Corporate governance

intro
 collapse of high profile companies like Enron, WorldCom,
HIH insurance group , The Parmalat case collapse of the
China Aviation Oil etc. These failures have shattered the trust
of investors world
 Nigerian Deposit Insurance Corporation, the main reason for
these failures was interference of board members.
 Reasons citied for above failures lax regulations,
overconfident and egoistic management, and inappropriate
business conduct by top level management, deficiency of
alert oversight functions, unproductive audit functions, poor
financial disclosures and negligent shareholders.
Lessons learned
 Some corporate executives will do anything to meet the
earning goal.[personal enrichment by selling company’s
stock]
 Ethical climate is set by top management
 Auditors and their client can get close too
 No matter how good the accounting principles are cannot
stop fraud.
 Financial statements are only part of information an investor
need to know, must analyse past present and future.
 Global accepatnce of having checks and balance = Corporate
Governace
 Why needed?
Corporation a citizen, responsible to abide law of the country,
source of its income is money of the people must revert back
the benefits.
Principle: company must ensure flow of profit but not transced
the line of morality and ethics.
Imp for banks= management of money
 Corporate Governance is aimed at ensuring proper
governance of business as well as complying with all the
governance norms prescribed by regulatory board for the
benefit of all interested parties
 Corporate governance is about the nitty-gritty of how a
corporation executes its commitment to investors and other
stakeholders. It is about loyalty to investors, valuing principled
business behavior and functioning with a high degree of
transparency. The corporate governance is therefore a
systematic approach where the connective members,
management and employees are expected to cooperate in the
decision making process of the company including society.
definitions

 “nation’s system of corporate governance

can be seen as an institutional matrix that structures th
relations among owners, boards, and top managers, and
determines the goals pursued by the corporation¨. (World
Bank,
2002)
 OECD: “Corporate governance specifies the
distribution of rights and responsibilities among different
participants in the corporation,
such as the board, managers, shareholders and other
stakeholders, and spells out the rules
and procedures for making decisions on corporate affairs.
Basis of judging corporate governance

Suggested model code of best practices,

ii) Preferred internal systems,
iii) Recommended disclosure requirements,
iv) Board members’ role,
v) Independent director,
vi) Key information to the board/committee,
vii) Committees of board,
viii) Policies to be established by the board and
ix) Monitoring performance.
Concept of corporate governance

 To do business in the interest of the stake holders.

 It is about promoting corporate fairness, transparency
and accountability. In other words, 'good corporate
governance' is simply 'good business‘
 It ensures: Adequate disclosures and effective
decision making to achieve corporate objectives;
Transparency in business transactions; Statutory
and legal compliances; Protection of shareholder
interests Commitment to values and ethical
conduct of business
Objective of corporate governance

 A properly structured board capable of taking independent and

objective decisions is in place at the helm of affairs;
 The board is balance as regards the representation of adequate
number of nonexecutive and independent directors who will
take care of their interests and wellbeing of all the
stakeholders;
 The board adopts transparent procedures and practices and
arrives at decisions on the strength of adequate information;
 The board has an effective machinery to subserve the concerns
of stakeholders;
 The board keeps the shareholders informed of relevant
developments impacting the company
 The board effectively and regularly monitors the functioning of
the management team;
 The board remains in effective control of the affairs of the
company at all times.
Principles of corporate governance

 Transparency
Adequate and timely disclosure of relevant
information.(leading newspapers)

Accountability
Responsibility to use resources in the best
interest
Principles of corporate governance

Independence
Management to be independent. BOD to take
decisions on basis of wisdom.
Popularly espoused principles of corporate governance

 Rights and equitable treatment of shareholders:

Respect the
Respect th e right of
right of shareholder
shareholder
Provide Relevant
information

Encourage to
participate in general
meetings
Popularly espoused principles of corporate governance

 Interest of other stakeholders

recognize that they have legal

and other
obligations to all legitimate
stakeholders.
Popularly espoused principles of corporate
governance

