National Aviation College

Graduate Programs
Final exam of Corporate Governance

Personal Information:

Name: SOLOMON ABERA ID No. GBLR/049/12 Department: Business leadership

1
General instruction:

 Here below seven (7) discussion questions are provided. You are supposed to discuss on
them.
 Attempt all questions in accordance with the instructions
 All questions carry the equal weights/marks
 Please try to be to the point. Overwriting has no value.
 Clear handwriting is rewarded otherwise you will assume the risk thereof

2
Questions:

1. Discuss the agency, stakeholder and steward theories’ views of corporate

governance. Briefly elaborate the assumptions each theory holds of corporate
governance.

a. Agency means a person, by whatever title that person may be referred

to, who is primarily responsible for the day to day management of the
affairs of an insurer.
b. Stakeholder a stakeholder are group for a company is any
individual, entity or group of individuals or entities whose interests are
affected by what the company does. Lenders to a company are
stakeholders because they have put money into the company, and wish
to have the money repaid with interest. They will be concerned with
anything that increases the risk of non-payment. Employees of a
company have an interest in what their company does. The company is
their employer, and they are dependent on the company for their jobs,
salaries, work experience, training, and career prospects and so on. The
general public may be significant stakeholders for a large company
because the company may have an impact on the economy as a whole,
and on the environment.
2. Explain corporate governance transparency.
The companies to present full and comprehensive disclosure of all matters material to
investors and stakeholders. The company’s board should ensure that the reports and other
communication issued to stakeholders are in clear and easily understood language and
deferent methods like media . The maneger also transparent to the boards by clear timely
report financial activity,owerer shipes .

Because there are so many interested parties, it’s inefficient to allow them to control the
company directly. Instead, the corporation operates under a system of regulations that allow
stakeholders to have a voice in the corporation commensurate with their stake, yet allow the
corporation to continue operating in an efficient manner. Corporate governance also takes into

3
 account audit procedures in order to monitor outcomes and how closely they adhere to goals, and
to motivate the organization as a whole to work toward corporate goals. By using corporate
governance procedures wisely and sharing results, a corporation can motivate all stakeholders to
work toward the corporation’s goals by demonstrating the benefits, to stakeholders, of the
corporation’s success.

3. What is corporate governance? Why corporate governance is important

in our time?

What is corporate governance? Corporate governance is process and structure

used to direct and manage the business and affairs of an insurer towards enhancing
business prosperity and corporate accountability with ultimate objectives of realizing
long-term shareholders value, as well as customers and other stakeholders’ interest.

Why corporate governance is important in our time?

1. To minimize the agency problem regulators have been recognizing this problem and trying
to safeguard listed companies by requiring them to comply with numerous regulations
designed to promote the independence of the board of directors.The importance of corporate
governance is to built company by contributing of the with capital labour(expert and force)
and land conduct business to get profits. So on this process to separet the responsibility of the
shareholders and managers responsibility tobe form or establish corporet governance .the
conflect of interest be happen by the vishin an machis with of two

2. Institution building for a market economy In a market economy, private corporations raise
funds from investors and, combining these funds with other inputs labour and land, conduct
business. Their objective is simple to seek profits. The role and superior performance of private
sector corporations in economic growth so to develop an efficient and competitive corporate
organzetio,

3. Promotion of foreign investment development and transition economies need to raise funds
from foreign countries. On other also to collect finacies by selling of shares to solve financial

4
 problems and to establish the new company .The establishment of proper corporate
governance has become increasingly important in this context, The capital markets good for
develop capitals incountries.

4. Efficient allocation of capital

Corporate governance is closely related to corporate finance and investment.
corporations depended entirely on the government for their investment needs. In contrast,
in a market economy, they have to raise funds from the public directly or indirectly
through financial institutions; and/or generate enough earnings to fund their own
development. The public and the financial institutions provide their money to
corporations not as a gift but in expectation of sufficient financial returns. In seeking
maximum returns, fund providers try to discipline corporate managers to work for their
interests. Good corporate governance is key for the development of equity markets in
company. This means that the financial resources need to be allocated to the most
profitable companies with the highest growth potential. In its turn, an efficient financial
market should promote better practices in corporate governance by increasing market
discipline on corporate management

4,What is the relationship between corporation and stakeholders? How

the relationships between corporations and society are characterized?

