1. IS CORPORATE GOVERNANCE A BALANCING ACT?

In today’s economic environment, the role of non-employee directors of publicly held companies is
becoming increasingly difficult. Directors struggle to maintain economic performance, manage risks, and
comply with their legal obligations, all while ensuring they uphold good behavior.

In general, Directors have three main roles – viz- monitor and provide leadership to Management on
behalf of Shareholders; provide Strategic Direction and Policy Support; acquire resource for the company.
These roles presuppose that through the expertise, wisdom, experience and information available to
individual Directors, the Board will provide the required direction to the enterprise and would identify
and acquire tangible as well as intangible resources required for sustainable performance. The monitoring
role includes protecting and assuring the integrity of internal controls; the audit function; appraising and
measuring management performance etc.

Today Directors are clearly spending more time on their Board roles with full Board meetings,
Committee meetings, teleconferences, shareholders meetings and Director Development programmes
among other commitments. They also need to make out time to attend to Board and individual Director
performance evaluation. With more stringent corporate governance expectations, reputational risk is
included to an already time-consuming job. Given the vital importance of the responsibilities assigned to
Non-Executive Directors, it is expected that they will devote significant time and effort to their
boardroom and non-boardroom duties.

Boards are expected to have Non-Executive Director compensation policies that seek to attract and retain
highly qualified Directors; align Directors’ interests with those of the long-term owners of the corporation;
provide complete disclosure to shareholders regarding all components of Director Compensation and seek
to provide for long-term stewardship of the corporation.

Although Non-Executive Director compensation is generally immaterial to a company’s bottom line and
insignificant when compared to executive pay, it is an important aspect of a company’s governance. Since
Director pay is set by the Board and has inherent conflicts of interest, care must be taken to ensure that
there is no appearance of impropriety. In setting Director Pay, the Board should take cognizance of the
following:

1
Peer Groups – As Directors are recruited from many industries, the Board should consider competitive
data both pertaining to the industry in which the company is operating and across a broader group of
size-appropriate companies. In addition, it is important to assess total Director Compensation, and not pay
by component since companies tend not to offer all components to Directors. Thus, a periodic
benchmark of what comparators are paying is good practice and a useful guide to the Board in fixing and
reviewing Director Compensation.

Workload – It is nearly impossible to determine the actual number of hours a Director will put into the
role. While number of meetings is an imperfect way to determine workload, and more importantly, to
determine the value that a Director will bring to the Board, it nevertheless is useful information when
benchmarking pay packages. Consideration should also be given to other time commitment required of
Directors in the discharge of their responsibilities.

The merit and timing of pay increases – Boards generally feel a bit awkward about approving an
increase in their compensation. However, it is suggested that an increase may be justified if the Company
is doing well and where a peer review suggests that the company’s Directors’ pay lags the market.

2. IN WHOSE INTEREST SHOULD A COMPANY RUN?

Determining the corporate objective has been debatable for many years in many places. Generally, a
corporation is a group of members formed by the shareholders, as well as other groups like employees,
suppliers and customers who all have different contributions to the success of the corporation. However,
it is undoubtedly “ambiguous and obscure” as mentioned by Professor Paul Davies when ascertaining
whose interests ought the company to be run, as it is difficult to determine which groups’ interests should
override the others and is of utmost importance to a company. In fact, there have been two schools of
thought put forward in relation to the corporate objectives. They are the shareholder value principle,
which argues that the company’s objective is to maximize the shareholder interests; while the other one is
the stakeholder theory, which provides that the company should serve not only for the betterment of the
shareholders, but also the interests of different stakeholders such as employees, customers and creditors.

the company, as an artificial person, can have no interests separate from the interests of those who are
associated with it, whether as shareholders, creditors, employers, suppliers, customers or in some other
way.

2
“company’s interests” refers to “the interests of all of the company’s shareholders, present and future.”
Apart from the local non statutory implication, it is also viewed by the majority in the context of common
law that “company” refers to shareholders, thus interests of the company are to be equated with “the
interests of the general body of shareholders”.

However, it has been argued that the shareholder’s interests should not be the exclusive focus of the
directors, but something beyond. According to the case in Brady & Anor v Brady & Anor (Brady), it is
mentioned by Nourse L.J. that “the interests of a company, an artificial person, cannot be distinguished
from the interests of the persons who are interested in it.” This has actually broadened the concept of
“company’s interests” that it embraces the interests of other individuals who also participates in the
corporate entity. Consequently, there is no definite answer as to what conceives the interests of a
company. Nevertheless, we may have better clues by evaluating the best interests of the company under
different approaches in the next part.

The shareholder and stakeholder debate

The debate between the shareholder and stakeholder concepts has emerged over the last decades. The
shareholder approach believes that shareholder’s interests should be the focus of a company, which is a
“dominant principle in corporate law”. On the contrary, the stakeholder approach takes a view that the
directors should balance the interests of different constituencies that make up the company, rather than
considering the sole interests of shareholders. We shall examine the arguments of both approaches and
critically analyze the drawbacks of their approaches in this part of the paper.

The Shareholder Approach

The shareholder approach is also named as the shareholder primacy model, and the core concept is that
the ultimate objective of a company is to maximize wealth for shareholders. This concept has been put
forth earlier in Dodge v Ford Motor Company, which provided the primary legal support for the
shareholder primacy model. Further advocated by Professor Berle, directors should be obliged to act
exclusively in the interests of shareholders, which is also regarded as “the substance of the corporate
fiduciary duty”. In general, there are three major arguments in favour of the shareholder primacy model.

The primary argument in favour of this approach is that shareholders are the “residual claimants” when
the company is solvent. It is believed that a company should be accountable for the benefit of the residual
3
claimants, as shareholders being the equity investors are the “greatest stake in the outcome of the
company”. They may benefit from the company’s surplus, but also bear a greater risk than other
constituencies as their interests are not adequately protected by contractual means under most
circumstances. Thus, they should be given a right to control above other stakeholders because their
interests are associated with every decision they made for the firm. Unlike shareholders, interests of
non-shareholder constituencies are better protected by legal mechanisms like contract law, rather than an
involvement in corporate governance.

Secondly, it is the reduction of agency costs. Under the agency theory, it is known that the agent, namely
the directors, should act on behalf of the shareholder’s interests in running the business of a company.
However, in the absence of the shareholder primacy, it is likely that the directors will “shirk” their duties
and agency costs will be incurred to monitor their work so as to prevent their abuses in positions. In order
to reduce the agency costs, the effective way is to uphold the shareholder value that directors are made
accountable to shareholder’s interests.

Finally, it is believed that directors can make better corporate decisions if they are focused solely on
shareholder’s interests. As if directors owe duties to other non-shareholder constituencies, it would not be
possible for them to balance all of the diverging interests. Besides, it is apparently incapable for the court
to formulate and enforce fiduciary duties to ensure that the directors act fairly and make decisions more
efficiently in the interests of all stakeholders. Hence, the shareholder primacy model is more certain and
easier to administer as compared with the stakeholder approach.

The Stakeholder Approach

According to the prominent proponent of the stakeholder theory, Professor Freeman, “stakeholders” are
defined as “groups and individuals who can affect, or are affected by, the achievement of the
organization’s mission.” Thus, the directors should run a firm not only for the benefit of shareholders, but
all potential stakeholders that make up the company, such as employees, customers, creditors, suppliers
as well as the local community. We shall look into the importance of considering the stakeholder’s
interests in the following parts.

1 Creditor’s interest

4
Unlike other constituencies, creditor’s interests are taken into account by the company only when the
company is in a state of insolvency or financial difficulty as there is a substantial risk that it may be
unable to discharge its debts. It is supported by various common law cases that the duties of directors
would shift from shareholders to creditors under such circumstances. For instance, Nourse L.J. has
mentioned in Brady’s case that “where the company is insolvent, or even doubtfully solvent, the interests
of the company are in reality the interests of existing creditors alone.” Reaffirming Nourse L.J.’s
reasoning in West Mercia Safewear Ltd v Dodd, it is also suggested that directors ought to consider the
interests of creditors in making decisions when the company is in times of financial difficulty.

Nevertheless, creditor’s interests will become paramount only where the company is insolvent or nearing
insolvency. Therefore, it is unlikely that the interests of creditors would be an exclusive focus of the
company under normal situation, and director’s duties are likely to protect rather than to promote their
interests.

