Understanding Corporate Governance

Corporate Governance

• Involves relationships between stakeholders and corporate goals
• Aims to distribute corporate resources to benefit stakeholders like shareholders, investors, employees, customers, suppliers, the environment, and the community
• Targets prevention of abusive or unlawful activities by entrepreneurs and business owners
• According to the Code of Corporate Governance, it ensures management enhances corporate value in a global market

Strategic Aims of Corporate Governance

• Increase transparency by disclosing company account transactions
• Promote management accountability to directors and director accountability to shareholders
• Ensure fair treatment of all shareholders
• Allows firms to self-evaluate before regulatory scrutiny
• Protect shareholders' long-term interests

Elements of Good Governance

• Direction: includes making strategic decisions and discussing company concerns

Oversight

• Corporate governance provides leadership oversight, prioritizing shareholders' interests

Stakeholder Relations

• Corporate governance addresses business accountability to all stakeholder groups
• Emphasis on balancing investor interests with concerns for other stakeholders

Corporate Citizenship

• Good governance requires companies to balance profit with responsible policies and practices

Independence of Directors

• Having mostly non-executive independent directors avoids conflicts of interest
• Independent judgment is in the best interest of the company

Effective Risk Management

• Companies should diversify operations to avoid over-reliance on single markets

Solid Structure and Organizations

• Companies should monitor interactions and transactions through transparent practices via a structured framework

Transparency

• Important for public trust and counteracting secretiveness

Self-evaluation

• Regular self-evaluations are essential to identify and mitigate issues

Employee Feedback

• Feedback from employees and customer surveys can improve effectiveness of company policies

Role of the Board of Directors

• The Board is essential for setting strategic direction, implementing strategies, and supervising management

Role of Shareholders

• Shareholders participate in corporate governance by appointing directors and approving major decisions
• They can take legal action against poorly governed companies

Role of Securities and Exchange Commission

• Regulation of corporate governance based on Securities Regulation Code and Corporation Code

Challenges in Corporate Governance

• Short-termism: Short tenures can deprive the board of long-term oversight and expertise

Rule-Based Approach

• Legal rules are enforced by law and attract penalties, if they are not followed

Principles-Based Approach

• A unique rule is not suitable for every company

Characteristics of a Rule Based Approach

• Approved set of requirements
• Fast approach of ensuring conformity
• Implements a checklist method
• Clear demarcation between conformity and non-conformity
• Easy to establish if an entity is conforming
• Lowering of flexibility on the part of administrators and auditors
• Challenging to set rules entirely for all situations
• Likely to misunderstand rules
• Similar rules apply to all, whatsoever their sizes are

Rule Based Approach: Advantages

• Companies do not have a choice to ignore rules
• Companies are all required to mee the minimum standards of corporate governance.
• Investor confidence in the stock market might be improved

Rule Based Approach: Disadvantages

• The same rules might not suit every company because circumstances of each company differ
• Corporate governance can be too rigid if the same rules are applied to all companies
• Areas like negotiating director pay, suitable skill ranges and assessing board performance are hard to regulate

Agency Theory

• Examines agent-principal relationships, where the agent acts in the principal's interest
• An example is the relationship between shareholders and top executives

Improving Agent Motivation

• Incentives can be designed based on what motivates the agent in acting in their interest

Agency Theory in Corporate Governance

• Addresses the agency relationship between shareholders and top management
• Aims to contribute to the good performance of the company

Stewardship Theory

• Defines a steward as someone who protects and cares for others
• States company leaders guard owner/shareholder interests and decide on their behalf
• Stewardship governance requires a dependable CEO who prioritizes company interests over personal ones
• Sees the needs as every part of a company from employees, suppliers, and business partners

James H. Davis

• managers seek to innately do a good job and seek to maximize company profits

Stewardship Theory in Corporate Governance

• Satisfying shareholders is the purpose of this theoru

Stakeholder Theory

• A business' purpose is to create value for all stakeholders, not just shareholders
• Thinks of the corporate environment as an interconnected network of groups

Edward Freeman

• Coined the term Stakeholder Theory
• Recognized its importance to Corporate Social Responsibility

Principles of Stakeholder Theory

• Entry/Exit: Clear rules for hiring and termination
• Governance: Adjusting rules relating stakeholders
• Externalities: What happens when a group has actions that negatively impact the company
• Contract Costs: The amount of cost should be equal
• Agency: The principles and the responsibility of the stakeholders
• Immortality: To ensure the principle last for the benefit of all parties involved in the longer time period

Categories of Stakeholders

• Organizational Stakeholders: Those present inside the company with a direct interest
• Economic Stakeholders: Customers, bankers, creditors, and suppliers
• Societal Stakeholders: These stakeholders regulate the business setting under which the companies function

Stakeholder Theory in Corporate Governance

• Focuses on the effect of corporate activities on the stakeholders
• The corporate officers and stakeholders must take in account the stakeholder's interest
• Make sure to create a strong relationship between the community and the investor

Business Principles

• All stakeholders are treated fairly and have rights
• Honesty and ethical behavior
• Responsibilities and roles of the stakeholders

Corporate Social Responsibility (CSR)

• Modern practice of companies actively engaging in social and community concerns
• Targets customers and the buying public
• A business philosophy to behave as a good corporate citizen

Bloom Over Doom(NIKE)

• The company's philosophy that reflects the innovation and sustainability of the brand
• The goal is to support a future healing the society
• Incorpates the vision of the brand for the future

Loves Pets Campaign (Subaru)

• This Dog's Day is a part of the Subaru initiative for the pets of the brand
• Has resulted in some collaborations

Sustainable Practice of Alaska Airlines

• Using its business model to support aviation technologies

Concept of CSR

• Milton and Edward rose the rise of CSR

Milton and Friedman

• The responsibility businesses has to increase profit

Key Components of CSR

• Workplace and Labor Relations Workplace and labor relations are good CSR practices
• Corporate Governance Transparency and Accountability
• Business Ethics Submission and obedience to legal standards

Profit Maximization Management (Phase 1)

• Management must maximize profit

Trusteeship Management ( Fase 2)

• Management was considered both an instrument of stock holders and and as a trustee

Quality of Life Management (Phase 3)

• Security of basic goods that was no longer a huge problem

Socioeconomic CSR

• Says that a business is a large portion of society and exceeds profits

Classical CSR

• Business is for profits and only profits

Public Image

• Increase sales and better the finance of a company and their workers

Businesses' Social Role

• They are part of the effort to better quality problems

Public Expectation

• They are not only in it for the money but to better things

Points of Businesses with CSRStockholders Interest

• Stock increases and market shall observe the company

Possesion of Resources

• They have more money to help continue charitable