CMBA914

Corporate Governance and Ethics

Chapter-1
Introduction to Corporate
Governance
2

Definition

Corporate governance is a system of rules, practices, processes,

and principles by which a company is directed and controlled. It
encompasses the relationships between a company's various
stakeholders, including its shareholders, board of directors,
management, customers, suppliers, financiers, government, and the
community.
3

Definition (Cont.)

The primary goal of corporate governance is to ensure that a

company operates in a fair, transparent, accountable, and ethical
manner while safeguarding the interests of its stakeholders.
4

Definition (Cont.)

Corporate governance is the process and structure used to direct

and manage the business and affairs of the company towards
enhancing business prosperity and corporate accountability with
the ultimate objective of realizing long term shareholder value,
whilst taking into account the interest of other stakeholders.
5

Definition (Cont.)

Good governance is not simply about corporate excellence. It is

the key to economic and social transformation. The corporation of
today are no longer sheer economic entities. These are the engines
of economic and social transformation.
6

Definition (Cont.)
7

Corporate Governance of an Organization

8

Why Corporate Governance?

 Better access to external finance.

 Lower cost of capital.
 Improved company performance - sustainability.
 Higher firm valuation and share performance.
 Reduced risk of corporate crisis and scandals.
9

4 Pillars of Corporate Governance

10

4 Pillars of Corporate Governance (Cont.)

 Accountability: Directors should be held accountable for their

decisions and actions to shareholders (private or public / govt)
and, in certain cases, key stakeholders (management, staff etc),
submitting themselves to rigorous scrutiny.
11

4 Pillars of Corporate Governance (Cont.)

 Transparency: Directors should clarify to shareowners and other

key stakeholders why every material decision has been made.
 Fairness: All share owners should receive equal, just and
unbiased consideration by the directors and management.
12

4 Pillars of Corporate Governance (Cont.)

 Responsibility: Directors should carry out their duties with

honesty and integrity.
13

Principles of Corporate Governance

14

Elements of Corporate Governance

 Good board practices

 Control environment
 Transparent disclosure
 Well defined shareholders rights
 Board commitment
15

Components and Aspects of Corporate Governance

 Board of Directors
 Shareholder Rights
 Ethical Conduct
 Responsibility to Stakeholders
 Risk Management
 Compliance with Laws and Regulations
16

Components and Aspects of Corporate Governance (Cont.)

 Long-Term Sustainability
 Strategic Planning
 Board Independence
 Shareholder Engagement
17

Components and Aspects of Corporate Governance (Cont.)

 Board of Directors: The board plays a central role in corporate

governance. It is responsible for overseeing the company's
management, setting strategic goals, and making decisions in
the best interests of shareholders. An effective board should
include a mix of independent and non-executive directors.
18

Components and Aspects of Corporate Governance (Cont.)

 Shareholder Rights: Corporate governance emphasizes the

protection of shareholders' rights, such as voting rights, access
to information, and the ability to hold management and the
board accountable.
19

Components and Aspects of Corporate Governance (Cont.)

 Ethical Conduct: Ethical behavior and integrity are

fundamental to corporate governance. Companies are expected
to adhere to high ethical standards in all their dealings, from
financial reporting to business practices.
20

Components and Aspects of Corporate Governance (Cont.)

 Responsibility to Stakeholders: Beyond shareholders,

companies have responsibilities to other stakeholders, including
employees, customers, suppliers, and the community. Corporate
governance aims to balance the interests of all these parties.
21

Components and Aspects of Corporate Governance (Cont.)

 Risk Management: Effective corporate governance involves

risk assessment and management to protect the company and its
stakeholders from potential harm.
 Compliance with Laws and Regulations: Companies must
comply with applicable laws and regulations related to
governance, which can vary by country and industry.
22

Components and Aspects of Corporate Governance (Cont.)

 Long-Term Sustainability: Corporate governance encourages

companies to focus on long-term sustainability rather than
short-term profits. This includes considering environmental,
social, and governance (ESG) factors.
23

Components and Aspects of Corporate Governance (Cont.)

 Strategic Planning: Corporate governance frameworks often

require boards to be actively involved in setting the company's
strategic direction and overseeing its execution.
24

Components and Aspects of Corporate Governance (Cont.)

 Board Independence: Many corporate governance guidelines

emphasize the importance of having independent directors on
the board to ensure unbiased decision-making.
25

Components and Aspects of Corporate Governance (Cont.)