2 Employee’s interest

Employees are considered to have an interest in the company as they contribute their work, skills and
knowledge at present in receipt of benefits such as pension provided by the company in future. Besides,
human capital is often regarded as a kind of investment of the company, which is particularly applicable
to some high technology industries as technological innovation requires significant contributions made by
employees. As a result, directors should consider the interests of employees in the sense that they are a
key group of stakeholders who can promote competence and enhance sustainability of the companies they
worked for.

3 Customer’s interest

Customer’s interests should not be neglected by the directors as they are important assets of the company.
A good example to illustrate the importance of a company to consider customer’s interests is the success
story of Toyota in the U.S automobile markets. As the U.S automobile makers failed to meet the
changing consumer demands by continuing to produce large and fuel-inefficient automobiles, consumers
had eventually switch to smaller and more fuel-efficient Japanese models. This has made Toyota’s market
value worth more than twice the combined market value of the big three U.S automobile makers as of
2005. Hence, customers constitute an important stakeholder group for they are crucial to a company’s
success.
5
4 Other stakeholder group’s interests

Stakeholder groups such as suppliers do have interests in the company, as they will make some
firm-specific investments for the needs of particular customers, and they are likely to share the surplus
generated by the company. For suppliers are crucial factors of production, it is important for companies to
establish stable trading relationships within the supply chain. Apart from that, companies are considered
to have social responsibility as their corporate decisions may affect the community at large, therefore
interests of the community should be recognized in their commercial activities.

Criticisms of the two approaches

Considering the arguments for the shareholder primacy model and the stakeholder approach, there are
several flaws that made the approaches less persuasive in general.

Regarding the shareholder primacy model, it is rather misleading to argue that the shareholders are the
sole “residual claimants” in the company, especially under circumstances when the company is not in
bankruptcy. It is not the shareholder’s firm-specific investments that made their position more vulnerable
when compared to other stakeholder groups. As employees, suppliers and other constituencies have
contributed to the firm’s success and they suffer as well when the company performs poorly. In reality of
a public company, it is also the decision made by the board of directors in controlling whether dividends
should be paid to shareholders or used to raise the earnings for employee’s salaries and other purposes.
Thus, it is not justified to focus solely and protect the shareholder’s interests based on the argument that
they are the only residual risk-bearers.

For the stakeholder theory, the primary criticism is that it fails to deal with the problem of balancing the
potential conflicting interests of all different constituencies. Even so, there is no way for the stakeholders
to claim for any failure on the part of the directors. Moreover, there is no clear boundary for the
stakeholder groups to be considered by a company, the problem has been addressed by Professor
Sternberg that a company being accountable to everyone, is actually accountable to no one.

6
It is of my view that neither of the approaches are convincing in the sense that the shareholder approach
focuses on implementation but neglected justification, and it is vice versa for the stakeholder approach in
addition to their problematic arguments. In fact, these approaches can supplement each other in order to
come up with a generally accepted principle, thus a new approach has emerged as the “Enlightened
Shareholder Value”, which will be discussed in the next part.

The Concept of “Enlightened Shareholder Value”

The “Enlightened Shareholder Value” (ESV) approach is actually based on the shareholder primacy
model that the ultimate objective of a company is still promoting shareholder’s benefits. Yet the heart of
this approach is considered to be more enlightened and balanced because directors are obliged to “achieve
the success of the company for the benefit of the shareholders by taking proper account of all the relevant
considerations for that purpose”. The “relevant considerations” include sustaining long-term relationships
with employees, customers and suppliers, as well as the impact of company’s activities on the
community.

The ESV approach has also been successfully adopted in the Companies Act 2006 (UK) (the Act) after
the inclusion of it in the Company Law Reform Bill in 2005. It is clearly stated under section 172(1) of
the Act that directors only owe duties to act in the interests of shareholders, yet they seek to consider a
broader range of matters in order to fulfill that duty. This new approach is adopted by the British
government because it has reflected the modern view of “corporate social responsibility”, such as
rejecting business planning that would raise profits at the expense of the local community. This view has
also been advocated by Professor Jensen before the emergence of the ESV approach, that the way to
maximize a company’s long-term market value is through the fostering of sustainable and co-operative
relationships with various stakeholder groups. One can easily imagine that a shareholder is unlikely to
benefit from a company with unstable supply from their suppliers; their products disliked by the
customers or even continuous striking by their employees.

It is personally opined that focusing mainly on shareholder’s wealth maximization is generally the most
effective way to achieve the broader goal of promoting overall social benefits. The company is also likely
to make more responsible corporate decisions by considering the interests of other constituencies and the
community in which they operated. Accordingly, the ESV approach is a more balanced and generally
accepted approach that it merges elements of the shareholder primacy model and the stakeholder theory.

7
In conclusion A company should serve the interests of constituencies who have the most stakes in the
well-being of their business. However, the constituency in question can arguably be the shareholders or
other stakeholder groups under the interpretation of different approaches. As a matter of fact, it is difficult
to have a clear guiding principle to whose interests the company should serve even today, because of the
ongoing developments of the society, insertion of more firm objectives…etc. The ESV approach maybe
applicable to corporations nowadays due to the prevailing firm objective of “corporate social
responsibility”, yet this may not be the case in the future as our society is becoming more volatile.

Considering all the above, it is not possible to adopt a single approach for corporate objectives all the
time, as the stakeholder group who is mostly important to a company at a certain time does not equally
means the same at other times.

3. HIGHLIGHT OF NIGERIA CORPORATE GOVERNANCE CODE OF 2018

There is a need for corporations to adhere and to the codes of corporate governance to reflect the
company’s economic strength while providing assurance to existing shareholders.
The recent Nigerian code of corporate governance 2018 was released on January 15th, 2019 by the
Financial Reporting Council (FRC). The implementation of the codes is based on the “Apply and
Explain” principle. This assumes the application of all principles and requires corporate entities to explain
how the principles have been applied to suit their unique organizational context while still achieving the
intended outcome of the principles.
Some key principles of the corporate governance of 2018 code are as follows:

• Section 2 of the Code empowers its users to determine the size and composition of their boards while
considering the scale and complexity of their operations, the need for sufficient members to serve on its
committees, the need to secure the necessary quorum at meetings; as well as ensuring diversity. The Code
also recommends an appropriate mix of executive directors, non-executive directors and independent
non-executive members, with a majority of non-executive directors. However, the Code does not specify
the number of independent non-executive directors required on boards but recommends that the majority
of the non- executive directors be the independent non-executive directors.
The implication of this code is that Companies will now be granted the autonomy to determine the size
and composition of their Boards within the confines of the requirements set out. This flexibility gives the
users of the Code significant control over their cost of governance.

8
• Section 3 of the Code states the responsibilities of the chairman of the board in providing overall
leadership to the company and driving effective board operations. It also recommends that the chairman
should not be involved in the day-to-day operations of the company. The implication of this code is that
the board will need to ensure a clear separation of roles between the Non-Executive Directors including
the chairman and the Executive Directors. The roles and responsibilities of each director position should
be formally stated in the appointment letters to directors.

• Section 8 of the code highlights the major role that a company secretary plays in supporting the
effectiveness and management of the board and also mandates that the secretary provides independent
guidance and support. The Code mandates that the board should properly empower the company
secretary as well as approve the performance evaluation, appointment, and removal. The implications of
this code is that in order to empower and strengthen the independence of the company secretary, the
company would need to ensure that the company secretary is not a member of the board to guarantee the
continuous provision of objective and independent guidance to the board.

• The Code further recommends the establishment of committees to be responsible for the nomination and
governance, remuneration, risk management and audit of the company. However, companies can
combine these responsibilities in board committees taking into consideration the size, needs, and
activities of the company. The Code also recommends that the board committees responsible for
nomination, governance, remuneration and audit should comprise of only Non-Executive Directors
(majority of whom should be Independent Non-Executive Directors if possible. possible).

• Section 11 of the Code introduces additional responsibilities for the audit committee of the company.
Specifically, they are expected to ensure the development of a comprehensive internal control framework
and obtain annual assurance and report annually, in the audited financial and operating effectiveness of
the company’s internal controls to promote reliability and safeguards of company’s assets.