The shareholder owns part of a public company through shares of stock, while a stakeholder has
an interest in the performance of a company for reasons other than stock performance or
appreciation. They are dependent on the company for their jobs, salaries, work experience,
training, and career prospects and so on. The general public may be significant stakeholders for
a large company because the company may have an impact on the economy as a whole, and on
the environment.
The company been better managed and more successful commercially .From a business case
perspective, improving relation with socity improves corporate reputation among stakeholders
of the company. By improving reputation and stakeholder relations, the company is likely to
perform better over the medium to long-term. Some institutional investors like Aden water

5
companies are required to take socially responsible investment into consideration when making
investment decisions. There is a stronger probability of support from the investment community
for a company with good CSR policies.
Paying attention to stakeholder is important in terms of risk management. Such risks can
destroy reputation and impact on share value. A company business might benefit from the trust
between suppliers and customers that comes from ethical dealing. The corporate should
recognize the rights of stakeholders that to encourage active co-operation between corporations
and stakeholders in creating wealth jobs and the sustainability of financially sound enterprises.

5. Are the same corporate governance practice and rule applied to all
companies and countries? Use real world cases you are familiar with
and theories to explain your arguments.

That is dife within country

1. Tradition of the socity

2. The rules and regulations
3. Economical capacity

In different country Differences in countries’ systems of corporate governance with respect

to ownership concentration, the identity of owners, and the regulatory and legislative
framework, all have important implications for both firm performance and economic
performance. As noted above, the main agency problems in outsider systems stem from the
conflicts of interest between managers and dispersed shareholders, while insider systems
generally have large blockholders who exercise control over management. In the latter case,
therefore, the main conflict of interest is between controlling blockholders and weak minority
shareholders. These differences are associated not only with the degree of monitoring and
control which owners exercise, but also with differences in the degree of commitment and
trust which exist amongst stakeholders. For example, the identity of owners can affect firm
performance through the incentives they provide for various stakeholders to make firm-
specific investments. This in turn can impact upon the structure of industry and underlying

6
economic performance. For example, ownership by other firms, cross shareholding, and
pyramiding can influence the behaviour of firms in product markets.

6. Is the size of the board a key determinant to a firm’s success

/performance? What composition of members serving on board should
look like? Does it impact firm’s performance? Briefly discuss it.

DETERMINANTS OF INTERNAL CORPORATE GOVERNANCE

THE BOARD OF DIRECTORS

The board of directors is the first level of supervision over the activities of the bank and its
management. The powers and rules of the board are specified in the law and the statute of a
bank. The mode of operation should be specified in the rules of procedure of the board. The
core competences of the board forming the foundations of the bank activities include:
approving and overseeing the strategic objectives of the bank and its corporate values,
overseeing the work of the management board and the determination of the scope of the
obligations and liability of the management members, the establishment of guidelines for the
acceptable level of risk, overseeing the introduction of the management system and
assessment of the adequacy and effectiveness of the system

SIZE OF THE BOARD OF DIRECTORS

The two most important functions of the board of directors are those of advising and
monitoring (classified two main roles of the board: it should control the operations of the
firm and the activities of the CEO; and it should enhance the image of the firm and sustain a
good relationship between the stakeholders and firm management to encourage the
organization culture. This shows that these board functions could develop the performance
of a firm. Small board size was favored to promote critical, genuine and intellectual
deliberation and involvement among members, which presumably might lead to effective
corporate decision- making, monitoring and improved performance

Board gender diversity

7
Gender diversity is part of the broader concept of board diversity. Boards are concerned with
having right composition to provide diverse perspectives. Greater female representation on
boards provides some additional skills and perspectives that may not be possible with all-
male boards Board diversity promotes more effective monitoring and problem- solving.
Gender diversity in the boards is supported by different theoretical perspectives.
Representation from diverse groups will provide a balanced board so that no individual or
group of individuals can dominate the decision- making of the board However, many
scholars now believe that an increase in board diversity leads to better boards and governance
on the ground that diversity allows boards to tap on broader talent pools for the role of
directors

Educational qualification
Director's educational qualifications are central to effectively interpret and utilize the
information generated by the management of particular types of business enterprise.
Educational qualification affects the oversight and monitoring role of boards of directors
Board of directors is vested with the responsibility of ensuring that the shareholders’ money
is not wasted, shareholders have a serious interest in ensuring that the board is staffed with
well educated and experienced directors The human capital provided by its board of directors
is vital given the corporate board is one of the mechanisms for oveseeing the firm and it can
arguably provide the knowledge needed to function in the new environment. Personal profile
factors of directors such as education and experience is important for board efficiency.