 Role and responsibilities of the board

able ability to review

to deal with and challenge
various business management
issues performance. I
Popularly espoused principles of corporate
governance

 Integrity and ethical behavior

Ethical and responsible decision making is not only

important for public
relations, but it is also a necessary element in risk
management and avoiding lawsuits

Organizations
should develop a code of conduct for their directors and
executives
Popularly espoused principles of corporate governance

 Mechanisms and controls

Corporate governance mechanisms and controls are designed to

reduce the inefficiencies that arise from
moral hazard and adverse selection. For example, to monitor
managers' behavior, an independent third
party (the external auditor) attests the accuracy of information
provided by management to investors. An
ideal control system should regulate both motivation and ability.
Internal controls
 Monitoring by the board of directors Internal control procedures
and internal auditors:
policies
implemented by an entity's
Regular board
board of directors, audit
meetings allow
committee, management, and
potential
other personnel to
problems to be
provide reasonable assurance of
identified, discussed
the entity achieving its
and avoided.
objectives related to reliable
financial reporting,
operating efficiency, and
compliance with laws and
regulations.
 Balance of power:

President be a different person from the Treasurer. separation of

power i One group may propose
company-wide administrative changes, another group review and can
veto the changes, and a third group
check that the interests of people (customers, shareholders,
employees) outside the three groups are
being met.
salient advantages of Corporate
Governance
 Good corporate governance ensures corporate success and economic
growth.
 2. Strong corporate governance maintains investors’ confidence, as a
result of which, company can raise capital efficiently and effectively.
 3. There is a positive impact on the share price.
 4. It provides proper inducement to the owners as well as managers
to achieve objectives that are in interests of the shareholders and the
organization.
 5. Good corporate governance also minimizes wastages, corruption,
risks and mismanagement.
 6. It helps in brand formation and development.
 7. It ensures organization in managed in a manner that fits the best
interests of all
committies

 Cadbury committee 1992

 Greenbury Report 1995
 Hampel report 1998
 Combined Code Corporate Governance 1998
 Turnbull Report 1999
 Myners : Review of Institutional Investment
2001
 Higgs Report 2003
 2018 – New 2018 UK Corporate Governance Code
Theories
 Agency theory
Takes shareholder as principal and director as
agent.
The shareholders expect the agents to act and
make decisions in the best interest of
principal. 
Separation of ownership and control.

The theory prescribes that people or employees are held

accountable in their tasks and responsibilities.

Rewards and Punishments can be used to correct the priorities of

agents.

Directors and mangers have an edge over the shareholders due to their
expertise and thus conflict occur.
Assumptions and propositions of agency theory

Managers are inspired by self Governanance mechanism are

interest and take undue needed for controlling the self
advantage of their power to serving attitude of the
maximize their welfare at the managers
cost of that of shareholders

BOD
must act An effective
independ board consist
ently in of majority of
the best independent
interest directors
of the
sharehold
er
criticism

Overstresses the welfare of the shareholder and ignores other stakeholders

Structure of the BOD executive or non executive directoer cannot solve the
problem

Assumption that strong independent director can solve the problem has
proved to be wrong

Narrow view of corporate governance as shows company only responsible to

shareholders
The stewardship theory
 Rules out conflict between managers and owners.
 Managers are trustworthy, will not misappropriate funds.
 Also known as trusteeship theory.
 Interests of the owners and the mangers are alinged and
work to achieve collective goals.
 BOD and CEOs must be given adequate authority and
discretion to act as stewards.
 Stewards are company executives and managers working for
the shareholders, protects and make profits for the
shareholders.

Assumption: manger steward work efficiently in the interest of the company.

Assumptions and propositions

 Managers stewards.
 Mangers guided by motive of self reputation in the
stock market.
 Auditing and financial reporting strong mechanisms
to regulate behaviour.
 Based on trusteeship
Stakeholders theory

 Stakeholder theory incorporated the accountability

of management to a broad range of stakeholders.
 It states that managers in organizations have a
network of relationships to serve – this includes the
suppliers, employees and business partners.
 The theory focuses on managerial decision making
and interests of all stakeholders have intrinsic value,
and no sets of interests is assumed to dominate the
others 
 Duty to increase the wealth of all stake holders.