• The Code also recommends an annual board evaluation to assess the performance of the board, board
committees and individual directors in executing their role and responsibilities in the company. It also
introduces that a Corporate Governance Evaluation is performed annually, to be focused on the
implementation of the Code. Both evaluations are to be externally facilitated by an independent
consultant at least once every three years. The summary report of this evaluation is to be included in the
company’s annual report and investors’ portal.

9
• On compliance, the Code encourages the board as part of its responsibilities to ensure that the company
is in compliance with the laws of the Federal Republic of Nigeria and other applicable regulations. It
further requires external auditors to report to any regulatory agency where companies or anyone
associated with the companies commit an indictable offense under any law whether or not such matter is
or will be included in the management letter issued to the committee responsible for audit and/ or the
board.

• On whistleblowing, the Code requires the board to establish and review periodically an effective
whistleblowing framework for stakeholders who wish to report any illegal or unethical behavior, as well
as ensure that there is no retaliation or consequence against the whistleblower for making reports.
Whistleblowers who suffer retaliation may be entitled to compensation or reinstatement as found
appropriate.

In conclusion, corporate governance is a key driver to the establishment of any sustainable company. The
practices recommended in the Code will require companies particularly those who have not previously
been regulated by any corporate governance Code to conduct assessment of their existing operations, and
to ensure it is in line with the principles articulated in the Codes highlighted above and put in place
appropriate processes and practices to address any observed gaps found in its operations.

4. COMPARISON OF MODELS OF CORPORATE GOVERNANCE

The Corporate governance models are broadly classified into following categories:

1. Anglo-American Model

2. The German Model

3. The Japanese Model

4. Social Control Model

Anglo-American Model

10
Under the Anglo-American Model of corporate governance, the shareholder rights are

recognised and given importance. They have the right to elect all the members of the Board

and the Board directs the management of the company. Some of the features of this model are:

 This is shareholder oriented model. It is also called Anglo-Saxon approach to corporate

governance being the basis of corporate governance in Britain, Canada, America,

Australia and Common Wealth Countries including India

 Directors are rarely independent of management

 Companies are run by professional managers who have negligible ownership stake.

There is clear separation of ownership and management.

 Institution investors like banks and mutual funds are portfolio investors. When they are

not satisfied with the company’s performance they simple sell their shares in market

and quit.

 The disclosure norms are comprehensive and rules against the insider trading are tight

 The small investors are protected and large investors are discouraged to take active

role in corporate governance.

German Model

This is also called European Model. It is believed that workers are one of the key stakeholders

in the company and they should have the right to participate in the management of the

company. The corporate governance is carried out through two boards, therefore it is also

known as two-tier board model. These two boards are:

11
 1. Supervisory Board: The shareholders elect the members of Supervisory Board.

Employees also elect their representative for Supervisory Board which are generally

one-third or half of the Board.

2. Board of Management or Management Board: The Supervisory Board appoints and

monitors the Management Board. The Supervisory Board has the right to dismiss the

Management Board and re-constitute the same.

Japanese Model

Japanese companies raise significant part of capital through banking and other financial

institutions. Since the banks and other institutions stakes are very high in businesses, they also

work closely with the management of the company. The shareholders and main banks together

appoint the Board of Directors and the President. In this model, along with the shareholders,

the interest of lenders is recognised.

Social Control Model

Social Control Model of corporate governance argues for full-fledged stakeholder

representation in the board. According to this model, creation of Stakeholders Board over and

above the shareholders determined Board of Directors would improve the internal control

systems of the corporate governance. The Stakeholders Board consists of representation from

shareholders, employees, major consumers, major suppliers, lenders etc.

Indian Model

In India there are mainly three types of companies’ viz. private companies, public companies

and public sector undertakings. Each of these companies has distinct kind of shareholding

12
pattern. Thus the corporate governance model in India is a mix of Anglo-American and

German Models.

13
 Comparison
Anglo American German/Continental Japanese
European
Objective Maximize the shareholders’ Maximize shareholders’ Ensuring firms
profit profit are run by using
society’s
resources
efficiently and
taking into
account a range
of stakeholders.
Oriented towards Stock Market Banking Market Banking Market
Interest party Shareholder Shareholders Shareholders,
employees,
suppliers and
customers.
Shareholder Low, shareholders group hold High, shareholders group High, majority of
Concentration small percentage of total shares hold large percentages of the companies are
total number of shares founded and ran
by families
Shareholder Identity Most are agents of financial Most are private companies Mostly are private
institutions (20%-40%), followed by persons who
financial institutions founded and ran
(10%-30%) and then private the company and
persons (15%-35%) financial
institutions
Liquidity of Market Many companies are listed and Fewer companies are Fewer companies
their shares publicly traded. publicly traded. People are publicly
Pension plan provides financial mostly invest on an traded. People
resources for the stock market individual basis. mostly invest on
an individual
basis.
Discipline Mechanism External discipline mechanism. Internal discipline Internal discipline
mechanisms mechanisms
Management Executive directors and Supervisor Board and Board Board of
non-executive directors of Directors Directors and
revision
commission
Control Control is concentrated in the Control is concentrated in Control is
hands of a small number of large number of anonymous concentrated in
investors with a variety of investors majority
interests shareholders
Agency Problem Interest between managers and Interest between controlling Interest between
dispersed shareholders shareholders and powerless managers and
minority shareholders. firm
Insider/Outsider System Outsider system Insider system Insider system
Decision Making Management Shareholders with large Subject to the
14
 percentages of shares influence of
employees and
owners
Long term/ short term Short term Long term Long term
oriented
Corporate Control Hostile Takeover Cross-shareholdin
gs
Financial resources Over investments, decision Limited, ownership is Limited,
making will be the concentrated, only few ownership is
management’s interest. owners are equity suppliers concentrated
Dual structure of CEO Authority pressures to separate Separate function of CEO Separate function
function of CEO and Chairman. and Chairman. of CEO and
However, most of the CEOs in Chairman
US companies are also the
chairman of the board in 1991.
Majority of the board External directors Internal directors Internal directors
Compensation Wages based on the nature of job Wages and allowance for Wages based on
done, no personal circumstances. the stock prices
and allowance for
personal
circumstances.
Accounting System GAAP IFRS GAAP and IFRS
Employees Mobility High Low Low
Influences Foreign influences Government or familial Government or
control and local control familial control
and local control
Focus Role of free market based on it Produces richness and being Business network
to exercise a control over the the engine of national wealth acting in an
companies’ owners interdependent
way and on the
own interests of
all involved
parties.
Evaluation of Financial performance Return on social capital Return on human
governance efficiency capital
Issues covered by Capital market Transactions Corporations
governance network
Ethical Principal Utilitarianism Deontological Deontological

From the various models highlighted above, the appropriate model for Nigeria corporate Governance is
Social Control Model of corporate governance and the reason is that it argues for full-fledged stakeholder
representation in the board. According to the model, creation of Stakeholders Board over and above the
shareholders determined Board of Directors would improve the internal control systems of the corporate

15
governance. The Stakeholders Board consists of representation from shareholders, employees, major
consumers, major suppliers, lenders etc.

5. THEORIES THAT UNDERPIN CORPORATE GOVERNANCE

For the purpose of this paper various corporate governance theories have been reviewed: agency,
stakeholders and resource dependency theory, stewardship theory, social contract theory legitimacy
theory and political theory in enable easy comparism.

Agency Theory
Much of the research into corporate governance derives from agency theory (see Figure 1). Since the
early work of Berle and Means in 1932, corporate governance has focused upon the separation of
ownership and pedals which results in principal-agent problems arising from the dispersed ownership in
the modern corporation. They regarded corporate governance as a mechanism where a board of directors
is a crucial monitoring device to minimize the problems brought about by the principal-agent relationship.
In this context, agents are the managers, principals are the owners and the boards of directors act as the
monitoring mechanism (Mallin, 2004). Moreover, literature on corporate governance attributes two
factors to agency theory. The first factor is that corporations are reduced to two participants, managers
and shareholders whose interests are assumed to be both clear and consistent. A second notion is that
humans are self-interested and disinclined to sacrifice their personal interests for the interests of the
others (Daily, Dalton & Cannella, 2003).

