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Catholic University of Eastern Africa Faculty Of

Catholic University of Eastern Africa Faculty Of

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Published by Terrence

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Published by: Terrence on Mar 08, 2010
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Catholic University of Eastern AfricaFaculty of CommerceDepartment of Accounting and FinanceFinancial Reporting and AnalysisCBF 321
Assignment: Corporate Governance and Analysis andSustainability ReportingPresented by:
1.Michael Musila10088072.Anthony Makau10080723.Catherine Mokeira10084214.Terrence Chanzu10087835.Kemboi Nicholas1008836
Robert Koech1008784
Sangoro Thodosia10087988.Fidel Odhiambo10081169.Mary Njeri1008430
Corporate governance
DefinitionTraditionally defined as the ways in which a firmsafeguards theinterests of itsfinanciers(investors, lenders, andcreditors). The modern definition calls it theframeworkof rulesandpracticesby which a board of directors ensures accountability, fairness, andtransparencyin thefirm's relationship with its all stakeholders. This framework consists of; (1) explicit andimplicit contractsbetween the firm and the stakeholders fordistribution of  responsibilities,rights,and rewards, (2)Procedures for reconciling the sometimes conflicting interests of stakeholders in accordance with theirduties,privileges, androles,and (3) Procedures for proper supervision, control, and information-flows to serve as asystemof  checks- and-balances.
It is a system of structuring, operating and controlling a company with a view toachieve long term strategic goals to satisfy shareholders, creditors, employees,customers and suppliers, and complying with the legal and regulatory requirements,apart from meeting environmental and local community needs. Corporategovernance is the set of processes, customs, policies, laws, and institutionsaffecting the way a corporation (or company) is directed, administered orcontrolled.Corporate governance is a multi-faceted subject. An important theme of corporategovernance is to ensure the accountability of certain individuals in an organizationthrough mechanisms that try to reduce or eliminate the principal-agent problem. Arelated but separate thread of discussions focuses on the impact of a corporategovernance system in economic efficiency, with a strong emphasis on shareholders'welfare. The positive effect of corporate governance on different stakeholders ultimately is astrengthened economy, and hence good corporate governance is a tool for socio-economic development.
Role of Institutional Investors
Many years ago, worldwide, buyers and sellers of corporation stocks were
investors, such as wealthy businessmen or families, who often had a vested,personal and emotional interest in the corporations whose shares they owned. Overtime, markets have become largely
: buyers and sellers are largelyinstitutions (e.g., pension funds, mutual funds, hedge funds, exchange-traded funds,
other investor groups; insurance companies, banks, brokers, and other financialinstitutions). The rise of the institutional investor has brought with it some increase of professional diligence which has tended to improve regulation of the stock market(but not necessarily in the interest of the small investor or even of the naïveinstitutions, of which there are many). Note that this process occurredsimultaneously with the direct growth of individuals investing
in themarket (for example individuals have twice as much money in mutual funds as theydo in bank accounts). However this growth occurred primarily by way of individualsturning over their funds to 'professionals' to manage, such as in mutual funds. Inthis way, the majority of investment now is described as "institutional investment"even though the vast majority of the funds are for the benefit of individualinvestors.Unfortunately, there has been a concurrent lapse in the oversight of largecorporations, which are now almost all owned by large institutions. The Board of Directors of large corporations used to be chosen by the principal shareholders, whousually had an emotional as well as monetary investment in the company, and theBoard diligently kept an eye on the company and its principal executives. The interests of most investors are now increasingly rarely tied to the fortunes of individual corporations.
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of directors, management, shareholders and Auditors).Other stakeholders who take part include suppliers, employees, creditors,customers and the community at large.In corporations, the shareholder delegates decision rights to the manager to act inthe principal's best interests. This separation of ownership from control implies aloss of effective control by shareholders over managerial decisions. Partly as aresult of this separation between the two parties, a system of corporate governancecontrols is implemented to assist in aligning the incentives of managers with thoseof shareholders. With the significant increase in equity holdings of investors, therehas been an opportunity for a reversal of the separation of ownership and controlproblems because ownership is not so diffuse.A board of directors often plays a key role in corporate governance. It is theirresponsibility to endorse the organization’s strategy, develop directional policy,appoint, supervise and remunerate senior executives and to ensure accountabilityof the organization to its owners and authorities.

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