Corporate Governance refers to ‘ethical’ Management of corporate entities, and the

interrelationships that exist between the different participants. Good corporate Governance
determines the direction and performance of a corporate firm it pursues its economic
goals.
Corporate Governance occupies a significant place in the world of business today. To this
effect, those entrusted with the responsibility of managing the affairs of Corporations have
certain duties and obligations for the benefit of the Corporation and society at large.
Discus the following, citing practical examples, in relation to good Corporate Governance.
1. The function of Accountability and Transparency as core pillars of Corporate
Governance.
2. Why is it important in good Corporate Governance, to treat the corporation as a
separate legal entity from its owners, and what are the advantages of such
treatment to all stakeholders?
3. Why is a corporation treated as a Corporate Citizen under contemplation of the
Law?

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 TABLE OF CONTENTS

1. INTRODUCTION......................................................................................... 4

2. ACCOUNTABILITY AND TRANSPARENCY – CORE PILLARS OF

CORPORATE GOVERNANCE...................................................................5

3. CORPORATION AS A SEPARATE LEGAL ENTITY.............................6

4. CORPORATE CITIZENSHIP.....................................................................7

5. CONCLUSION............................................................................................8

6. REFERENCES.............................................................................................9

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INTRODUCTION

Recent years have witnessed an exponential growth in corporate governance. Improvements in

corporate governance practices are being orchestrated at a legal level. Corporate ownership
structure has been considered as having the strongest influence on systems of corporate
governance. Corporate governance is a multi faceted subject. It includes legal systems, cultural
and religious traditions, political stability and economic events. This subject may be treated in a
narrow or broad manner, depending on the viewpoint of the policy maker, practitioner,
researcher or theorist. It seems that existing definitions of corporate governance fall along a
spectrum with ‘narrow’ views on one end and more inclusive ‘broad’ views placed at the other.
One approach towards corporate governance adopts a narrow view, were corporate governance is
restricted to the relationship between a company and its shareholders. This is a traditional
finance paradigm expressed in ‘Agency theory’. The agency theory treats the difficulties that
arise under conditions of incomplete and asymmetric information when a principal (shareholder)
hires an agent (manager), such as the problem of potential moral hazard or conflict of interest in
as much as the principal is, presumably, hiring the agent to pursue its (the principal's) interests.
At the other end of the spectrum, corporate governance may be seen as a web of relationships,
not only between a company and its owners (shareholders) but also between a company and a
broad range of other stakeholders; employees, customers, suppliers, bondholders, to name but a
few. Such a view tends to be expressed in ‘stakeholder theory’. This is the more inclusive and
broad way of treating the subject of corporate governance and one which is gradually attracting
greater attention, as issues of accountability and corporate social responsibility are brought to the
forefront of policy and practice in corporations.

How then can we define corporate governance? Parkinson (1994) defines it as a process of
supervision and control intended to ensure that the company’s management act in accordance
with the interests of the shareholders (narrow view). Tricker (1984) says the governance role is
not concerned with the running of the business of the company per se, but with giving overall
direction to the enterprise, with overseeing and controlling the executive actions of management
and with satisfying legitimate expectations of accountability and regulation by interest beyond
corporate boundaries (broad view).

In a board culture of corporate governance, business author Gabrielle O’Donovan further defines
corporate governance as ‘an internal system encompassing policies, processes and people which
serves the needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity, accountability and integrity’.
Sound corporate governance is reliant on external market place commitment and legislation, plus
a healthy board culture which safeguards policies and processes. O'Donovan goes on to say that
'the perceived quality of a company's corporate governance can influence its share price as well
as the cost of raising capital’. Quality is determined by the financial markets, legislation and
other external market forces plus how policies and processes are implemented and how people
are led. External forces are, to a large extent, outside the circle of control of any board. The
internal environment is quite a different matter, and offers companies the opportunity to
differentiate from competitors through their board culture.

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In my own understanding, corporate governance is a set of processes, customs, policies, laws and
institutions affecting the way a corporation is directed, administered and controlled. Corporate
governance also includes the relationships among the many stakeholders involved and the goals
for which the corporation is governed. Policies and practices focus on the impact of corporate
governance systems in economic efficiency with a strong emphasis on shareholders’ welfare.

ACCOUNTABILITY AND TRANSPARENCY – CORE PILLARS OF CORPORATE

GOVERNANCE

There has been a renewed interest in the corporate governance practices of modern corporations
since 2001, particularly due to the high profile collapse of a number of large United States firms
such as Enron Corporation and MCI Inc. (formerly WorldCom). Managers’ accountability to
shareholders and corporations to society are two important objectives of corporate governance.
To maintain integrity and to function fairly and efficiently, the market needs high quality
information, timely disclosures and efficient access to such information. Investors need this
information to make investment decisions and to trade. When relevant information is not
properly disclosed in a timely fashion, when insiders abuse their positions and misuse
information, or when misleading information is given, this will destroy market fairness and
integrity and the level playing field.