The seminal papers of Alchian and Demstez (1972) and Jensen and Meckling (1976), describe the firm as
a nexus of contracts among individual factors of production resulting in the emergence of the agency
theory. The firm is not an individual but a legal fiction, where conflicting objectives of individuals are
brought into equilibrium within a framework of contractual relationships. These contractual relationships
are not only with employees, but with suppliers, customers and creditors (Jensen & Meckling, 1976). The
intention of these contracts is that all the parties acting in their self-interest are motivated to maximize the
value of the organization, reducing the agency costs and adopting accounting methods that most
efficiently reflect their own performance (Deegan, 2004).

The agency role of the directors refers to the governance function of the board of directors in serving the
shareholders by ratifying the decisions made by the managers and monitoring the implementation of
those decisions. This role has been examined in a large body of literature (Fama & Jensen, 1983;
Baysinger & Butler, 1985; Lorsch & MacIver, 1989; Baysinger & Hoskisson, 1990; Daily & Dalton,
16
1994). Much of this research has examined board composition due to the importance of the monitoring
and governance function of the board (Pearce & Zahra, 1992; Barnhart, Marr & Rosenstein, 1994; Daily
& Dalton, 1994; Gales & Kesner, 1994; Bhagat & Black, 1998; Kiel & Nicholson, 2003;), because
according to the perspective of agency theory the primary responsibility of the board of directors is
towards the shareholders to ensure maximization of shareholder value. The focus of agency theory of the
principal and agent relationship (for example shareholders and corporate managers) has created
uncertainty due to various information asymmetries (Deegan, 2004). The separation of ownership from
management can lead to managers of firms taking action that may not maximize shareholder wealth, due
to their firm specific knowledge and expertise, which would benefit them and not the owners; hence a
monitoring mechanism is designed to protect the shareholder interest (Jensen & Meckling, 1976). This
emphasizes the role of accounting in reducing the agency cost in an organization, effectively through
written contracts tied to the accounting systems as a crucial component of corporate governance
structures, because if a manager is rewarded for their performance such as accounting profits, they will
attempt to increase profits which will lead to an increase in bonus or remuneration through the selection
of a particular accounting method that will increase profits.

Arising from the above is the agency problem on how to induce the agent to act in the best interests of the
principal. This results in agency costs, for example monitoring costs and disciplining the agent to prevent
abuse (Shleifer & Vishny, 1997). Jensen and Meckling (1976) define agency costs: the sum of monitoring
expenditure by the principal to limit the aberrant activities of the agent; bonding expenditure by the agent
which will guarantee that certain actions of the agent will not harm the principal or to ensure the principal
is compensated if such actions occur; and the residual loss which is the dollar equivalent to the reduction
of welfare as a result of the divergence between the agents decisions and those decisions that would
maximize the welfare of the principal. However, the agency problem depends on the ownership
characteristics of each country. In countries where ownership structures are dispersed, if the investors
disagree with the management or are disappointed with the performance of the company, they use the exit
options, which will be signaled through reduction in share prices. Whereas countries with concentrated
ownership structures and large dominant shareholders, tend to control the managers and expropriate
minority shareholders in order to gain private control benefits (Spanos, 2005).

The agency model assumes that individuals have access to complete information and investors possess
significant knowledge of whether or not governance activities conform to their preferences and the board
has knowledge of investors’ preferences (Smallman, 2004). Therefore according to the view of the

17
agency theorists, an efficient market is considered a solution to mitigate the agency problem, which
includes an efficient market for corporate control, management labour and corporate information (Clarke,
2004). According to Johanson and Ostergen (2010) even though agency theory provides a valuable
insight into corporate governance, its’ applies to countries in the Anglo-Saxon model of governance as in
Malaysia. Various governance mechanisms have been discussed by agency theorists in relation to
protecting the shareholder interests, minimizing agency costs and ensure alignment of the agent-principal
relationship. Among the mechanisms that have received substantial attention, and are within the scope of
this study, are the governance structures (Davis, Schoorman & Donaldson, 1997).

Stakeholder Theory
This theory centres on the issues concerning the stakeholders in an institution. It stipulates that a
corporate entity invariably seeks to provide a balance between the interests of its diverse stakeholders in
order to ensure that each interest constituency receives some degree of satisfaction (Abrams, 1951).
However, there is an argument that the theory is narrow (Coleman, 2008: 4) because it identifies the
shareholders as the only interest group of a corporate entity. However, the stakeholder theory is better in
explaining the role of corporate governance than the agency theory by highlighting different
constituents of a firm (Coleman, 2008: 4).

With an original view of the firm the shareholder is the only one recognized by business law in most
countries because they are the owners of the companies. In view of this, the firm has a fiduciary duty to
maximize their returns and put their needs first. In more recent business models, the institution converts
the inputs of investors, employees, and suppliers into forms that are saleable to customers, hence returns
back to its shareholders. This model addresses the needs of investors, employers, suppliers and
customers. Pertaining to the scenario above, stakeholder theory argues that the parties involved should
include governmental bodies, political groups, trade associations, trade unions, communities, associated
corporations, prospective employees and the general public. In some scenarios competitors and
prospective clients can be regarded as stakeholders to help improve business efficiency in the market
place.

Stakeholder theory has become more prominent because many researchers have recognized that the
activities of a corporate entity impact on the external environment requiring accountability of the
organization to a wider audience than simply its shareholders. For instance, McDonald and Puxty (1979)
proposed that companies are no longer the instrument of shareholders alone but exist within society and,
therefore, has responsibilities to that society. One must however point out that large recognition of this
18
fact has rather been a recent phenomenon. Indeed, it has been realized that economic value is created by
people who voluntarily come together and cooperate to improve everyone’s position (Freeman et. al.,
2004). Jensen (2001) critiques the Stakeholder theory for assuming a single-valued objective (gains that
accrue to a firm’s constituency). The argument of Jensen (2001) suggests that the performance of a firm
is not and should not be measured only by gains to its stakeholders. Other key issues such as flow of
information from senior management to lower ranks, interpersonal relations, working environment, etc.
are all critical issues that should be considered. Some of these other issues provided a platform for other
arguments. An extension of the theory called an enlightened stakeholder theory was proposed. However,
problems relating to empirical testing of the extension have limited its relevance (Sanda et. al., 2005).

In order to differentiate among stakeholder types, Rodriguez et al., (2002): classification was adopted;
consubstantial, contractual and contextual stakeholders. Consubstantial stakeholders are the stakeholders
that are essential for the business’s existence (shareholders and investors, strategic partners, employees).
Contractual stakeholders, as their name indicates, have some kind of a formal contract with the business
(financial institutions, suppliers and sub- contractors, customers). Contextual stakeholders are
representatives of the social and natural systems in which the business operates and play a fundamental
role in obtaining business credibility and, ultimately, the acceptance of their activities (public
administration, local communities, countries and societies, knowledge and opinion makers) Rodriguez et
al., (2002). Rajan and Zingales (1998) and Zingales (1998) argue that the company has to safeguard the
interests of all who contribute to the general value creation, that is, make specific investments to a given
corporation. These firms-specific investments can be diverse and include physical, human and social
capital. These specific investments ex ante, nor evaluated independency from the firm’s functioning.

Resource Dependency Theory

The basic proposition of resource dependence theory is the need for environmental linkages between the
firm and outside resources. In this perspective, directors serve to connect the firm with external factors by
co-opting the resources needed to survive (Pfeffer and Salancik, 1978). Thus, boards of directors are an
important mechanism for absorbing critical elements of environmental uncertainty into the firm.
Williamson (1985) held that environmental linkages or network governance could reduce transaction
costs associated with environmental interdependency. The organization’s need to require resources and
these leads to the development of exchange relationships or network governance between organizations.
Further, the uneven distribution of needed resources results in interdependence in organizational
relationships. Several factors would appear to intensify the character of this dependence, e.g. The

19
importance of the resource(s), the relative shortage of the resource(s) and the extent to which the
resource(s) is concentrated in the environment (Donaldson and Davis, 1991).