 Shareholder Engagement: Companies are encouraged to

engage with shareholders and seek their input on important
matters through annual general meetings and other
communication channels.
26

International Initiatives on Corporate Governance

 International Corporate Governance Network founded by

institutional investors in Europe and North America.
 Global Corporate Governance Forum founded by Organization
for Economic Cooperation and Development (OECD) and
World Bank.
 Commonwealth Association for Corporate Governance founded
27

Corporate Governance and Corporate Management

Corporate Governance Corporate Management

External Focus Internal Focus

Governance assumes an open Management assumes a closed
system system
Strategy-orientated Task-orientated
Concerned with where the Concerned with getting the
company is going company there
28

Theories of Corporate Governance

 Agency Theory
 Stakeholder Theory
 Stewardship Theory
 Resource Dependence Theory
 Transaction Cost Economics
 Market for Corporate Control Theory
29

Theories of Corporate Governance (Cont.)

 Political Theory of Corporate Governance

 Behavioral Theory
 Cultural and Institutional Theory
 Environmental, Social, and Governance (ESG) Frameworks
30

Theories of Corporate Governance (Cont.)

 Agency Theory: This theory assumes that there is a separation

of ownership and control in a corporation. Shareholders are the
owners of the company, and managers are the agents hired to
run it. Agency theory focuses on the potential conflicts of
interest between shareholders (principals) and managers
(agents).
31

Theories of Corporate Governance (Cont.)

 Stakeholder Theory: Unlike agency theory, which primarily

emphasizes shareholders, stakeholder theory argues that a
corporation has a broader responsibility to all its stakeholders,
including employees, customers, suppliers, and the community.
32

Theories of Corporate Governance (Cont.)

 Stewardship Theory: Stewardship theory is the opposite of

agency theory. It posits that managers are inherently trustworthy
and will act in the best interests of shareholders because they
see themselves as stewards of the company's resources.
33

Theories of Corporate Governance (Cont.)

 Resource Dependence Theory: This theory emphasizes the

dependence of organizations on external resources, such as
capital, suppliers, and customers. It suggests that corporate
governance should be designed to manage these dependencies
effectively and ensure the company's access to critical
resources.
34

Theories of Corporate Governance (Cont.)

 Transaction Cost Economics: Developed by Oliver

Williamson, this theory focuses on the costs associated with
various forms of economic transactions within a firm, including
those between shareholders and managers.
35

Theories of Corporate Governance (Cont.)

 Market for Corporate Control Theory: This theory posits

that the market for corporate control, through mechanisms like
takeovers and mergers, serves as a disciplining force on poorly
performing managers. If managers are not serving the interests
of shareholders, they risk being replaced through market
mechanisms.
36

Theories of Corporate Governance (Cont.)

 Political Theory of Corporate Governance: This theory

views corporate governance as a political process, influenced
by various interest groups, regulations, and power dynamics. It
emphasizes the role of government, policymakers, and
regulatory bodies in shaping corporate governance practices.
37

Theories of Corporate Governance (Cont.)

 Behavioral Theory: Behavioral theories of corporate

governance consider psychological and behavioral factors that
influence the decisions and actions of corporate actors,
including managers and board members.
38

Theories of Corporate Governance (Cont.)

 Cultural and Institutional Theory: Corporate governance

practices can vary significantly across cultures and institutions.
This theory focuses on how cultural and institutional factors
shape governance norms and practices in different regions and
industries.
39

Theories of Corporate Governance (Cont.)

 Environmental, Social, and Governance (ESG)

Frameworks: With growing concerns about sustainability and
ethical considerations, ESG frameworks have gained
importance in corporate governance. These frameworks
encourage companies to integrate environmental, social, and
governance factors into their decision-making processes.
40

Good Corporate Governance

Obligation to society at large

 National Interest
 Political Non-alignment
 Legal Compliances
 Rule of Law
 Honest and Ethical Conduct
41

Good Corporate Governance (Cont.)

Obligation to society at large

 Corporate Citizenship
 Ethical Behaviour
 Social Concerns
 Corporate Social Responsibility.
 Environment-friendliness
42

Good Corporate Governance (Cont.)

Obligation to investors
 Towards Shareholders
 Measures Promoting Transparency and Informed Shareholder
Participation
 Transparency
 Financial Reporting and Records
43

Good Corporate Governance (Cont.)

Obligation to customers
 Quality of Products and Services
 Products at Affordable Prices
 Unwavering Commitment to Customer Satisfaction
44

Good Corporate Governance (Cont.)

Obligation to employees
 Fair Employment Practices
 Equal-opportunities Employer
 Encouraging Whistle Blowing
 Humane Treatment
 Empowerment
End of Chapter 1
Thank You