilities of
the board of directors
The BODs should:
1. Understand its responsibilities
2. Fulfill its responsibilities
3. Provide suitable leadership to the
company.
Governance should, therefore, clearly establish
the responsibilities of the BOD and ensure
these are carried out properly.
The composition and balance of
the board of directors
The board should not be dominated
by a powerful chief executive and/or
chairman.
The board should have a suitable balance, and
consist of individuals with a range of
backgrounds and experience
Financial reporting, narrative
reporting and auditing
The board should be:
1. properly accountable to its
shareholders, and
2. should be open and transparent
with investors generally
High standards of financial reporting (and
narrative reporting) and external auditing must
be upheld
Directors’ remuneration
To encourage their commitment to
achieving the objectives of their
company, they should be given
suitable incentives.
Linking remuneration to performance
is considered essential for successful
corporate governance
Risk management and internal
control
The directors should ensure that
1. their company operates within
acceptable levels of risk, and
2. that through a system of internal
control, the resources of the
company are properly used and
its assets are protected
Shareholders’ rights
Encourage the involvement of
shareholders through:
1. more dialogue with the directors
2. greater use of shareholder powers
CONCEPTS OF GOOD GOVERNANCE
These concepts should be
evident in the relationship
between the shareholders and
board of directors
 Fairness
 Openness/Transparency
 Independence
 Honesty and Integrity
 Responsibility and Accountability
 Reputation
 Judgment
THE CORPORATE GOVERNANCE
TRIANGLE
CORPORATE GOVERNANCE TRIANGLE
Chief Executive
Officer
Managing Director
• In a publicly listed entity where there are
many different shareholders, the presence of
a knowledge gap exists between the owners
and management. How do you understand
“knowledge gap” in this context?
• What do you think can be done to address
this knowledge gap?
STAKEHOLDERS AND THEIR INFLUENCE
ON CORPORATE GOVERNANCE
INTERNAL STAKEHOLDERS
EXTERNAL STAKEHOLDERS
 Shareholders
 Directors
 Senior Management
 Other Employees
 Lenders
 Suppliers
 Regulators
 Government
 Customers
 General Public or Special Interest
Groups
 Stock Exchanges
 Auditors
 Investors
AGENCY THEORY IN CORPORATE
GOVERNANCE
HOW DOES AGENCY THEORY
AFFECT CORPORATE GOVERNANCE?
AGENCY CONFLICTS
Agency conflicts are differences
in the interests of a company’s
owners and managers.
 Moral hazard
 Effort level
 Earnings retention
 Risk aversion
 Time horizon
HOW TO SOLVE THE ISSUES THAT ARISE
OUT OF THE AGENCY THEORY?
Agency costs
CHAIRMAN OF THE BOARD VS
CHIEF EXECUTIVE OFFICER
BOARD COMMITTEES
Board committees
• A board committee is a committee set up by
the board, and consisting of selected
directors, which is given responsibility for
monitoring a particular aspect of the
company’s affairs for which the board has
reserved the power of decision-making
Can board
committees
make
decisions?
NO.
They only report
back to the board
and make
recommendations.
• The number of and the type of board
committee created will depend on the
company. The common committees are:
– Remuneration committee
– Audit committee
– Nominations committee
– Risk management committee