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THE NATURE OF

CORPORATE GOVERNANCE
GITTA PUSPARINI

OUTLINE

What is Corporate Governance?


Why Corporate Governance?
Corporate Governance Issues
Governance of the Modern Corporation
What Does Corporate Governance Look Like?
Two Model of Corporate Governance
Effective Corporate Governance

WHAT IS CORPORATE GOVERNANCE?

Corporate gvernace is the process by which


organizations are directed and controlled.[1]
Corporate governance is about the way in which
boards oversee the running of a company by its
managers, and how board members are in turn
accountable to shareholders and the
company.[1]

WHAT IS CORPORATE GOVERNANCE?


To remove the opportunity for employees to make
unethical decisions, most companies have developed
formal systems of accountability, oversight, and control
(corporate governance)[2]:
Accountability refers to how closely workplace decisions
are aligned with a firms stated strategic direction and its
compliance with ethical and legal considerations
Oversight provides a system of checks and balances
that limit employees and managers opportunities to
deviate from policies and strategies and that prevent
unethical and illegal activites
Control is the process of auditing and improving
organizational decisions and actions.

WHY CORPORATE GOVERNANCE?


Corporate governance is also part of a firms
corporate culture. A governance system that does
not provide checks and balances creates
opportunities for top managers to put their own selfinterests before those of important stakeholders.[2]

WHY CORPORATE GOVERNANCE?


In addition to the interest of their owners, some argue
that managers are accountable to the public interest
or, more specifically, to their stakehoders: their
customers, their vendor partners, state and local entities,
and the communities in which tjey conduct their
business operations.[1]
So, corporate governance is concerned with how well
organizations meet their obligations to all these people.
Ideally, mechanisms are in place to hold them
accountable for that performance and to introduce
corrective action if they fail to live up to that
performance expectation.[1]

CORPORATE GOVERNANCE ISSUES


Corporate Governance Issues [1]
Executive compensation
Composition and structure of the board of directors
Auditing and control

Risk management
CEO selection and termination decisions
Integrity of financial reporting
Stakeholder participation and input into decisions
Compliance with corporate governance reform
Role of the CEO in board decisions
Organizational ethics programs

GOVERNANCE OF
Owners
Public shareholders
THE MODERN
Institutional investors
Other corporations
CORPORATION
Audit
committee

Compensati
on
committee

Board of
Directors

Corporate
governance
committee

CEO, CFO,
COO
Managers
and
employees

Source: Adapted from Fred R. Kaen,


A Blueprint for Corporate
Governance, New York: AMACOM,
2003

Creditors
Financial
Institutions
Bondholders

Stakeholders
Customers, vendor partners, state
and local entities, community
partners

WHAT DOES CORPORATE


GOVERNANCE LOOK LIKE? [1]
The owner of the corporation supply equity or risk capital to the
company by purchasing shares in the corporation.
The board of directors, is elected by the owners to represent their
interest in the effective running of the corporation. The board is
typically made up of inside and outside members inside members
hold management positions in the company, whereas outside
members do not.
The audit committee is staffed by members of he board of directors
plus independent or outside directors. The committee is responsible
for monitoring the financial policies and procedures of the
organization specifically the accounting policies, internal controls,
and the hiring of external auditors.
The compensation committee is also staffed by members of the
board of directors. The primary responsibility of the compensation
committee is to oversee compensation packages for the senior
executives of the corporations.

TWO MODEL OF CORPORATE


GOVERNANCE [2]
Shareholder model of corporate governance
Founded in classic economic precepts, including the goal of
maximizing wealth for investors and owners. A shareholder
orientation should drive a firms decisions toward serving the best
interests of investors.

Stakeholder model of corporate governance


Adopts a broader view of the purpose of business. Although a
company has a responsibility for economic success and viability
to satisfy its stockholders, it also must answer to other
stakeholders, including employees, suppliers, government
regulators, communities, and special interest groups with which it
interacts.

EFFECTIVE CORPORATE GOVERNANCE


To be truly effective, boards should follow these six steps [1]:
Create a climate of trust and candor, BoD and senior
executives should be working in partnership
Foster a culture of open dissent, propossals should be open
for discussion and review
Mix up roles, rotation of assignments can avoid typecasting
and ensure positive debate of all key proposals
Ensure individual accountability
Let the board assess leadership talent, the board members
should actively meet with future leaders in their current
positions
Evaluate the boards performance, effective corporate
governance demands superior performance involved in the
process

REFFERENCE
1. Ghillyer, Andrew W. 2010. Buseiness Ethics : A Real
World Approach.
2. Ferrel, O.C. 2005. Business Ethics : Ethical Decision
Making and Cases.