MASTERS IN BUSINESS ADMINISTRATION (MBA)

BUAD 836: BUSINESS POLICY AND STRATEGY

INDIVIDUAL ASSIGNMENT

ON

QUESTION: Explain any five factors that should be put in place to ensure
good corporate governance, and support your explanation with reasons from
professional and expert point of view.

E-TUTOR: DR UMAR SALISU

DENIS MAKERI CLEMENT

P18DLBA81637
1.0 Introduction
Corporations are owned by shareholders who purchase shares and therefore own a percentage
of the sum of the corporations‟ assets. Corporate governance forms the basis for corporations
to make decisions that consider many aspects of the business, including economic, social,
regulatory and the market environment (CIBN, 2019). Therefore, A corporation is a mechanism
established to allow different parties to contribute capital, expertise, and labour for their mutual
benefit. The investor/shareholder participates in the profits (in the form of dividends and stock
price increases) of the enterprise without taking responsibility for the operations. Management
runs the company without being responsible for personally providing the funds. To make this
possible, laws have been passed that give shareholders limited liability and, correspondingly,
limited involvement in a corporation’s activities (Wheelen, Hunger, Hoffman and Bamford,
2018)

The word governance is derived from the Greek word “for steering” and, as such, means not
only to control but also to provide direction (Lafferty 2006). According to Donaldson (2012),
Corporate governance involves prescribing what a firm ought to do and then steering the firm
in that direction. To fully answer the ought question, it is important to be clear about the identity
and purpose of the for-profit corporation. Historically, corporate governance has been
dominated by a strongly held assumption that shareholder value (i.e., wealth) maximization is
the purpose of the corporation (Buchholtz, 2018). Therefore, the Directors, as representatives
of the shareholders in achieving their objectives, have both the authority and the responsibility
to establish basic corporate policies and to ensure that they are followed.

Increasingly, shareholders, activist investors, and various interest groups have seriously
questioned the role of the board of directors in corporations. According to Wheelen, et al,
(2018), they are concerned that inside board members may use their position to feather their
own nests and that outside board members often lack sufficient knowledge, involvement, and
enthusiasm to do an adequate job of monitoring and providing guidance to top management.
Instances of widespread corruption and questionable accounting practices at Enron, Global
Crossing, WorldCom, Tyco, Bernard L. Madoff Investment Securities, and Qwest, among
others, seem to justify their concerns. The board at HP appeared to be incapable of deciding
upon the direction of the business, moving CEOs in and out as its ideas changed (Buchholtz,
2018).

The general public has not only become more aware and more critical of many boards’ apparent
lack of responsibility for corporate activities, it has begun to push government to demand
accountability (Wheelen, et al, 2018). Due to the enormous influence that corporate governance
wields in making and marring the reputation of a corporation; consequently, implementing
factors necessary for good corporate governance becomes inevitable for any corporation that
wants to be successful.
This assignment is structured to start with an introduction, which will be followed by the five
factors that will ensure good corporate governance and then the conclusion.

2.0 Five Factors That Should Be Put in Place to Ensure Good Corporate
Governance
There are several factors, sometimes called pillars, that promote good governance (CIBN,
2019). In corporations; these factors should be evident in the relationship between the
shareholders and the board of directors. Some of these factors should also apply to the entity’s
dealings with its employees, customers, suppliers and the general public. The factors can also
be referred to as concepts which are described here. Also, it is useful to think about what might
happen if these concepts are not applied. In particular, how the absence of these concepts might
affect the relationship between the board of directors and the shareholders.

2.1 Fairness
In corporate governance, fairness refers to the principle that all shareholders should receive fair
treatment from the directors. At a basic level, it means that all the equity shareholders in a
company should be entitled to equal treatment, such as one vote per share at general meetings
of the company and the right to the same dividend per share (ICAN, 2014; Bruce, 2015; Reyes,
2018; CIBN, 2019).

In the UK for example, the concept of fair treatment for shareholders is supported by the law
(which provides some protection for minority shareholders against unjust treatment by the
directors or the majority shareholders). However, in some countries, the law provides little or
no protection for minority shareholders. For example, in a takeover bid for a company, the law
might permit a higher price to be offered to large shareholders than the price offered to small
shareholders (Wheelen, et al, 2018).