Additionally, directors may serve to link the external resources with the firm to overwhelm uncertainty
(Hillman, Cannella Jr & Paetzols, 2000), because managing effectively with uncertainty is crucial for the
existence of the company. According to the resource dependency rule, the directors bring resources such
as information, skills, key constituents (suppliers, buyers, public policy decision makers, social groups)
and legitimacy that will reduce uncertainty (Gales & Kesner, 1994). Thus, Hillman et al. (2000) consider
the potential results of connecting the firm with external environmental factors and reducing uncertainty
is decrease the transaction cost associated with external association. This theory supports the appointment
of directors to multiple boards because of their opportunities to gather information and network in
various ways.

Stewardship Theory
In contrast to agency theory, stewardship theory presents a different model of management, where
managers are considered good stewards who will act in the best interest of the owners (Donaldson &
Davis 1991). The fundamentals of stewardship theory are based on social psychology, which focuses on
the behaviour of executives. The steward’s behaviour is pro- organizational and collectivists, and has
higher utility than individualistic self-serving behavior and the steward’s behavior will not depart from
the interest of the organization because the steward seeks to attain the objectives of the organization
(Davis, Schoorman & Donaldson 1997). According to Smallman (2004) where shareholder wealth is
maximized, the steward’s utilities are maximised too, because organisational success will serve most
requirements and the stewards will have a clear mission. He also states that, stewards balance tensions
between different beneficiaries and other interest groups. Therefore stewardship theory is an argument
put forward in firm performance that satisfies the requirements of the interested parties resulting in
dynamic performance equilibrium for balanced governance.

Stewardship theory sees a strong relationship between managers and the success of the firm, and therefore
the stewards protect and maximise shareholder wealth through firm performance. A steward who
improves performance successfully, satisfies most stakeholder groups in an organization, when these
groups have interests that are well served by increasing organisational wealth (Davis, Schoorman &
Donaldson 1997). When the position of the CEO and Chairman is held by a single person, the fate of the
organization and the power to determine strategy is the responsibility of a single person. Thus the focus
of stewardship theory is on structures that facilitate and empower rather than monitor and control (Davis,
20
Schoorman & Donaldson 1997). Therefore stewardship theory takes a more relaxed view of the
separation of the role of chairman and CEO, and supports appointment of a single person for the position
of chairman and CEO and a majority of specialist executive directors rather than non-executive directors
(Clarke 2004).

Social Contract Theory

Among other theories reviewed in corporate governance literature social contract theory, sees society as a
series of social contracts between members of society and society itself (Gray, Owen & Adams 1996).
There is a school of thought which sees social responsibility as a contractual obligation the firm owes to
society (Donaldson 1983). An integrated social contract theory was developed by Donaldson and Dunfee
(1999) as a way for managers make ethical decision making, which refers to macrosocial and microsocial
contracts. The former refers to the communities and the expectation from the business to provide support
to the local community, and the latter refers to a specific form of involvement.

Legitimacy Theory
Another theory reviewed in the corporate governance literature is legitimacy theory. Legitimacy theory is
defined as “a generalized perception or assumption that the actions of an entity are desirable, proper, or
appropriate with some socially constructed systems of norms, values, beliefs and definitions” (Suchman
1995). Similar to social contract theory, legitimacy theory is based upon the notion that there is a social
contract between the society and an organisation. A firm receives permission to operate from the society
and is ultimately accountable to the society for how it operates and what it does, because society provides
corporations the authority to own and use natural resources and to hire employees (Deegan 2004).

Traditionally profit maximization was viewed as a measure of corporate performance. But according to
the legitimacy theory, profit is viewed as an all inclusive measure of organizational legitimacy
(Ramanathan 1976). The emphasis of legitimacy theory is that an organization must consider the rights of
the public at large, not merely the rights of the investors. Failure to comply with societal expectations
may result in sanctions being imposed in the form of restrictions on the firm's operations, resources and
demand for its products. Much empirical research has used legitimacy theory to study social and
environmental reporting, and proposes a relationship between corporate disclosures and community
expectations (Deegan 2004).

Political Theory
21
Political theory brings the approach of developing voting support from shareholders, rather by purchasing
voting power. Hence having a political influence in corporate governance may direct corporate
governance within the organization. Public interest is much reserved as the government participates in
corporate decision making, taking into consideration cultural challenges (Pound, 1983). The political
model highlights the allocation of corporate power, profits and privileges are determined via the
governments’ favor. The political model of corporate governance can have an immense influence on
governance developments. Over the last decades, the government of a country has been seen to have a
strong political influence on firms. As a result, there is an entrance of politics into the governance
structure or firms’ mechanism (Hawley and Williams, 1996).

6. ROLE OF REGULATORY AGENCY IN KEYING INTO CORPORATE GOVERNANCE

the regulatory bodies oversee the performance and operations of corporate entities including banks and
other financial institutions and ensure that regulations, and economic and social policies are complied
with and/or implemented. They may impose appropriate sanctions whenever the need arises.

Regulatory agencies serve two primary functions in government: they implement laws and they enforce
laws. Regulations are the means by which a regulatory agency implements laws enacted by the
legislature. You can think of regulations as formal rules based upon the laws enacted by a legislature that
govern specific social or economic activities.

Implementing Laws

Regulatory agencies use a specific procedure to create and implement regulations. We'll use the federal
process as an example:

1. Advance notice

An agency that is about to start drafting new regulations will publish advance notice of its proposed
rulemaking in the Federal Register, which is available to the public and usually monitored by industry
experts to stay informed of proposed changes in regulations or proposed new regulations.

2. Proposed regulation

22
The regulatory agency will draft the proposed regulations to fulfill the requirements of the law upon
which the regulation is based. For example, if a new law is passed by Congress that limits water pollution
produced by a business, the agency will develop regulations that carefully outline the limits of pollution,
how the limits are measured, reporting requirements, enforcement powers vested in the agency, and
penalties the agency is entitled to impose under the law.

3. Public comments

The proposed regulations are published and the public is invited to comment. It's not unusual for industry
leaders and interest groups to comment in an attempt to modify the rules to advance their particular
interests.

4. Review of comments

The agency will review the public comments and may or may not make any changes based upon them.

5. Final regulation

The completed regulation is published in the Federal Register and will eventually be added to the Code of
Federal Regulations, which is essentially a list of all the federal regulations, broken up into titles and
chapters.

6. Implementation

The regulation is implemented, or made effective, and enforcement commences.

Enforcing Laws

Regulatory enforcement is the other primary role filled by regulatory agencies. Agencies have a
responsibility to monitor businesses to ensure they are complying with regulations. Agencies vary on how
they perform their enforcement responsibilities, but we can take a look at a generalized process:

1. Investigation

If the agency has reason to believe that a business has violated its regulations, the agency will commence
an investigation. The investigation may include interviewing relevant witnesses and reviewing documents.
23
Some investigations may utilize scientific testing, such as environmental investigations to determine the
level of pollution spewing out of a factory's smokestack. The agency will give the business a chance to
respond to the allegations. The response is usually presented in writing with any supporting
documentation.

2. Decision

The agency will make a decision, demand any corrective action if necessary, and impose any penalty that
it deems appropriate that it is authorized to impose by law.

7. DISCUSS THE BOARD OF DIRECTORS UNDER: COMPOSITION, RELATIONSHIP WITH

MANAGEMENT, ROLE OF BOARD COMMITTEES, ROLE OF MANAGING DIRECTORS,
ROLE OF CHAIRMAN, ROLE OF COMPANY SECRETARY, BOARD EVALUATION FOR
EFFECTIVENESS.

A. Composition

Board composition can reflect various degrees of heterogeneity (Bhagat & Black, 2002). Common
measures of board composition include the ratio of independent non-executive directors and board size
(Rashid, 2011), which is the measure used in this research. Other measures of board composition in the
literature include gender and age diversity. However, to date there have been inconclusive findings as
regards the relationship between board composition and firm performance (Finegold et al., 2007; Bermig
& Frick, 2010; Rashid, De Zoysa, Lodh & Rudkin, 2010). Other differences in board composition are
considered here to represent 'board diversity'. More independent board composition can result in
enhanced decision making through increased information flows, although this may entail a cost (Sanda et
al., 2011). In light of this, Eklund, Palmberg and Wiberg (2009:8) stress board heterogeneity entails a
trade-off between "information efficiency" in the case of heterogeneous boards, which typically are better
informed on 'outside' issues, versus "decision efficiency" of homogenous boards deriving from higher
trust, shared experience and values.