Board Business management experience

Business management experience of directors enables them to have better knowledge and
understanding about business and enable to contribute effectively in the decision making
process as well as in effectively monitoring the activities of management Directors need to be
competent and capable of understanding the business operation. found that boards rich in
appropriate experience are associated with superior returns. He argues that boards comprising
directors with appropriate knowledge gained through experience can be not only better
monitors, but also more useful advisors to top managers.

Board Industry specific experience

8
 Appointing directors with related and relevant skills and knowledge to perform task specific
duties such as the firm's internal control and procedures will enhance the quality of
information gathered and the solution to problems and of the views held and judgments made
during the decision-making process In other words, their knowledge of the industry, its
opportunities and threats and their connections to the industry participants based on their
experience enables them to contribute substantively in the firm performance.

7. Briefly discuss the Cadbury’ code of best practices.

Contemporary CG started in 1992 with the Cadbury report in the UK. Cadbury was the result
of several high profile company collapses. is concerned primarily with protecting weak and
widely dispersed shareholders against self-interested Directors and managers.

The Cadbury Code of Best practices had 19 recommendations. The recommendations are in the
nature of guidelines relating to Board of Directors, Non-executive Directors, Executive Directors
and those on Reporting and Control.
Relating to the Board of Directors these are:
 The Board should meet regularly retain full and effective control over the company and
monitor the executive management
 There should be a clearly accepted division of responsibilities at the head of a company,
which will ensure balance of power and authority, such that no individual has unfettered
powers of decision. In companies where the Chairman is also the Chief Executive, it is
essential that there should be a strong and independent element on the Board, with a
recognized senior member.
 The Board should include non-executive Directors of sufficient caliber and number for
their views to carry significant weight in the Board’s decisions.
 ·The Board should have a formal schedule of matters specifically reserved to it for
decisions to ensure that the direction and control of the company is firmly in its hands.
 There should be an agreed procedure for Directors in the furtherance of their duties to
take independent professional advice if necessary, at the company’s expense.

9
  All directors should have access to the advice and services of the Company Secretary,
who is responsible to the Board for ensuring that Board procedures are followed and that
applicable rules and regulations are complied with. Any question of the removal of
Company Secretary should be a matter for the Board as a whole.
Relating to the Non-Executive Directors the recommendations are:
 Non-executive Directors should bring an independent judgment to bear on issues of
strategy, performance, resources, including key appointments, and standards of conduct.
 The majority should be independent of the management and free from any business or
other relationship, which could materially interfere with the exercise of their independent
judgment, apart from their fees and shareholding. Their fees should reflect the time,
which they commit to the company.
 Non-executive Directors should be appointed for specified terms and reappointment
should not be automatic.
 Non-executive Directors should be selected through a formal process and both, this
process and their appointment, should be a matter for the Board as a whole.
For the Executive Directors the recommendations in the Cadbury Code of Best Practices are:
 Director’s service contracts should not exceed three years without shareholders’ approval
 There should be full and clear disclosure of their total emoluments and those of the
Chairman including pension contributions and stock options. Separate figures should be
given for salary and performance-related elements and the basis on which performance is
measured should be explained.
 Executive Directors’ pay should be subject to the recommendations of a Remuneration
Committee made up wholly or mainly of Nonexecutive Directors.
Reporting and Controls the Cadbury Code of Best Practices stipulate that:
 It is the Board’s duty to present a balanced and understandable assessment of the
company’s position.
 The Board should ensure that an objective and professional relationship is maintained
with the Auditors.
 The Board should establish an Audit Committee of at least three Non-executive Directors
with written terms of reference, which deal clearly with its authority and duties.

10
 The Directors should explain their responsibility for preparing the accounts next to a
statement by the Auditors about their reporting responsibilities.
 The Directors should report on the effectiveness of the company’s system of internal
control
 The Directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary.

11