2.2 Openness/transparency
Openness or transparency means ‘not hiding anything’. Intentions should be clear, and
information should not be withheld from individuals who ought to have a right to receive it
(Wheelen, et al, 2018). Ensure timely, periodic distribution of any material matters involving
the company to your shareholders (Jeremy, 2018). Transparency means clarity. In corporate
governance, it should refer not only to the ability of the shareholders to see what the directors
are trying to achieve. It also refers to the ease with which an ‘outsider’, such as a potential
investor or an employee, can make a meaningful analysis of the company and its intentions
(ICAN, 2014).

Transparency therefore means providing information about what the company has done, what
it intends to do in the future, and what risks it faces.
 a) In public sector organisations and government, openness means telling the public, and
not making decisions ‘behind closed doors.
b) In listed companies (stock market companies) openness includes matters such as:
i. requiring major shareholders to declare the size of their shareholding in the company,
and
ii. requiring the board of directors to announce to the stock market information about
any major new developments in the company’s affairs, so that all shareholders and
other investors are kept informed (Buchholtz, 2018).
c) In listed companies (stock market companies) openness includes matters such as:
i. requiring major shareholders to declare the size of their shareholding in the company,
and
ii. requiring the board of directors to announce to the stock market information about
any major new developments in the company’s affairs, so that all shareholders and
other investors are kept informed (Buchholtz, 2018).

2.3 Independence and Diversity

According to Bruce (2015), an effective board should consist of a diverse group of directors
with different skills, backgrounds and perspectives, including independent directors.
Independence, on the other hand, means freedom from the influence of someone else (ICAN,
2014). A principle of good corporate governance is that a substantial number of the directors
of a company should be independent, which means that they are able to make judgements and
give opinions that are in the best interests of the company, without bias or pre-conceived ideas
(Solange, 2016; Jeremy, 2018; CIBN, 2019).

Similarly, professional advisers to a company such as external auditors and solicitors should be
independent of the company, and should give honest and professional opinions and advice.

a. The independence of a director is threatened by having a connection to a special interest

group. Executive directors can never be independent, because their views will represent
the opinions of the management team. Similarly, a retired former executive might still be
influenced by the views of management, because he or she shares the ‘management
culture’. Directors who represent the interests of major shareholders are also incapable
of being independent (Solange, 2016).

b. The independence of external auditors can be threatened by over-reliance on fee

income from a client company. When a firm of auditors, or a regional office of a
national firm, earns most of its income from one corporate client there is a risk that
the auditors might choose to accept what they are told by the company’s management,
rather than question them rigorously and risk an argument. It has been suggested that
 this occurred in the Houston office of Andersen’s, the audit firm that collapsed in 2002
as a result of the Enron scandal (Bruce, 2015).

c. Familiarity can also remove an individual’s independence, because when one person
knows another well, he is more likely to accept what that person tells him and support
his point of view. Auditors are at risk of losing their independence if they work on the
audit of the same corporate client for too many years (Buchholtz, 2018).

2.4 Honesty and integrity (probity)

It might seem obvious that honesty should be an essential quality for directors and their
advisers. An individual who is honest, and who is known to be honest, is believed by others
and is therefore more likely to be trusted. However, honesty is not as widespread as it might
be. Business leaders, as well as political leaders, may prefer to ‘put a spin’ on the facts, and
manipulate facts for the purpose of presenting a more favourable impression (Wheelen, et al,
2018).

According to Jeremy (2018), integrity is similar to honesty, but it also means behaving in
accordance with high standards of behaviour and a strict moral or ethical code of conduct.
Professional accountants, for example, are expected to act with integrity, by being honest and
acting in accordance with their professional code of ethics (ICAN, 2014). If shareholders in a
company suspect that the directors are not acting honestly or with integrity, there can be no
trust, and good corporate governance is impossible (Reyes, 2018).

