Understanding Corporate Governance

• Corporate governance is as old as corporate entities.
• Governance issues arise whenever a corporate entity becomes independent and ownership is separated from owners.
• Corporate entities are established through legislation.
• Ownership forms the basis of power within a corporation.
• Company law is the body of statutes, rules, and regulations that govern corporate entities.
• Company law differs across jurisdictions.

Defining Corporate Governance (CG)

• Corporate governance is how powers are shared and exercised by different groups to achieve company objectives.
• Corporate governance is the way an organization is governed and the purpose practices and procedures serve to ensure objectives are achieved, subject to constraints and stakeholder interest.
• Corporate governance involved how powers are shared and exercised by different groups to ensure the achievement of objectives.
• Corporate governance is a monitoring and control process to ensure management runs the company in the interest of shareholders.
• Corporate governance is defined differently by various organizations and authors.
• Corporate governance includes discipline and professional affiliations.
• Corporate governance is contextual while also covering a wide array of economic phenomena.
• A narrow definition of corporate governance focuses on shareholder theory, as opposed to the stakeholder theory.
• The shareholder model focuses solely on management's accountability to shareholders and is considered a narrow view of corporate governance.
• Maher and Andersson determined that the stakeholder model views the long term contribution of all stakeholders to the enterprise, which ultimately leads to shareholder value.

Goals of Corporate Governance

• Corporate governance entails compliance with societal and regulatory rules.
• Corporate governance satisfies accepted business norms, ethical principles, and societal expectations.
• Corporate governance involves fully and truthfully reporting to stakeholders, including the public, to ensure accountability.

Governance vs Management

• Powers to manage the company rests with the Board of Directors (BoD), but are mostly delegated to the CEO and management.
• Certain matters should be reserved for board decisions.
• The Board of Directors is responsible for monitoring the work of management.
• The Board of Directors is not responsible for day-to-day management.
• The board of directors is responsible for governing the company; governance responsibilities go beyond management.

Theories of Corporate Governance

• Stewardship, stakeholder, and agency theories are ethnocentric, deriving from Western thought with its individual, enterprise, and state roles.
• Tricker (1996) explored the perceptions and expectations of these theories.
• The theories include agency theory, resource dependence theory, stewardship theory, and stakeholder theory.
• Agency theory, developed by Berle and Means (1932) in "The Modern Corporation and Private Property," posits that a principal cannot always verify if an agent has acted appropriately, because the principal and agent have different risk appetites.
• Agency costs include monitoring and bonding costs, as well as residual losses.
• Agency theory is based on separation of ownership and control and notes that agency costs only arise when ownership and control are separate.
• An agency relationship is contractual between a company, its principal owners, and its managing agents who act on their behalf.
• The nature of governance reflects the conflict of interest between managers and shareholders who seek long-term income and wealth versus short-term profits and dividends.
• Agency theory suggests that the system of corporate governance should be designed to minimize agency problems and costs.
• There is a separation of ownership from control.
• Individuals are driven by self-interest.
• There is a conflict of interest between principals and agents.
• Problems arise because managers are driven by self-interest and cannot be fully relied upon.
• Agency problems create costs for shareholders; the goal is to minimize these costs via monitoring and incentives.
• Agency conflicts arise from moral hazards, where managers seek benefits like status and company perks, potentially pressuring acquisitions and mergers for personal gain at shareholders' expense.
• Agency conflicts can also result from earnings retention.
• Managers may exert less effort if they lack company ownership, resulting in lower profits and share prices
• Shareholders have long-term financial prospects, managers are interested in short term gains.
• Agency costs are the expenses related to having agents, managers, to make decisions on behalf of principals, shareholders, which can be very high in large companies.
• Monitoring costs entail shareholders overseeing management actions to ensure their best interests, often through annual reports.
• Boding costs include a remuneration package for senior managers and directors that include incentives.
• Residual costs are incurred by shareholders when managers prioritize their interests over shareholder interests.
• Resource Dependence Theory (Pfeffer and Salancik, 1978).
• Organizations depend on resources, which underlies their power in the market.
• Boards are seen as important "boundary spanners."
• Boards of directors are an important mechanism for reducing environmental costs.
• Stewardship theory was put forward by Donaldson and Davis in 1991.
• Managerial opportunism is not relevant in this theory
• Agents are good stewards of the corporate assets
• Structures provide clear, consistent role expectations, and authorizes and empowers senior management.
• There should be no role ambiguity with role of the board
• Stakeholder theory states that a stakeholder theory of the firm must redefine the purpose as to coordinate stakeholder interests- Evan and Freeman (1993).
• Each stakeholder group is important to the success of the organization
• The board should include representatives of all parties that are critical to a company's success.

Principles of Corporate Governance include

• Fairness of treatment, such that all shareholders should be provided equal consideration.
• All stakeholders are to be treated fairly
• A fairer entity is more likely to survive the pressure of interested parties.
• Corporate accountability involves giving explanations for a company's actions and conduct.
• The board should present a balanced and understandable assessment of the company’s position and prospects.
• The board is responsible for determining the nature and extent of the significant risks it is willing to take.
• The board should maintain good risk management and internal control systems.
• The board should establish formal and transparent arrangements for corporate reporting and risk management and for maintaining an appropriate relationship with the company's auditor.
• The board should communicate with stakeholders at regular intervals, with a fair, balanced, and understandable assessment of how the company is achieving its business purpose.
• Boards of directors should fully accept responsibilities.
• Boards of directors should be made accountable to the shareholders.
• Transparency entails informing stakeholders about business strategies.
• Transparency demonstrates openness and a willingness to provide clear information to shareholders and stakeholders, including accurate financial disclosure
• Important matters should be timely and accurate.
• Investors should be granted with access to clear factual information.
• Organizations should publicly clarify the roles of the board and management to provide accountability to the shareholders.
• Transparency gives stakeholders confidence in the management.

Arguments For and Against Good Corporate Governance

• Good governance eliminates misleading or false reporting.
• Good governance prevents company dominance by self-seeking CEOs.
• Good governance promotes fairness, accountability, responsibility, and transparency.
• Good governance adds confidence in the capital markets and helps sustain share prices.
• CG compliance will make companies more likely to achieve success.
• Well governed companies develop a good reputation.
• Good governance encourages investors to hold shares for longer
• Arguments against corporate governance is that it is a box-ticking exercise.
• Argument against corporate governance is that companies adopt procedures and systems that have no benefit.
• Corporate governance is a time and resource consuming bureaucracy that does not focus on the details.
• Regulations are burdensome and can increase risk of scandals and failure.
• Corporate governance is costly in time and money
• Corporate governance complying companies can be at a competitive disadvantage.
• Connections between corporate governance and good financial results has not been proven.

Issues in Corporate Governance

• Role and responsibilities of Directors
• Composition and Balance of the Board
• Remuneration and Reward of Directors
• Reliability of Financial Reporting and External Auditors
• Board’s Responsibility for Risk Management and Internal Control
• Shareholders’ Rights and Responsibilities
• Corporate Social Responsibility and Business Ethics