In terms of this tension, however, agency theory is in favour of a majority of independent nonexecutive
directors (Huse, 2007; Rashid, 2011). King III stresses that the board should include a balance of
executive and non-executive directors, with a majority of independent non-executive directors, as this
reduces the possibility of conflicts of interest (IOD, 2009). The corporate governance literature tends to
24
advocate expanding the independent/outsider elements on corporate boards (Sanda et al., 2011). Sahin,
Basfirinci and Ozsalih (2011), however, observe that previous literature does not offer consistent
evidence on the impact of the proportion of non-executive to executive directors on financial
performance.

On the one hand, certain studies (Weisbach, 1988; Pearce & Zahra, 1992; Daily & Dalton, 1993;
Rosenstein & Wyatt, 1994; MacAvoy & Millstein, 1999; Krivogorsky, 2006) suggest a positive
relationship between board composition and firm performance. Others, on the other hand, have found no
relationship between firm performance and board composition (Daily & Johnson, 1997; Bhagat & Black,
1999; Dulewicz & Herbert, 2004).In support of the latter camp, Finegold et al. (2007:867) note that no
consistent empirical evidence has been found to suggest increasing percentages of outsiders on boards
will enhance performance, but "pushing too far to remove insider and affiliated directors may harm firm
performance by depriving boards of the valuable firm and industry specific knowledge they provide."

An argument challenging the role of independent non-executive directors rests on the information
asymmetry between executive directors and independent non-executive directors (Rashid, 2011).
Executive directors are nested within the company they govern and may therefore have a better
understanding of the business than independent non-executive directors and may, in addition, be better
able to make useful decisions (Sanda et al., 2011). By contrast, independent non-executive directors may
lack day-to-day inside knowledge of the company and therefore may play a reduced control role in the
firm (Nicholson & Kiel, 2007; Rashid et al, 2010). Nevertheless, this debate is set to continue, as there
are no empirical findings to tilt the argument in any particular direction (Rashid, 2011).

There are several explanations for the inconclusive results on the relationship between executive versus
independent non-executive directors and firm performance. One such explanation is that the simultaneity
between key variables of interest confounds the interpretation of the results in studies that focus on direct
relationships (Finegold et al., 2007). Yet another explanation is that performance and board
characteristics are jointly endogenous, and thus firm performance is not only a function of past board
independence, but also influences board structure (Panasian, Prevost & Bhabra, 2008).

Nonetheless, Panasian et al. (2008:136) stress that, "despite the inconclusive results of empirical literature
on the effectiveness of outsider directors on the board, an international movement advocating greater
board independence continues to strengthen". Given the lack of clarity as regards the net effect of board

25
composition and size on firm performance, this study seeks to address what is considered to be a
deficiency in the literature, and to investigate the net relationships between board composition and firm
performance in the South African context. On the basis of the theory and the empirical findings discussed
above, the following hypothesis is offered:

B. Relationship with Management

The relationship between the board of directors and the management cannot be described as just being
that of a relationship between an employee and his or her manager. Though the board oversees the
decisions taken by the management and ratifies them along with acting as the final arbiters of the strategic
direction and focus that the company is heading into, the relationship goes beyond that. For instance, the
board of directors is responsible for the actions of the management and hence not only does the board
need to monitor the management, the management needs to take the board into confidence about its
decisions. Hence, the relationship can be described as being symbiotic with each with each serving in an
ecosystem called the organization. The point here is that neither the management nor the board can exist
without each other and hence both need each other to survive and flourish.

Another aspect to the relationship between the board and the management is that more often than not,
there is a significant representation of the management in the board. This means that the other board
members have to study the decisions taken by these members carefully so that there are no agency
problems, conflicts of interest and asymmetries of information. Only when the board and the management
coexist together in a harmonious manner can there be true progress for the organization. For this to
happen, there must be a provision for having independent directors and those directors that are not
affiliated to the management. The point here is that unless there is objectivity and separation of the
directors belonging to the management and those from outside can there is a semblance of avoidance of
conflict of interest.

The third aspect of the relationship between the board and the management is the role played by
institutional investors or directors from large equity houses and mutual fund companies. These directors
bring to the table rich and varied expertise and experience in running companies and hence their input is
26
crucial to the working of the company. It is for this reason that many regulators insist on having a certain
percentage of the board as independent directors and another percentage from institutional shareholders.
The reason for this is the fact that unless there is a process of due diligence and oversight over the actions
of the management, the management can take unilateral decisions that are not always in the best interests
of the company.

Finally, the relationship between the board and management is somewhat strained whenever the company
is not doing well. This happens because the board has a top view of the organization and the management
has a deeper insight. Hence, to be fair to the management, they are the ones who have to run the
organization and so they cannot be constrained by what the board dictates sitting on its perch. This is the
classic problem that many companies face especially when they are not doing well and the remedy for
this is to take the board into confidence about the complexities of the day to day operations and apprise
them of the nuances and subtleties of running the organization.

C. Role of board Committee’s

Boards of directors perform their advisory and oversight function through well-structured, planned, and
assigned committees to take advantage of the expertise of all the directors.

Committees appointed by the Board focus on specific areas and take informed decisions within the
framework of delegated authority, and make specific recommendations to the Board on matters in their
areas or purview. All decisions and recommendations of the committees are placed before the Board for
information or for approval.

To enable better and more focused attention on the affairs of the Corporation, the board delegates
particular matters to the committees of the board set up for the purpose. Committees review items in great
detail before it is placed before the Board for its consideration. These committees prepare the groundwork
for decision making and report at the subsequent board meeting.

The following are some of the important committees of the Board-

 Audit Committee
 Shareholders Grievance Committee
 Remuneration Committee

27
 Risk Committee
 Nomination Committee
 Corporate Governance Committee
 Corporate Compliance Committee
 Ethics Committee

The role of the audit committee shall include the following:

 Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
 Recommending the appointment and removal of external auditor, fixation of audit fee and
also approval for payment for any other services.
 Reviewing with management the annual financial statements before submission to the board,
focusing primarily on;
 Any changes in accounting policies and practices.
 Major accounting entries based on exercise of judgment by management.
 Qualifications in draft audit report.
 Significant adjustments arising out of audit.
 The going concern assumption.
 Compliance with accounting standards.
 Compliance with stock exchange and legal requirements concerning financial statements
 Any related party transactions
 Reviewing with the management, external and internal auditors, the adequacy of internal
control systems.
 Reviewing the adequacy of internal audit function, including the structure of the internal audit
department, staffing and seniority of the official heading the department, reporting structure coverage and
frequency of internal audit.
 Discussion with internal auditors any significant findings and follow up there on.
 Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a material nature
and reporting the matter to the board.
 Discussion with external auditors before the audit commences about nature and scope of audit
as well as post-audit discussion to ascertain any area of concern.
28
 Reviewing the company’s financial and risk management policies.
 To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of nonpayment of declared dividends) and creditors.

The Shareholders/ Investor Grievances Committee looks into redressal of shareholder and investor
complaints, issue of Duplicate/ Consolidated Share Certificates, Allotment and Listing of shares and
review of cases for refusal of Transfer/ Transmission of shares and debentures and reference to Statutory
and Regulatory Authorities.

The role of a Remuneration Committee is:

 To decide and approve the terms and conditions for appointment of executive directors and/ or
whole time Directors and Remuneration payable to other Directors and matters related thereto.
 To recommend to the Board, the remuneration packages of the Company’s Managing/Joint
Managing/ Deputy Managing/Whole time / Executive Directors, including all elements of remuneration
package (i.e. salary, benefits, bonuses, perquisites, commission, incentives, stock options, pension,
retirement benefits, details of fixed component and performance linked incentives along with the
performance criteria, service contracts, notice period, severance fees etc.);
 To be authorized at its duly constituted meeting to determine on behalf of the Board of
Directors and on behalf of the shareholders with agreed terms of reference, the Company’s policy on
specific remuneration packages for Company’s Managing/Joint Managing/ Deputy Managing/
Whole-time/ Executive Directors, including pension rights and any compensation payment;
 To implement, supervise and administer any share or stock option scheme of the Company.
 to review the overall compensation policy, service agreements and other employment
conditions to Executive Directors and senior executives just below the Board of Directors and make
appropriate recommendations to the Board of Directors;

The primary role of the Nomination Committee of the board is to assist the board by identifying
prospective directors and make recommendations on appointments to the board and the senior most level
of executive management below the board. The committee also clears succession plans for these levels.
The Nomination Committee is responsible for making recommendations on board appointments and on
maintaining a balance of skills and experience on the board and its committees.

