Module I

Concepts of Corporate Governance

Corporate Governance
a. Governance: Defined

Governance refers to "all of processes of governing,

whether undertaken by a government, market or network,
whether over a family, tribe, formal or informal
organization or territory and whether through the laws,
norms, power or language."

It relates to "the processes of interaction and decision-

making among the actors involved in a collective problem
that led to the creation, reinforcement, or reproduction of
social norms and institutions.”

Governance has been defined to refer to structures and

processes that are designed to ensure (also known as the
elements):
1. Accountability
2. Responsiveness
3. Rule of Law
4. Transparency
5. Broad-based participation.
6. Equity and inclusiveness
7. Empowerment, and
8. Stability
b. Elements of Governance

4 Different Aspects as Template to Assess Governance:

1. Public-sector management. This is the most readily

identified dimension of the World Bank’s governance
work. The language of public-sector management is
predominantly technical, changing the organizational
structure of a sector agency to reflect new objectives,
making budgets work better, sharpening civil-service
objectives and placing public-enterprise managers under
performance contracts.

2. Accountability. Governments and their employees should

be held responsible for their actions.

3. Legal framework for development. Appropriate legal

systems should be created that provide stability and
predictability, which are the essential elements in creating
an economic environment in which business risks may be
rationally assessed.

4. Transparency and information. The themes of

transparency and information pervade good governance
and reinforce accountability. Access to information for the
various players in the market is essential to a competitive
market economy.
 c. Characteristics of Good Governance

Good governance means that processes and institutions

produce results that meet the needs of society while making
the best use of resources at their disposal.

8 Major Characteristics of Good Governance:

1. Participatory
2. Consensus-Oriented
3. Accountable
4. Transparent
5. Responsive
6. Effective and efficient
7. Equitable and inclusive
8. Follows the rule of law.

It assures that corruption is minimized, the views of

minorities are taken into account and that the voices of
the most vulnerable in society are heard in decision-
making. It is also responsive to the present and future
needs of society.

Good governance can help your business thrive in the

following ways:
1. Grow your business
2. Stay ahead of risks
3. Improve compliance
4. Improve trust and reputation
 d. Corporate Governance History and Framework

Corporate governance in the business context refers to the

systems of rules, practices, and processes by which companies
are governed.
In this way, the corporate governance model followed by a
specific company is the distribution of rights and responsibilities
by all participants in the organization.
Governance ensures everyone in an organization follows
appropriate and transparent decision-making processes and
that the interests of all stakeholders (shareholders, managers,
employees, suppliers, customers, among others) are protected.

Corporate governance deals with the way the investors

make sure they get a fair return on their investment.

The purpose of corporate governance is to facilitate effective,

entrepreneurial and prudent management that can deliver the
long-term success of the company.

Corporate governance is the system by which companies

are directed and controlled. Boards of directors are responsible
for the governance of their companies. The shareholders’ role
in governance is to appoint the directors and the auditors and
to satisfy themselves that an appropriate governance structure
is in place.
 The responsibilities of the board include setting the
company’s strategic aims, providing the leadership to put them
into effect, supervising the management of the business and
reporting to shareholders on their stewardship.

Corporate governance is therefore about what the board of a

company does and how it sets the values of the company, and it
is to be distinguished from the day-to-day operational
management of the company by full-time executives.

Corporate governance refers to the way in which

companies are governed and to what purpose. It identifies who
has power and accountability, and who makes decisions.

Corporate governance ensures that businesses have

appropriate decision-making processes and controls in place so
that the interests of all stakeholders (shareholders, employees,
suppliers, customers and the community) are balanced.

Governance at a corporate level includes the processes

through which a company’s objectives are set and pursued in
the context of the social, regulatory and market environment.
It is concerned with practices and procedures for trying to
make sure that a company is run in such a way that it achieves
its objectives, while ensuring that stakeholders can have
confidence that their trust in that company is well founded.

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.
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. 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.

