ETHICS & CORPORATE

GOVERNANCE
BM055-3-2

Introduction to Corporate
Governance

Learning Outcomes
A brief history of developments in
corporate governance since the early
1990s is provided. The objectives of good
corporate governance, and the issues and
concepts involved, are also explored. After
reading and understanding the contents of
this chapter and working through the
sample questions, you should be able to:

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 Define corporate governance.

Explain the importance of good corporate
governance.
Identify the stakeholders in a company.
Explain the key issues in corporate
governance.
Explain the different approaches to good
corporate governance: the shareholder
value approach, shareholder approach
and the stakeholder or pluralist approach.
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Defining Corporate Governance

Governance refers to the way in which
an entity or body of people is governed
and to the functions of governing, such as
the structural framework, the procedures
and the way power and actions are carried
out by various authorities and people that
forms the groups being governed, with a
certain objective.

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 The governance of a country, for example,

refers to the powers and actions of the
legislative assembly, the executive
government and the judiciary. The
democratic process of election for
members to sit in Parliament as
representatives of the citizens, the sharing
of powers executed within the legal
frameworks.
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 Corporate governance refers to the way in

which companies are governed, and to
what purpose. It is concerned with
practices and procedures for trying to
ensure that a company is run in such a
way that it achieves its objectives, with
certain amount of checks and balances to
minimize abuse of power and fair
treatment of the stakeholders
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 The terms corporate governance has no

standard definitions, but could be
described in manner ways.
(a) Corporate governance is the system
by which companies are directed and
controlled' (Cadbury Report, 1992).The
Cadbury Report was a major UK inquiry
into corporate governance, and this is a
generally accepted definition.

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 The Organisation for Economic Cooperation & Development (OECD) (2004)

describes corporate governance as
involving a set of relationships between a
companys management, its board, its
shareholders and other stakeholders, and
provides the structure through which the
objectives of the company are set, and the
means of attaining those objectives and
monitoring performance are determined.
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 Professor Bob Tricker, (1984) in his book

on Corporate Governance differences
between governing and managing in
companies by saying: Whilst management processes have
been widely explored, relatively little
attention has been paid to the processes
by which companies are governed. If
management is about running businesses,
governance is about seeing that it is run
properly.
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 Monks and Minow (2001) defined

corporate governance as the relationship
among various participants in determining
the direction and performance of
corporations, shareholders, the
management led by the chief executive
officer, and the board of directors; whilst
other participants include the employees,
customers, suppliers, creditors and the
community.
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 The Malaysian Code on Corporate

Governance (2000) defined corporate
governance as 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 interests of other
stakeholders.
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The Malaysian Code on Corporate

Governance (2000) defined corporate
governance as 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 interests of stakeholders.
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Importance of Corporate
Governance
Day to day management by business
executives
to find a way in which the interests of
shareholders, directors and other interest
groups (stakeholders)
Good corporate governance support capital
markets
good for the country and the corporations that
support the economy to show that (adequate)
corporate governance & practices are being
carried out by the BOD & the participants
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Concepts of Sound Corporate

Governance

openness, honesty and transparency;

independence;
accountability;
responsibility;
fairness;
reputation;
social responsibility

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Whistleblowing
A whistleblower is normally an employee
or anyone who provides information about
his or her company which he or she
reasonably believes provides evidence of (a) a violation of a law or regulation by the
company;
(b) a miscarriage of justice;
(c) a financial malpractice; or
(d) a danger to public health or safety.
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 In the government sector, a whistleblower

might also provide evidence of a gross
waste of public funds or gross misuse of
power and corrupt practices by elected
persons in power.
Presumably, the whistleblower in each
case disapproved of the transaction and
believed that the company was aware that
it was in breach of the law, but intended to
go through with the sale.
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 An employee may have evidence that his

or her superiors are in breach of company
regulations and so reports the facts to
someone else in a position of seniority
within the company, such as a managing
director
An employee may honestly believe that
there is, has been or could soon be
serious malpractice by someone within the
company, but feel unable to report his or
her concerns in the normal way.
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 This could be because the individual to

whom he or she normally reports is
involved in the suspected malpractice.

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Practice Questions:
1. Explain in your own words what is
corporate governance.
2. Why is corporate governance important?
3. In companies structures, who are the
people in power to make decisions?
4. What can be seen as organs in a
corporation?
5. What is a one-tier and two-tier board
structure?
6. How would you define whistleblowing?
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