CHAPTER 2
CORPORATE GOVERNANCE RESPONSIBILITIES AND
ACCOUNTABILITIES
 Many of the characteristics of good
governance described in Chapter 1 are
relevant to both SME’s and large listed public
companies.
 Good corporate governance is based on
principles underpinned by consensus and
continually developing notions of good
practice.
 There are no absolute rules which must be
adopted by all organizations.
 “There is not simple universal formula for good
governance.”
The essence of any system of good corporate
governance is to allow the board and management
the freedom to drive their organization forward and
to exercise that freedom within a framework of
effective accountability.
RELATIONSHIP BETWEEN
SHAREHOLDERS/ OWNER(S) AND
OTHER STAKEHOLDERS
Governance starts with the
shareholders/owners delegating responsibilities
through an elected board of directors (BOD) to
management, and, in turn, to operating units with
oversight and assistance from internal auditors.
The BOD and its audit committee oversee
management, and, in that role, are expected to
protect the shareholders’ rights.
Management is part of the governance
framework: management can influence who sits on
the board and the audit committee as well as other
governance controls that might be put into place.
In return for the responsibilities (and power)
given to management and the board, governance
demands accountability back through the system to
the shareholders. However, the accountabilities do
not extend only to the shareholders because
companies also have responsibilities to other
stakeholders.
Stakeholders can be anyone who is
influenced, whether directly or indirectly, by the
actions of a company. They have interest in the
quality of corporate governance because it has a
relationship to economic performance and the
quality of financial reporting.
Management and the board have
responsibilities to act within the laws of society and
to meet various requirements of creditors,
employees, and the stakeholders.
While shareholders/owners delegate
responsibilities to various parties within the
corporation, they also require accountability as to
how well the resources that have been entrusted to
management and the board have been used. For
example, the owners want accountability on such
things as:
 Financial performance
 Financial transparency – financial
statements that are clear with full disclosure
and that reflect the underlying economics of
the company.
 Stewardship – including how well the
company protects and manages their
resources.
 Quality of internal control
 Composition of the board of directors and
the nature of its activities – including
information on how well management incentive
systems are aligned with the shareholders’
best interests.
The owners want disclosures from
management that are accurate and objectively
verifiable.
Management has always had the primary
responsibility for the accuracy and completeness of
an organization’s financial statements. From a
financial reporting perspective, it is management’s
responsibility to:
 Choose which accounting principles best
portray the economic substance of
company transactions
 Implement a system of internal control
that assures completeness and accuracy
in financial reporting
 CHAPTER 2
CORPORATE GOVERNANCE RESPONSIBILITIES AND
ACCOUNTABILITIES
 Ensure that the financial statements
contain accurate and complete disclosure
PARTIES INVOLVED IN CORPORATE
GOVERNANCE: THEIR RESPECTIVE
BROAD ROLE AND SPECIFIC
RESPONSIBILITIES
Overview of Responsibilities
Party
(Broad Role)
1. Shareholders Provide effective oversight
through election of board
members.
Approval of major initiatives,
such as buying or selling stock,
annual reports on management
compensation, from the board.
2. Board of The major representative of
Directors stockholders to ensure that the
organization is run according to
the organization’s charter and
that there is proper
accountability.
3. Non-Executive The same as the broad rule of
or Independent the entire board of directors.
Directors
4. Management Operations and accountability.
Manage the organization
effectively.
Provide accurate and timely
reports to shareholders and
other stakeholders.
5. Audit Provide oversight of the internal
Committees of and external audit function and
the Board of the process of preparing the
Directors annual financial statements as
well as public reports on
internal control.
6. Regulators Set accounting and auditing
a. Board of standards dictating underlying
Accountancy financial reporting and auditing
concepts.
Set the expectations of audit
quality and accounting quality.
Ensure the accuracy,
b. Securities
and timeliness, and fairness of
Exchange public reporting of financial and
Commission other information for public
companies.
7. External Perform audits of company
Auditors financial statements to ensure
that the statements are free
from material misstatements,