29
Succession planning for the board is a matter which is devolved primarily to the Nomination Committee,
although the committee’s deliberations are reported to and debated by the full board. The board itself also
regularly reviews more general succession planning for the senior management of the group.

D. Role of Managing Director

Together with the audit and compensation committees, the nominating/corporate governance committee
rounds out the three standing committees of a public company’s board of directors. It plays a critical role
in overseeing matters of corporate governance for the board, including formulating and recommending
governance principles and policies. As its name implies, this committee is charged with enhancing the
quality of nominees to the board and ensuring the integrity of the nominating process. Given the recent
focus on board composition and diversity, director elections, and proxy access, the role of
nominating/corporate governance committee is in the spotlight

The managing directors oversees the activities of a company or a department. Responsible for the
management of that entity's resources as well as the establishment of strategic goals and formulating
plans to make sure those goals are met. This is the person who usually has the last say in an organisation.

i. They Directs and supervises the activities of staff

ii. Provides guidance for workers as needed and approves training opportunities
iii. Implements company policies
iv. Delegates duties among staff members
v. Maintains budgets for managed entity as well as the individual projects it takes on
vi. Monitors costs against budget
vii. Makes key decisions for managed entity
viii. Researches and analyses industry, market, and competitors to make informed strategy
decisions
ix. Creates initiatives to take advantage of market opportunities, reduce operational threats,
forestall business risks, and maximises core strengths
x. Identifies core competencies and defines operational goals
xi. Liaisons with Board of Directors to make sure all efforts are in alignment

E. Role of chairman

30
 The chairman's primary role is to ensure that the board is effective in its task of setting and
implementing the company's direction and strategy. The chairman is appointed by the board and the
position may be full time or part time. other role of chairman are as follows:

i. As well as being chairman of the board, he/she is expected to act as the company’s leading
representative which will involve the presentation of the company’s aims and policies to the
outside world.
ii.To take the chair at general meetings and board meetings. With regard to the latter this will involve:
the determination of the order of the agenda; ensuring that the board receives accurate, timely
and clear information; keeping track of the contribution of individual directors and ensuring that
they are all involved in discussions and decision-making. At all meetings the chairman should
direct discussions towards the emergence of a consensus view and sum up discussions so that
everyone understands what has been agreed.
iii. To take a leading role in determining the composition and structure of the board. This will
involve regular reviews of the overall size of the board, the balance between executive and
non-executive directors and the balance of age, experience and personality of the directors.
iv. To ensure effective communication with shareholders and, where appropriate, the
stakeholders.

F. Role of a Company Secretary:

The Company Secretary plays an important role in company administration and plays a three-fold role as
a statutory officer, as a coordinator and as an administrator. He is liable not only to the company, but also
to its shareholders, creditors, employees, consumers, society and the Government. As one of the principal
officers of the company, he is responsible for strict compliance with the various provisions of the
Companies Act. He also holds a high administrative position in the company and it is his duty to ensure
that the policies and decisions of the Board are effectively implemented. As a general administrative
officer, the Company Secretary is responsible for efficient administration of the company and has to
supervise, control and coordinate the functioning of different departments of the organization. He is in
such a position that he can have an overall view of different aspects of company administration and can
develop a strong and efficient organizational structure.

31
As the principal officer of the company, the Company Secretary is a vital link between the Company, the
Board of Directors, shareholders and governmental and regulatory agencies. He is a business manager
and an important adjunct in corporate management hierarchy. He acts as a confidante of the Board of
Directors, takes part in the formulation of long-term and short-term corporate policies, maintains statutory
books and records and ensures compliances with legal and procedural requirements under various
enactments for effective corporate governance. His duty involves advising the Board of Directors on the
ramifications of the proposals under the consideration of the Board. As a corporate development planner
he identifies expansion opportunities, arranges collaborations, amalgamation, mergers, acquisitions,
takeovers, divestment, setting up of subsidiaries and joint ventures within and outside India. He looks
after the entire secretarial functions which include preparing agenda, convening, conducting and minuting
meetings of Board of Directors, Shareholders, Annual General Meetings, Inter-departmental meetings
and meetings with foreign delegations, Financial Institutions, regulatory authorities, etc

G. Board Evaluation for Effectiveness

good governance requires boards to have effective processes and to evaluate their performance and
appraise directors at least once a year

The application of simple standards at board level can radically improve performance.

 Audits of board processes against external benchmarks

 Audits of director skills against external benchmarks
 Psychometric profiling and 360 feedback to discover strengths and development needs of
individual directors and managers
 Facilitation of corporate retreats for both strategy and budget planning
 Executive coaching and appraisals of executive and non-executive directors to improve
individual and group performance

These processes will enable you and your board to significantly raise your game, increase your
professionalism and improve corporate performance.

The evaluation process is a constructive mechanism for improving board effectiveness, maximising
strengths and tackling weaknesses, leading to an immediate improvement in performance throughout the
organisation.
32
It will check that there are proper board procedures in place, with all directors fully understanding their
role and having the special skills that directors need.

A well conducted evaluation helps the board, committees and individual directors perform to their
maximum capabilities.

A quick and simple audit against established standards for directors and board processes (followed by
appropriate action!), can lead to an immediate improvement of performance throughout the organisation.

Evaluation of the performance of the board is a process for improving board effectiveness, maximising
strengths and tackling weaknesses.

8. CO-CONCEPT OF CORPORATE GOVERNANCE?

Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is
actually conducted by the board of Directors and the concerned committees for the company’s
stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and
social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors,
and company’s management) in shaping corporation’s performance and the way it is proceeding towards.
The relationship between the owners and the managers in an organization must be healthy and there
should be no conflict between the two. The owners must see that individual’s actual performance is
according to the standard performance. These dimensions of corporate governance should not be
overlooked.

Corporate governance is a process that aims to allocate corporate resources in a manner that maximizes
value for all stakeholders – shareholders, investors, employees, customers, suppliers, environment and the
community at large and holds those at the helms to account by evaluating their decisions on transparency,
inclusivity, equity and responsibility. The World Bank defines governance as the exercise of political
authority and the use of institutional resources to manage society's problems and affairs.

33
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a
corporation (or company) is directed, administered or controlled. Corporate governance also includes the
relationships among the many stakeholders involved and the goals for which the corporation is governed.
In contemporary business corporations, the main external stakeholder groups are shareholders, debt
holders, trade creditors, suppliers, customers and communities affected by the corporation's activities.
Internal stakeholders are the board of directors, executives, and other employees.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a
fair return on their investment. Corporate Governance clearly distinguishes between the owners and the
managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of
owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate
authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the
need for corporate governance arises. Also, efficiency as well as globalization are significant factors
urging corporate governance. Corporate Governance is essential to develop added value to the
stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development.
This also ensures that the interests of all shareholders (majority as well as minority shareholders) are
safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully
recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. 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. It lowers the capital cost.
4. There is a positive impact on the share price.

34
5. It provides proper inducement to the owners as well as managers to achieve objectives that are
in interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.

CONCLUSION

The outcome of a good corporate governance practice is an accountable board of directors who ensures
that the investors’ interests are not jeopardized (Hashanah and Mazlina, 2005). The accountability and
transparency component of corporate governance would help companies gain shareholders’ and
investors’ trust. These stakeholders need assurance that the company will be run both honestly and
cleverly. This is where corporate governance is critical. (Morck and Steier, 2005). Corporate governance
improves stakeholders’ confidence and this would aid the sustainability of business in the long run. The
present corporate governance theories cannot fully explain the intricacy and heterogeneity of corporate
business. Governance may differ from country to country due to their various cultural values, political
and social and historical circumstances. In this sense, governance in developed countries and developing
countries can vary due to the cultural and economic contexts of individual countries. However, the
literature has confirmed that even with strict regulations, there have been breaches in corporate
governance. Hence it is vital that a rounded recognition be driven across the corporate world that would
bring about a different perspective towards corporate governance. The days of cane and halter are
becoming a mere shadow and the need to get to the root of a corporation is crucial. Therefore, it is
significant to re-visit corporate governance in the light of the conjunction of these theories and with a
fresh angle, which has a universal view and incorporating subjectivity from the perspective of social
sciences.

