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CORPORATE GOVERNANCE
STI400

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Vision
To be one of the leading, prestigious and
exclusive business and economic
institutions in ASEAN by the year of 2030

Mission
Organizing higher education in the field of
economics and business professionally
and competitively to produce quality
human resources with international
competitiveness by upholding integrity,
morality, faith and culture

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CORPORATE GOVERNANCE DESCRIPTION

•CORPORATE GOVERNANCE is the control of management in the interests of the
company, including accountability to shareholders who elect directors and auditors.
How a company is governed influences rights and relationships among organizational
stakeholders, and ultimately how an organization is managed, and whether it succeed
or fails. Companies do not fail but boards do.
•THIS COURSE teaches the fundamentals of corporate governance from a variety of
angles- THE BOARD OF DIRECTORS, MANAGEMENT, SHAREHOLDERS, THE
MEDIA, ADVISORS, REGULATORS AND OTHER STAKEHOLDERS –and focuses
on assessing the effectiveness and execution of governance roles and responsibilities.

RENCANA PEMBELAJARAN SEMESTER : CORPORATE GOVERNANCE

Pertemuan Bahan Kajian Referensi
1 Definition, aspects, structure and corporate governance sources ZR ch 2
2&3 Fidusiary roles and duties of BOD, Board of committees, board models, board ZR ch4 & 5
properties and other committees.

4&5 GMS, BoC and BoD, functions and responsibilities of commissioners and UU PT (Corp Law)
directors
6&7 Internal audit and external audit functions, IA & EA authority and ZR ch 8 & 9
responsibilities, IA & EA relationships with audit committees, IA & EA success
factors
8 MID TERM TEST

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RENCANA PEMBELAJARAN SEMESTER : CORPORATE GOVERNANCE

Pertemuan Bahan Kajian Referensi
9 the Roles and responsibilities of stakeholders ZR ch 10
10 management functions and responsibilities ZR ch6

11 the role of other participants in CG ZR ch 11

12 the role of technology in CG ZR ch 12

13 CG in private and nonprofit organizations zr ch 13

14 the aim of corvergency in CG and how they apply to ZR. ch 14
multinational corporations
15 & 16 investor confidence, global market, social environmental ZR ch 15
performance and ethical role

17 FINAL EXAM

REFERENCE
1) Rezaee, Zabihollah, 2009, Corporate Governance and Ethics, John Wiley & Son (ZR)
2) Indonesia Corporate law No. 40 year 2007 (UUPT)
3) Rezaee, Zahibollah, 2007, Corporate Governance Post- Sarbanes-Oxley, John
Wiley &sons, Inc. (ZRSOX) supporting.

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TATAP MUKA 1
CORPORATE GOVERNANCE: aspect, structure and sources

PRIMARY OBJECTIVES :
• Define corporate governance structure and its
components of principles, functions, and mechanisms.
• Illustrate how corporate governance has evolved from
compliance function to a strategic Imperative.
• Provide an overview of corporate governance
aspects and principles.
• List and define the seven essential corporate
governance functions.
• Become familiar with best practices of corporate
governance.

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Definition of Corporate Governance

The process affected by a set of legislative,
regulatory, legal, market mechanisms,
listing standards, best practices, and
efforts of all corporate governance
participants, including the company’s
directors, officers, auditors, legal counsel,
and financial advisors, which creates a
system of checks and balances with the
goal of creating and enhancing enduring
and sustainable shareholder value, while
protecting the interests of other
stakeholders.

Aspects of Corporate Governance

• In the post-SOX era, Corporate Governance further evolved to the integrated aspects of
meeting both compliance requirements and promoting a strategic business imperative.
There are three aspects: shareholder aspect, stakeholder aspect, and an integrated aspect.
• Shareholder Aspect
• of corporate governance is the concept that the corporation exists for the
benefit of shareholders, and therefore, emphasizes shareholder value creation
and enhancement as the primary objective of corporations. The shareholder
aspect of corporate governance is based on the premise that shareholders
provide capital to the corporation which exists for their benefit. It supports the
agency theory that fiduciary duties of corporate directors and executives are to
shareholders who have a residual claim on the company’s residual assets and
cash flows. Shareholders (principals) provide capital to the company, which is
run by management (agent). The principal-agent problem exists because
corporations are separate entities from their owners—management needs
physical capital (investment funds) and investors need skilled human capital to
run the company.