Accountability refers to the discipline and need to justify and accept responsibility for decisions
taken. Transparency refers to a process by which information about existing conditions,
decisions and action is made accessible, visible and understandable. Generally, accountability
and transparency work hand in hand to help improve the corporation’s performance and in turn
economic performance, hence being the core pillars of corporate governance.

Corporate governance represents the relationship among stakeholders that is used to determine
and control the strategic direction and performance of organizations. Accountability is a key
element as well as requirement for corporate governance, fortifying the latter in such a way that
it provides a transparent template for governing critical decisions, procedures, and activities.
Although external regulations are one part of the answer to improved governance, the prime
responsibility for good governance and accountability lies within the company rather than
outside it.

Transparency is an essential element of a well-functioning system of corporate governance.

Corporate disclosure to stakeholders is the principal means by which companies can become
transparent. An objective of many proposed corporate governance reforms is increased
transparency. This goal has been relatively uncontroversial, as most observers believe increased
transparency to be unambiguously good. From a corporate governance perspective, there are
likely to be both costs and benefits to increased transparency, leading to an optimum level
beyond which increasing transparency lowers profits. This result holds even when there is no
direct cost of increasing transparency and no issue of revealing information to regulators or
product-market rivals. Reforms that seek to increase transparency can reduce firm profits, raise
executive compensation, and inefficiently increase the rate of Chief Executive Officer’s (CEO)
turnover. Considering the possibility that executives will take actions to distort information and

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that executives could have incentives, due to career concerns, to increase transparency and that
increases in penalties for distorting information can be profit reducing.

In the case of the Enron Corporation scandal, revealed in October 2001, which eventually led to
the bankruptcy of the Enron Corporation, an American energy company based in Houston,
Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and
accountancy partnerships in the world. In addition to being the largest bankruptcy reorganization
in American history at that time, Enron was attributed as the biggest audit failure. Enron was
formed in 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. Several
years later, when Jeffrey Skilling was hired, he developed a staff of executives that, through the
use of accounting loopholes, special purpose entities, and poor financial reporting, were able to
hide billions in debt from failed deals and projects. Chief Financial Officer Andrew Fastow and
other executives not only misled Enron's board of directors and audit committee on high-risk
accounting practices, but also pressured Andersen to ignore the issues. Shareholders lost nearly
$11 billion when Enron's stock price, which hit a high of US$90 per share in mid-2000,
plummeted to less than $1 by the end of November 2001, and on December 2, 2001, Enron filed
for bankruptcy under Chapter 11 of the United States Bankruptcy Code. Enron's $63.4 billion in
assets made it the largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the
following year. This was a case of pure lack of good corporate governance as we have seen from
the management at Enron Corporation where there was information asymmetry (a fictitious
picture of the state of operations or financial position of the corporation given to decision makers
which in turn led to the collapse of Americas’ most innovative company.

CORPORATION AS A SEPARATE LEGAL ENTITY

The term corporation comes from the Latin word ‘corpus’ which means body. A corporation is
therefore a body, that is, it is a legal person in the eyes of the Law. A separate legal entity refers
to a type of artificial entity with detached accountability. A business can be setup as a separate
legal entity to legally separate it from the individual or owner, such as a limited liability
company or a corporation.

If a business is a separate legal entity, it means it has some of the same rights in law as a person.
It is, for example, able to enter contracts. In Zambia, a corporation is a separate legal entity from
its owners (shareholders) and can, for example, be sued, and enter into contracts in the name of
the company, not the shareholders.

A corporation is a legal entity that is created under the laws of a State designed to establish the
entity as a separate legal person having its own privileges and liabilities distinct from those of its
owners. It can bring lawsuits, can buy and sell property, can enter into contracts, and can be
taxed and even commit crimes. One of the notable features is that a corporation protects its
owners from personal liability for corporate debts and obligations within limits. This means that
the liability of shareholders is restricted to the shares they have in the corporation hence creditors
once the corporation is declared bankrupt cannot claim personal assets from shareholders unless
in a case where the shareholders put their personal assets as collateral. This then means that
shareholders’ assets, because of the legal personality of corporations are protected. Moreover,

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upon a corporations declaration of bankruptcy, creditors can only materialise their debt from the
corporations assets which if not enough cannot be transferred to the shareholders or employees.
To this extent, the creditors are not fully protected from losing out once a corporation goes
bankrupt, unless in a case where the creditors were deceived to believe that the corporation had
enough assets to offset the debt, then the people responsible for that deceit will be held liable.