35
REFERENCES
Abdallah, H., & Valentine, B. (2009). Fundamentals and Ethics Theories of Corporate Governance.
Middle Eastern Finance and Economics, 4, 88-96.
Abrams, F. W. (1951). Management’s Responsibilities in a Complex World. Harvard Business Review,
29, 54-64.
Alchian, A. & Demsetz, H. (1972). Production, Information, Costs and Economic Organization.
American Economic Review, 62(5), 777-795.
Barnhart, S., Marr, M., & Rosenstein, S, (1994). Firm Performance and Board Composition: Some New
Evidence. Managerial and Decision Economics, 15(4), 329-40.
Baysinger, B., & Butler, H. (1985). Corporate Governance and Board of Directors: Performance Effects
of Changes in Board Composition. Journal of Law Economics and Orgainization, 1(1), 101-124.
Baysinger, B. D., & Hoskisson, R. E. (1990). The composition of boards of directors and strategic
control: Effects on corporate strategy. Academy of Management Review, 15(1), 72-87.
Berle, A. A. & Means, G. C. (1932). The modern corporation and private property. Macmillan, New
York.
Bhagat, S., & Black, B. (1998). Board Independence and Long-term Performance. University of
Colorado.
Boyd, B. K. (1995). CEO Duality and Firm Performance: A Contingency Model. Strategic Management
Journal, 16(4), 301-312.
Cadbury Code. (1992). Report of the Committee on Financial Aspect of Corporate Governance
(pp. 15). London: Gee Publishing.
CalPERS (1999). CalPERS' Global Governance Principles. the CalPERS Investment Committee.
Retrieved September 4, 2003, from http://www.calpers-governance.org/principles/international/
Clarke, T. (2004), Theories of Corporate Governance. The Philosophical Foundations of Corporate
Governance, Routledge, Taylor & Francis Group, London, New York
Coleman, P. T., Hacking, A., Stover, M., Fisher-Yoshida, B, and Nowak, A. (2008). Reconstructing
ripeness I: A study of constructive engagement in protracted social conflicts. Conflict Resolution
Quarterly, 26(1), 3-42.
Christine A. Mallin (2004), Corporate Governance (Oxford University Press, Oxford 2004)
Combined Code (2006), The combined code on corporate governance. The Financial Reporting Council,
viewed 19 September 2008.
Crane. A., & Matten, D. (2007). Business Ethics (2nd Ed). Oxford University Press.
Daily, C. M., & Dalton, D. R. (1994). Bankruptcy and Corporate Governance: The Impact of Board
Composition and Structure. Academy of Management Journal, 37(6), 1603-1617.
Daily, C. M., Dalton, D. R., & Canella, A. A. (2003). Corporate Governance: Decades of Dialogue and
Data. Academy of Management Review, 28(3), 371–382.
Davis, J. H., Schoorman, F. D., & Donaldson, L. (1997). Toward a Stewardship Theory of Management.
Academy of Management Review, 22(1), 20-47.

36
Deegan, C 2004, Financial Accounting Theory, McGraw-Hill Australia Pty Ltd, NSW.
Donaldson, L., & Davis, J. H. (1991). Stewardship theory or agency theory: CEO governance and
shareholder returns. Australian Journal of Management, 16(1), 49-64.
Donaldson, T. (1983). Constructing a Social Contract for Business. In T. Donaldson, & P. Werhane
(Eds.), Ethical Issues in Business. Prentice-Hall, Englewood Cliffs, NJ.
Donaldson, T. & Dunfee, T. W. (1999). Ties That Bind. Harvard School of Business Press, Boston,
MA.
Elaine Sternberg, Corporate Governance: Accountability in the Marketplace (2nd edn Institute of
Economic Affairs, London 2004)
Edward Freeman, Strategic Management: A Stakeholder Approach (Pitman, Boston 1984)
Fama, E., & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics,
26(2), 301-325.
Freeman, R. E., Wicks, C. A., & Parmar, B. (2004). Stakeholder Theory and The Corporate
Objective Revisited. Organization Science, 15(3), 364-369.
Gales, L. & Kesner, I. (1994). An Analysis of Board of Director Size and Composition in Bankrupt
Organizations. Journal of Business Research, 30(3), 271-282.
Gray, R, Owen, D., & Adams, C. (1996). Accounting and Accountability. Changes and Challenges in
Corporate Social Environmental Reporting, Prentice -Hall Europe Harlow.
Gregory, H. J., & Simms, M. E. (1999). Corporate Governance: What It Is and Why It Matters.
The 9th International Anti-Corruption Conference papers. Durban, South Africa 9-15 October.
Hashanah, I., & Mazlina, M. (2005). PN9/2001: Case of Public Reprimands. Presented at FEP
Seminar 2005.
Hawley, J. P., & Williams, A. T. (1996). Corporate Governance in the United States: The Rise Of
Fiduciary Capitalism. Working Paper, Saint Mary's College of California, School of
Economics and Business Administration.
Hendry, K., & Kiel, G. C. (2004). The Role of the Board in Firm Strategy: Integrating Agency and
Organisational Control Perspectives. Corporate Governance: An International Review, 12(4),
500–520.
Hillman, A. J., & Dalziel, T. (2003). Boards of Directors and Firm Performance: Integrating Agency
and Resource Dependency Perspectives. Academy of Management Review, 28(3), 383–396.
Hillman, A. J., Cannella Jr, A. A., & Paetzols, R. L. (2000). The Resource Dependency Role of
Corporate Directors: Strategic Adaptation of Board Composition in Response to
Environmental Change. Journal of Management Studies, 37(2), 235-256.
ICGN (1999). ICGN Statement on Global Corporate Governance Principles. London: International
Corporate Governance Network.
ICGN (2005). ICGN Statement on Global Corporate Governance Principles. London: International
Corporate Governance Network.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behaviour, Agency Costs,
and Ownership Structure. Journal of Financial Economics, 3(4), 305 - 350.
Jensen, M. C. (2001). Value Maximisation, Stakeholder Theory and the Corporate Objective
Function. European Financial Management, 7(3), 297-317.

37
Johanson, D., & Ostergren, K. (2010). The Movement Towards Independent Directors on Boards: A
Comparative Analysis of Sweden and the UK. Corporate Governance: An International
Review, 18(6), 527-39.
Kiel, G., & Nicholson, G. (2003). Board Composition and Corporate Performance: How the
Australian experience informs contrasting theories of corporate governance. Corporate
Governance: An International Review, 11(3), 189–205.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2000). Investor protection and
corporate governance. Journal of Financial Economics, 58(1- 2), 3-2
Fortuna F. (2001) Corporate Governance. Subjects, models and systems. Milan, Italy:
FrancoAngeli, 2001, pp. 90-92. F. Fortuna, Corporate Governance. Soggetti, modelli e
sistemi. Milan, Italy: FrancoAngeli, 2001, pp. 90-92.
Nietsch M., 2005, Corporate Governance and Company Law Reform: a German perspective,
Corporate Governance. An international Review, 2(13), 369-376.
Smallman, C. (2004). Exploring Theoretical Paradigm in Corporate Governance. International
Journal of Business Governance and Ethics, 1(1), 78-94.
Spanos, L. J. (2005). Corporate Governance in Greece: Developments and Policy Implcations.
Corporate Governance, 5(1), 15-30.
Stiles, P. (2001). The Impact of the Board on Strategy: An Empirical Examination. Journal of
Management Studies, 38(5), 627–650.
Suchman, M. C. (1995). Managing Legitimact: Strategic and Institutional Approaches. Academy of
Management Review, 20(3), 571-610.
Tricker, R. I. (1994). International Corporate Governance. Simon & Schuster, Singapore.
Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: The Free Press.
Zingales, Luigi (1998). Corporate Governance. The New Palgrave Dictionary of Economics and the
Law. Available at SSRN: http://ssrn.com/abstract=46906 or
http://dx.doi.org/10.2139/ssrn.46906.

38