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Stakeholder Aspect
of corporate governance is the premise that a company’s success depends on the
contributions of investors and other key groups and how well it manages the
relationships with those groups which consist of shareholders, creditors, employees,
supplies, customers, and communities. The stakeholder model of corporate governance
focuses on a broader view of the company as a nexus of contracts among all corporate
governance participants with the common goal of creating value. The emerging model
concentrates on maximization for all stakeholders, including:
(1) contractual participants such as shareholders, creditors, suppliers, customers, and
employees; and
(2) social constituents including the local community; society and global partners; local,
state, and federal governments; and environmental matters. Under this view, public
companies must be socially responsible—good citizens granted the use of the nation’s
physical and human capital, managed in the public interest.

Integrated Aspect
of corporate governance focuses on both
shareholder value creation and enhancement and
stakeholder value protection. Modern corporate
governance emphasizes both financial aspects of
increasing shareholder value and an integrated
approach that considers the rights and interests of
all stakeholders. Corporate governance should be
viewed as a dynamic and integrated approach of
addressing financial, social, environmental, and
economic concerns of all stakeholders.

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Corporate Governance Structure

Corporate governance is
based on three interrelated
components:
corporate governance
principles, functions and
mechanisms.

HONESTY. Corporate communications with

both internal and external audiences,
Corporate Governance including public financial reports, should be
accurate, fair, transparent, and trustworthy
Principles
RESILIENCE. A resilient corporate governance
structure is sustainable and enduring in the
sense that it will easily recuperate from
setbacks and abuses.

RESPONSIVENESS. Effective corporate

governance responsive to the interests and
desires of all stakeholders, as well as
responsive to emerging initiatives, and
changes in political, regulatory, social, and
environmental issues.

TRANSPARENCY. Transparency means that the

company is not hiding relevant information,
and disclosures are fair, accurate, and reliable.

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What are the other principles corporate governance structure should be

developed on?
They are the following:

- Value-adding philosophy
- Ethical conduct
- Accountability
- Shareholder democracy and fairness
- Integrity of the financial reporting
- Transparency
- Independence

Corporate Governance
Functions

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OVERSIGHT FUNCTION. the responsibility of the board of directors, which is charged with the fiduciary duty of
overseeing the managerial function in the best interests of the company and its shareholders. The board of
directors should provide strategic advice to management and oversee managerial performance, yet avoid
micromanaging.

MANAGERIAL FUNCTION. the responsibility of management, which is charged with the responsibility of running
the company and managing its resources, operations, and disclosures of relevant and reliable financial and
nonfinancial information. The effectiveness of this function depends on the alignment of management’s
interests with those of shareholders.

COMPLIANCE FUNCTION. The set of laws, regulations, rules, standards, and best practices developed by state
and federal legislators, regulators, standard-setting bodies, and professional organizations to create a
compliance framework for public companies in which to operate and achieve their goals.

INTERNAL AUDIT FUNCTION. Assurance and consulting services to the company in the areas of operational
efficiency, risk management, internal controls, financial reporting, and governance processes.

LEGAL AND FINANCIAL ADVISORY FUNDTIONS. Legal advice and assists the company, its directors, officers,
and employees in complying with applicable laws and other legal obligations and fiduciary duties.
EXTERNAL AUDIT FUNCTION. External auditors lend credibility to the company’s financial reports and thus add
value to its corporate governance through their integrated audit of both internal control over financial reporting
and financial statements.
MONITORING FUNCTION. the responsibility of shareholders, particularly institutional shareholders, who are
empowered to elect and, if warranted, remove directors. Shareholders, particularly institutional shareholders,
empowered to elect and, if warranted, remove directors.