Assumptions

Social contract between company and its

stakeholders.
Stakeholders have different goals.
To create stakeholder holder group.
criticism

 Difficult to define the concept of stakeholder.

 Several stakeholders interest may be contradictory.
 Directors and mangers serve different groups but
they may fail to satisfy a genuine claim over the
company.
 Owner’s right as to how property will be used not
recognized.
 managers have fiduciary relationship with the
shareholders but not with the other stakeholders.
Importance of corporate gov.

 Echoing the views of President of The World

Bank, King Report on Corporate Governance,
March 2002 states "company remains a key
component of moden society. In fact, in
many respects, companies have become a
more immediate presence to many citizens
and modern democracies than either
Government or other organs of society".
 corporations being gripped by what King Report calls the three corporate sins that of
"Greed", "Sloth" and "Fear".

 Greed essentially refers to maximizing short term profits (to the advantage
of management of the day) at the cost of long term investment,

sloth = loss of enterprise and innovation within large

corporations
fear = to the increasing tendency of managements to be
subservient to investors needs alone at times at the cost of several
other important stakeholders (customers, suppliers, partners,
employees, regulators and community) which consequently results
in asset (tangible and intangible) attrition.
 There is thus a case for institution of systems
to check these “sins” that a corporation may
succumb to. Corporate Governance systems
though not a panacea for all these ills,
provides a mechanism for Boards to be
vigilant, identify and check Where necessary,
the emergence of any ofthese ills.
Globalization and corporate
governance
 Globalisation = the impromptu movement
of goods, services and
capital
integrates world
economies, culture,
engineering science and
government. 

relinquish of information, skilled

 . member of the working class mobility,
the altercation of technology,
economic funds flow and geographic
arbitrage between developed countries
and developing countries
how a society will conform to this
changing.
 Increasing competition,
• Technological development,
• Knowledge/Information transfer,
• Portfolio investment (fund transfer between
developed countries and emerging markets),
• Regulation/deregulation, International
standards,
• Market integration,
• Intellectual capital mobility,
• Financial crisis-contagion effect-global crisis.
Models of corporate governance

 insider model which is found in OECD

countries characterized by concentrated
shareholdings that may help to keep the
incumbent management in place
 outsider model which prevails in US and the
UK which predominantly relied on the equity
market to finance enterpnses
THE CONCEPT OF GLOBAL
GOVERNANCE

management of global
processes in the absence of
Global any form of global
governance government

international bodies
which seek to address Descriptive term
these issues and
prominent among
these are the United
Nations and the World
Trade Organisation
 cooperative problem-solving arrangements.
including states, intergovernmental
organisations, non-governmental
organisations (NGOs), other civil society
actors, private sector organisations, pressure
groups and individuals
 The system also includes of course informal
(as in the case of practices or guidelines) or
temporary units (as in the case of coalitions).
 The system also includes of course informal (as in the
case of practices or guidelines) or temporary units (as in
the case of coalitions).

 complex of formal and informal institutions,

mechanisms, relationships, and processes between and
among states, markets, citizens and organizations,
both inter- and non-governmental, through which
collective interests on the global plane are articulated,
rights and obligations are established, and differences
are mediated
 Global governance is not of course the same
thing as world government:
 Global governance therefore refers to the
political interaction that is required to solve
problems that affect more than one state or
region when there is no power of enforcing
compliance.
 Solution= but it would involve the creation of a
consensus on norms and practices to be applied.
 creation of a consensus on norms and practices to
be applied.

Companies adhere to these practices both because

they make economic sense, and because their
stakeholders, including their shareholders (most
individuals and institutional investors) are
concerned with these issues and this provides a
mechanism whereby they can monitor the
compliance of companies easily.