Corporate governance is the combination of rules, processes or

laws by which businesses are operated, regulated or controlled.
The term encompasses the internal and external factors that
affect the interests of a company’s stakeholders, including
shareholders, customers, suppliers, government
regulators and  management.
 The  board of directors is responsible for creating the
framework for corporate governance that best aligns business
conduct with objectives.

Specific processes that can be outlined in corporate

governance include:
1. action plans

2. performance measurement
3. disclosure practices
4. executive compensation decisions
5. dividend policies
6. procedures for reconciling conflicts of interest and
7. explicit or implicit contracts between the company and
stakeholders.

An example of good corporate governance is a well-

defined and enforced structure that works for the benefit of
everyone concerned by ensuring that the enterprise adheres to
accepted ethical standards, best practices and  formal laws.

Alternatively, bad corporate governance is seen as poorly-

structured, ambiguous and non-compliant, which could damage
the image or financial health of a business.
Principles of Corporate Governance

Corporate governance structure may vary, most

organizations incorporate the following key elements:

1. All shareholders should be treated equally and fairly. Part

of this is making sure shareholders are aware of their
rights and how to exercise them.

2. Legal, contractual and social obligations to non-

shareholder stakeholders must be upheld. This includes
always communicating pertinent information to
employees, investors, vendors and members of the
community.

3. The board of directors must maintain a commitment to

ensure accountability, fairness, diversity and transparency
within corporate governance. Board members must also
possess the adequate skills necessary to review
management practices.

4. Organizations should define a code of conduct for board

members and executives, only appointing new individuals
if they meet that standard.

5. All corporate governance policies and procedures should

be transparent or disclosed to relevant stakeholders.
 e. Rule-based Approach to Governance

Rules-based approach to corporate governance is based on

the view that companies must be required by law (or by some
other form of compulsory regulation) to comply with
established
principles of good corporate governance.

The rules might apply only to some types of company.

However, for the companies to which they apply, the rules must
be obeyed and few (if any) exceptions to the rules are allowed.

A rules-based approach instils the code into law with

appropriate penalties for transgression.

There are some advantages with a rules-based approach:

a. Companies do not have the choice of ignoring the rules.

b. All companies are required to meet the same minimum

standards of corporate governance.

c. Investor confidence in the stock market might be

improved if all the stock market companies are required to
comply with recognized corporate governance rules.

There are disadvantages with a rules-based approach.

a. The same rules might not be suitable for every company,
because the circumstances of each company are different.
 A system of corporate governance is too rigid if the same
rules are applied to all companies.
b. There are some aspects of corporate governance that
cannot be regulated easily, such as: negotiating the
remuneration of directors, deciding the most suitable
range of skills and experience for the board of directors,
and assessing the performance of the board and its
directors.

A rules-based approach to regulation prescribes in detail or

gives a set of rules, how to behave whereas a principle-based
approach to regulation outcomes and principles are set and
the controls, measures, procedures on how to achieve that
outcome is left for each organization to determine.

f. Principle-based Approach to Governance

A principles-based approach requires the company to adhere

to the spirit rather than the letter of the code. The company
must either comply with the code or explain why it has not
through reports to the appropriate body and its shareholders.

The Value and Challenges of a Principles- Based Approach

Principles essentially have no minimum standard of practice
and can rise over time.
 Principles work to influence a broad set of practices
conforming to a level of expectation by the community at large.
Principles also encourage organizations to start right away
at moving their current practices in-line with the Principles,
leaving room for continuous improvement over time.

Principles are very useful however, in allowing

organizations to customize their interpretations of how best to
implement new practices for the unique conditions and
operational realities of their organization and industry. This
should thus result in better, more appropriate governance
actions compared to minimum compliance with a set of basic
rules.

Activity:

Good governance can help your business thrive in the

following ways:
1. Grow your business
2. Stay ahead of risks
3. Improve compliance
4. Improve trust and reputation
Choose two of the four cited above and discuss
why good governance helps in it.

With a 3-sentence min and max.

Deadline on or before end of February.
Submission via PM.
https://www.quora.com/
https://www.business.govt.nz/
https://www.managementstudyguide.com/
https://searchcompliance.techtarget.com/
https://kfknowledgebank.kaplan.co.uk/