The corporate governance structure is shaped by

internal and external governance mechanisms, as
well as policy interventions through regulations.
Both internal and external corporate governance
Corporate Governance mechanisms of the company have evolved over
Mechanisms time to monitor, bond and control management.

Internal mechanisms are designed to manage,

direct, and monitor corporate activities in order
to create sustainable stakeholder value.

External mechanisms are intended to monitor the

company’s activities, affairs, and performance to
ensure that interests of insiders (management,
directors, and officers) are aligned with the
interests of outsiders ( shareholders and other
stakeholders).

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Examples of internal
governance mechanisms:
- board of directors,
particularly Examples of external
- independent directors mechanisms:
- audit committee
- management
- internal controls - market for corporate control
- internal audit functions - capital market
- labor market
- federal and state statutes
- court decisions
- shareholders proposals
- best practices of investors
activists

These mechanisms may be helpful in aligning management incentives

with shareholder interests, and also controlling management
behavior. Corporate governance mechanisms may be ineffective in
situations in which independence is removed, or in which corporate
governance participants fail to perform their duties.

Thus corporate governance mechanism are viewed as a nexus of

contracts that is designed to align the interests of management with
those of its shareholders.
Companies that do not adopt an effective corporate governance
structure would presumably be inefficient and in the long-term
would be disciplined by the capital markets.

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CG reforms reduced conflict of interests

Conflicts of interests may arise among directors,

management, auditors, financial analysts,
corporate counsel, and investors in instances in
which personal goals of such participants are at
odds with those of others. For example, conflicts
of interest may arise among management and
shareholders or the board of directors as to the
operation of the organization. Also, management
may experience conflict with corporate
gatekeepers acting on behalf of the shareholders,
such as auditors, corporate counsel, and the board
of directors.

To restore investor’s confidence after the

collapse of the dotcom market, the economic
Corporate downturn, reported financial scandals, and
Governance numerous earnings restatements of high-
Reports profile companies several corporate
governance reforms in the United States have
been established, including SOX, SEC-related
implementation rules, listing standards of
national stock exchanges, auditing standards
of the PCAOB, guiding principles of
professional organizations (The Conference
Board, Council of Institutional Investors, and
National Association of Corporate Directors),
and best practices.

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Corporate governance reporting reports the effectiveness, responsiveness, and

credibility of an organization’s corporate governance measures. Corporate
governance measures and performance indicators that could be included in CGR
are:
(1)descriptions of an organization’s culture, appropriate tone at the top, board of
directors, internal controls, and commitment to economic, social, and
environmental goals;
(2)major risks facing the organization in achieving its economic, social, and
environmental goals and measures taken to address such risks;
(3)the percentage of the board of directors who are independent and nonexecutive
directors;
(4)the existence of an audit committee comprising all independent and financially
literate directors;
(5) the adequacy of internal controls;
(6) corporate governance principles and mechanisms to which the organization
adheres; and
(7) the status of the organization’s compliance with applicable laws, rules,
regulations, and standards, and disclosure of areas of noncompliance. All of these
reported phenomena would be helpful in assessing the future viability of the
organization.

Corporate Laws May vary from state to state. But most adopted
Model Business Corporation Act as their corporate
Sources of law
Corporate
Governance The Federal Securities Laws Fundamental are: the Securities Act of 1933 and
Securities Exchange Act of 1934
SOX expanded the role of federal statutes by
providing measures to improve corporate
governance, financial reports, and audit activities.
Listing Standards Adopted by national stock exchanges, these
standards are applicable to all public companies
listing their equity shares with some exceptions

Best Practices Recommended by professional organizations (e.g.

The
Conference Board, the Business Roundtable
Institute) and investor activists (e.g. Council of
Institutional Investors)

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Sarbanes-Oxley Act of 2002

SOX was signed into law on July 30, 2002, to reinforce

corporate accountability and rebuild investor confidence in
public financial reports. It was designed to:

(1) establish an independent regulatory structure for the

accounting profession,
(2) set high standards and new guiding principles for corporate
governance,
(3) improve the quality and transparency of financial reporting,
(4) improve the objectivity and credibility of audit functions and
empower the audit committee,
(5) create more severe civil and criminal remedies for violations
of federal securities laws,
(6) increase the independence of securities analysts.