including misstatements that
may be due to fraud.
8. Internal Perform audits of companies
Auditors for compliance with company
policies and laws, audits to
evaluate the efficiency of
operations, and periodic
evaluation, and tests of
controls.
SHAREHOLDERS VS STAKEHOLDERS
Shareholders (specific term) are simply people or
entities that own at least one share in a company.
They own the business and benefit directly from
increases in the value of the business.
Stakeholders (broader term) describes people or
entities that, in one way or another, are interested
in how well or poorly a company performs because
they are affected by that performance. They have
an interest in the business, but do not own it, yet
some have more power over the business than
others. Examples:
a. Employees – who might lose jobs if the
company doesn’t do well;
b. Suppliers – who might lose a valuable
customer if the company goes out of business;
c. Lenders – those the company borrowed
money from who might lose that money if the
company goes belly-up;
d. Customers – who need the products or
services the company sells; and
e. Shareholders – the value of their shares and
dividend payments fluctuate based on how
things are going with the company
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CORPORATE GOVERNANCE RESPONSIBILITIES AND
ACCOUNTABILITIES
All shareholders are stakeholders but not all a greater influence on the
stakeholders are shareholders. organization. The business relies on
them for long-term survival.
b. Secondary stakeholders – can
SOCIAL RESPONSIBILITY influence public perception of the
PERSPECTIVES: THE SHAREHOLDER business.
AND STAKEHOLDER APPROACH Stakeholders Have Different Interests in a
Business
Milton Friedman
Stakeholder Mainly interested in…
Shareholder Model Shareholders/ o Return on investment + profits
 The only social responsibility of business is to Owners and dividends
o Success and growth of the
use its resources and engage in activities
business
designed to maximize profits so long as it
o Proper running of the business
stays within the rules of the game. Managers & o Rewards, including basic pay
 Social responsibility – business obligation Employees and other financial incentives
to make decisions that ultimately benefit o Job security & working
society. conditions
 Shareholders don’t necessarily have the time o Promotion opportunities + job
or expertise to make company decisions so satisfaction & status –
motivation, roles, and
they elect Board of Directors who appoint
responsibilities
Corporate Officers to manage day-to-day
Customers o Value for money
operations.
o Product quality & customer
 It is the responsibility of the Corporate service
Officers to make decisions that are at the best Suppliers o Continued, profitable trade with
interests of the shareholders. the business
 Social responsibility is in direct conflict with o Financial stability
the shareholder model because it diverts Banks & other o Can the business repay
resources and energies away from profit finance amounts loaned or invested?
providers o Profitability and cash flows of
maximizing behaviors.
the business
o Difficult to pursue of social
o Growth in profits and value of
responsibility initiative that all
the business
shareholders support Government o The correct collection and
o Opportunity cost of social payment of taxes
responsibility initiatives o Helping the business to grow by
creating jobs
o Compliance with business
Stakeholder Model legislation
 Maintains that businesses have a Society o Success of the business –
responsibility to not only seek profits, but particularly creating and
also satisfy the interests of multiple retaining jobs
stakeholders. o Compliance with local laws and
regulations
 Business managers need to maintain a
positive relationship with society and their
environment if they are to operate Potential Conflicts between Stakeholders
effectively. (Failure to do so can harm a Likely to be
Business Likely to be
business reputation and ultimately affect SUPPORTED
Decisions OPPOSED by
their ability to operate.) by
 Categories of Stakeholders: Cut jobs or
Shareholders Employees
a. Primary stakeholders – represent close business
Banks Local community
those individuals or groups who have units
 CHAPTER 2
CORPORATE GOVERNANCE RESPONSIBILITIES AND
ACCOUNTABILITIES
Add extra
Management
shifts to
Customers Local community
increase
Suppliers
capacity

Introduce
Customers
greater Employees
Shareholders
automation

Increase Shareholders
Customers
selling prices Management

Managing Stakeholder Influence and Power

(Stakeholder Mapping)

High Level of Low Level of

Stakeholder Stakeholder
Interest Interest

Key players
High Level of Take notice of
Keep them
Stakeholder them
satisfied
Power Engage directly
with them

Low Level of Communicate Communicate

Stakeholder regularly with only when
Power them necessary