CORPORATE CITIZENSHIP

Corporate citizenship is a term used to describe a company's role in, or responsibilities towards
society. For this reason it is sometimes used interchangeably with corporate social responsibility,
and in fact many companies including Microsoft, IBM and Novartis have used it in this way to
describe their social initiatives. However, many also take it to mean that corporations should be
regarded as citizens within a territory, that is, that corporations have citizenship of some sort.
This is usually based on the principle of corporate personhood (the controversy primarily over
the question of what subset of rights afforded under the law to natural persons should also be
afforded to corporations as legal persons.), in that in certain legal jurisdictions, such as Zambia,
companies are afforded some of the same legal rights as individuals. Therefore, if corporations
are 'artificial persons’ under the law (e.g. they own their own assets, they can sue and be sued,
and so on), then they can also claim some of the entitlements, privileges and protections of
citizenship such as rights to free speech and political participation. Although this debate remains
very active, a more recent approach to corporate citizenship has also stressed the political role of
corporations in protecting or inhibiting the citizenship rights of individuals (such as by taking
over previously governmental roles and functions or direct political activity such as lobbying and
party financing.

The term 'corporate citizenship' has been in use for some decades, but only rose to prominence
during the 2000’s. There is considerable confusion over what exactly is meant by the use of the
term. Matten and Crane (2005) distinguish between three views of corporate citizenship:

I. Limited view - where corporate citizenship is used to denote corporate philanthropy

in the local community, such as being a 'good citizen' in donating money to charity or
helping out a local sports or arts institution.
II. Equivalent view - where corporate citizenship is used to refer to corporate social
responsibility. Matten and Crane refer to corporate citizenship in terms of economic,
legal, ethical, and philanthropic responsibilities.
III. Extended view - where corporate citizenship is seen in terms of its distinctly political
connotations, such as corporate claims to citizenship entitlements, firms' participation
in global governance, or corporate involvement in the administration of individuals'
social, civil and political rights.

Although it is generally accepted that corporations are not citizens in the same way that "real"
citizens are - they cannot hold passports or vote in elections for example - it has been recognized
that they do share in some of the same or similar practices, such as paying taxes, engaging in free
speech, and expecting certain protections from the state. There is concern, however, that
extending the scope of citizenship to incorporate corporations may infringe upon democracy and
equality given their access to substantial power and resources. Some authors have suggested that

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corporations should not be considered in terms of the legal status or identity of citizenship but
could be thought of as acting as if they were citizens when they participate in politics through
lobbying and governance type activities.

CONCLUSION

The positive effect of corporate governance on different stakeholders ultimately is a strengthened

economy, and hence good corporate governance is a tool for socio-economic development.
Nevertheless "corporate governance," despite some feeble attempts from various quarters,
remains an ambiguous and often misunderstood phrase. For quite some time it was confined only
to corporate management. That is not so. It is something much broader, for it must include a fair,
efficient and transparent administration and strive to meet certain well defined, written
objectives. Corporate governance must go well beyond Law. The quantity, quality and frequency
of financial and managerial disclosure, the degree and extent to which the board of Directors
(BOD) exercise their trustee responsibilities (largely an ethical commitment), and the
commitment to run a transparent organization- these should be constantly evolving due to
interplay of many factors and the roles played by the more progressive/responsible elements
within the corporate sector. The Board is responsible for the successful perpetuation of the
corporation. That responsibility cannot be relegated to management. However it should be noted
that a corporation should cease to exist if that is in the best interests of its stakeholders,
perpetuation for its own sake may be counterproductive.

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REFERENCES

Barnet Richard, Ronald E. Muller (1974). Global Reach: The Power of the Multinational
Corporation, Simon & Schuster, New York, U.S.A.

Crane, A., Matten, D. and Moon, J. (2008), Corporations and Citizenship, Cambridge:
Cambridge University Press, U.S.A.

Gabrielle O’Donovan, (2006), The Corporate Culture Handbook: How to Plan, Implement, and
Measure a Successful Culture Change, Liffey Press, Ireland.

Parkinson, J., (1994), Creating Corporate Social Responsibility Orientation through Strategic
Change and Organization, Benedictine University, Missouri.

Thomson A. Arthur and Strickland A.J III, (1990), Strategic Management – Concepts and Cases,
5th Edition, Richard D. Irwin Inc, New York, U.S.A.

Tricker Ian Robert, (1984), Corporate Governance: Practices, Procedures, and Powers in British
Companies and Their Boards of Directors, Gower Publishing Company, Great Britain.

Velasquez G. Manuel, (2002), Business Ethics – Concepts and Cases, 5th Edition, Prentice-Hall,
New Jersey, U.S.A.

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