SARBANES-OXLEY ACT Of 2002

SOX provisions, SEC-related rules, and listing

SOX provisions,standards
SEC-related rules, and listing standards
influence corporate
influence governance
corporate structure
governance in at in at least
structure
least threethree
ways:ways:
Auditors,
Auditors,analysts, and
analysts, legal
and counsel
legal areare
counsel nownow brought
brought into
into the the realm
realm of internal
of internal governance
governance as gatekeepers
as gatekeepers
Legal status and fiduciary duty of company directors and
Legal status
officers, and fiduciary
(audit committee duty ofCEO),
and company
have been more
directors
clearly and officers,
defined (audit
and in somecommittee
instances,and
significantly
CEO), have been more clearly defined and in
enhanced
some instances, significantly enhanced
Certain aspects of state corporate law were preempted
Certain aspects of(For
and federalized state corporate
example, law were
Section 402 of SOX
preempted and federalized (For example,
prohibits loans to directors and officers, whereas state
Section 402 of such
law permits SOX prohibits
loans) loans to directors
and officers, whereas state law permits such
loans)

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A 2007 survey of 2000 corporate executives

reveals that:

(1) The compliance costs of SOX for the

Cost Benefit second consecutive year declined
substantially;
Of Sarbanes- (2) The cost dropped 23 percent in 2006;
Oxley (3) Total compliance costs decreased to an
average $2.9 million per company in 2006,
which is down 35 percent from the $4.51
million average costs in 2006;
(4) There was no significant change in audit
fees;
(5) The majority of surveyed executives (78
percent) reported that the costs to comply
with section 404 still outweigh any benefits.

More manageable and cost-effective Section

404 compliance is currently being addressed
by the SEC and the PCAOB.

Corporate Governance Rating

National and international organizations, including Institutional Shareholder

Services (ISS), the Corporate Library, Standard & Poor’s, Moody’s Investment
Service, Core Ratings, Governance Metrics International (GMI), and Glass
Lewis & Co., have developed and published variations of corporate
governance ratings that are often used by shareholders in assessing their
stock returns and bondholders in determining the costs of lending.

Example: GMI established its scoring algorithm with hundreds of metrics

relevant to the governance quality and risk assessment of each rated
company into six categories of board accountability, financial disclosure,
shareholder rights, executive compensation, takeover defenses, and
reputation/regulatory problems.

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Corporate Governance Reporting

Corporate Governance Reporting (CGR) entails assessing the quality

and effectiveness of the organization’s corporate governance and
reporting findings to interested stakeholders, including the board of
directors, executives, auditors, regulatory agencies, and
shareholders.

Corporate Governance Reporting:

(1) Disclose all relevant information about the effectiveness of the

company’s corporate governance
(2) Focus on the company’s sustainability performance
(3) Provide transparent information about the company’s
performance and its impacts on all stakeholders
(4) Assess the company’s responsiveness to the needs of its
stakeholders.

Global Convergence in Corporate Governance

There are no globally accepted corporate

governance reforms and best practices.
Differences are mainly driven by the country’s
statutes, corporate structures, and culture.
Country statutes could pose challenges for
regulators in adopting corporate governance
reforms and financial reporting disclosures for
home companies, as well as multinational
corporations. The United States and the UK,
for example, operate under common law,
which tends to give more anti director
privileges to minority shareholders compared
to countries under code law (e.g., Germany), in
the sense that regulators allow too many or
too few rights to minority shareholders.

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1. What are the versions of corporate

governance mechanisms? How are they
effective? How can they be ineffective?
2. Identify and define the three aspects of
corporate governance.
3. What entities or groups of individuals
are responsible for the oversight,
managerial, and monitoring functions, and
what are their basic responsibilities and
duties?
4. Compare and contrast the internal and
external audit functions.

END OF SLIDE
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0818786639

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