2.5 Responsibility and accountability

The directors of a company are given most of the powers for running the company. Many of
these powers are delegated to executive managers, but the directors remain responsible for the
way in which those powers are used (Wheelen, et al, 2018). An important role of the board of
directors is to monitor the decisions of executive management, and to satisfy themselves that
the decisions taken by management are in the best interests of the company and its shareholders
(Buchholtz, 2018).

The board of directors should also retain the responsibility for certain key decisions, such as
setting strategic objectives for their company and approving major capital investments. Bruce
(2015) posited that a board of directors should not ignore their responsibilities by delegating
too many powers to executive management, and letting the management team ‘get on with the
job’. The board should accept its responsibilities.

With responsibility, there should also be accountability. Corporate accountability refers to the
obligation and responsibility to give an explanation or reason for the company’s actions and
conduct (CIBN, 2019). In a company, the board of directors should be accountable to the
shareholders. Shareholders should be able to consider reports from the directors about what
they have done, and how the company has performed under their stewardship, and give their
approval or show their disapproval (Bruce, 2015). Some of the ways in which the board are
accountable are as follows:

a. Presenting the annual report and accounts to the shareholders, for the shareholders to
consider and discuss with the board. In Nigeria for example, this happens at the annual
general meeting of the company (ICAN, 2014).

b. If shareholders do not approve of a director, they are able to remove him from office.
Individual directors may be required to submit themselves for re-election by the
shareholders at regular intervals. In Nigeria for example, it is common practice for
directors to be required to retire every three years and stand for re-election at the
company’s annual general meeting.
In the UK, it is recognised that individual directors should be made accountable for the way in
which they have acted as a director. The UK Corporate Governance Code includes a provision
that all directors should be subject to an annual performance review, and should be accountable
to the chairman of the company for the way in which they have carried out their duties in the
previous year (Bruce, 2015).

It might be argued that a board of directors is not sufficiently accountable to the shareholders,
and that there should be much more accountability.

3.0 Conclusion
Corporate Governance essentially involves balancing the interests of a company’s many
stakeholders, such as shareholders, management, customers, suppliers, financiers, government
and the community. It is either by way of legislation or best practice code. Poor corporate
governance can weaken a company’s potential, lead to financial difficulties and, in some cases,
cause long-term damage to a company’s reputation.

In fact, it is one of the most important aspects of running a successful business, yet it is
something that many business owners dismiss as unimportant or rudimentary. In fact, good
governance is more important than ever for companies of all sizes and all stages. An effective
corporate governance structure can lead to (1) better access to favourable strategic transactions,
such as finance, (2) improved performance of the business, (3) reduced risk of corporate crisis
or scandal, (4) better shareholder relationships and investor confidence, and (5) a favourable
professional reputation in the industry, which often leads to a higher valuation of the business.
If the factors or pillars of good corporate governance is not in place, the corporation will fail or
threaten by hostile takeovers.
References
Bruce, F. D. (2015). The Role of Independent Directors in Corpoarate Governance (2nd ed.).
New York: American Bar Association.

Buchholtz, A. K. (2018). The Routledge Companion to Business Ethics. (E. Heath, B. Kaldis, &
A. Marcoux, Eds.) New York: Routledge.

CIBN. (2019). Ethics and Corporate Governance. Lagos: CIBN Press Ltd.

ICAN. (2014). Management, Governance and Ethics (1st ed.). United Kingdom: Emile Woolf
International.

Jeremy, A. (2018). The Five Factors that Contribute to Effective Corporate Governance.
Retrieved April 1, 2021, from Nedonboard: https://www.nedonboard.com/the-5-factors-
that-contribute-to-an-effective-corporate-governance/

Reyes, J. (2018). Reframing Corporate Governance: Company Law Beyond Law and
Economics: Corporations Globalisation and the Law Series. Northampton
Massachusetts: Edward Elgar Publishing Inc.

Solange, C. (2016). The Handbook of Board Governance: A Comprehensive Guide for Public,
Private and Not-for-Profit Board Members. (R. Leblanc, Ed.) New Jersey: John Wiley
and Sons, Inc. doi:10.1002/9781119245445

Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamford, C. E. (2018). Strategic Management
and Business Policy. (15th, Ed.) New York: Pearson.