MGT209
Corporate governance means to steer an
CONCEPTUAL FRAMEWORK OF
CORPORATE GOVERNANCE
OVERVIEW
The purpose of corporate governance is to help
build an environment of trust, transparency and
accountability necessary for fostering long-term
investment, financial stability and business
integrity, thereby supporting stronger growth and
more inclusive societies.
There is no single authority regulating corporate
governance. Its principles evolve overtime
addressing the needs of the industry which may
vary among jurisdictions. Globalization, the
treatment of investors and major corporate scandals
have been major driving forces behind corporate
governance developments.
COURSE OBJECTIVES
 After studying this module, you should be
able to Define and explain the meaning of
corporate governance;
 Discuss the implications of the separation of
ownership and control;
 Analyze the purposes and objectives of
corporate governance;
 Describe the decision authority and
incentives of shareholders, boards of
directors, and top management;
 Recognize the impact of organizational
culture on the overall control environment
and individual engagement risks and
controls;
 Describe and compare the essentials of rules
and principles-based approaches to
corporate governance, including the comply
or explain principle; and
 Explore the objectives, content, and
limitation of various codes of corporate
governance intended to apply to multiple
national jurisdictions.
CORPORATE GOVERNANCE DEFINITION
organization.
Governance comes from the Latin word “gubanare”
which means “to steer.”
 Corporate governance is the system by
which businesses are directed and
controlled.
 Corporate governance is the system of
stewardship and control to guide
organizations in fulfilling their long-term
economic, moral, legal and social
obligations towards their stakeholders.
 Corporate governance is a system of
direction, feedback and control using
regulations, performance standards and
ethical guidelines to hold the Board and
senior management accountable for ensuring
ethical behavior – reconciling long-term
customer satisfaction with shareholder
value – to the benefit of all stakeholders and
society.
 Corporate Governance is about promoting
corporate fairness, transparency and
accountability.
 Corporate governance deals with laws,
procedures, practices and implicit rules that
determine a company’s ability to take
informed managerial decisions vis-à-vis its
claimants – in particular, its shareholders,
creditors, customers, the State and
employees.
 Corporate governance is a system of
organizational control that defines and
establishes the responsibility and
accountability of the major participants in an
organization.
 Corporate governance is the road map of an
organization in order to maximize
shareholders’ wealth and protect
stakeholders’ interests.
Based on the previous definitions, corporate
governance best fits in an organization where the
following are present:
 Separation of ownership and control
  Stakeholders who have legitimate interests
in the organization
 Underlying principles of corporate
governance
Separation of Ownership and Control
Corporate governance has partly developed in
response to the issues arising from the corporate
structure which separates ownership and control.
Corporate governance counters these conflict by
providing a system that aligns the interest of the
owners and managers and putting in place a system
of oversight.
 Stakeholders
Stakeholders are persons or groups that have a
legitimate interest in a business's conduct and
whose concerns should be addressed as a matter of
principle. A stakeholder can be anyone who has any
type of stake in a business.

But what determines structure?

“Structure follows the strategy,” former president of
a big water firm espoused. For example, under
transaction costs theory, the way the company is
organized or governed determines its control over
transactions.
There are several ways to classify stakeholders such
as by Proximity, Legitimacy, Claims, Voice, How
much affected, How much affects, Degree of
Participation, Engagement, and Public Knowledge.
Each stakeholder has different claims from the
organization.

The strategy also sets the legal structure of an

Which of these conflicting interests are
organization.
legitimate?
Forms of Organization:
Stockholder theory (shareholder theory) argues
o Sole proprietorship that shareholders (as principals) own the company.
o Partnership As owners, they alone have a legitimate claim to
o Corporation influence over the company. It is the directors’ sole
duty to maximize the wealth of the shareholders.
This separation of ownership and control has led to
agency problem since corporation is managed by
agents who may not operate it in the best interest of
the shareholders.
Finance theory, the basic assumption is that the
primary objective for companies is shareholders
wealth maximization.
Agency theory takes the stance that management is
likely to pursue their own personal interests, rather
than act as stewards.
Transactions cost theory considers that managers’
decisions are limited by the understanding of
alternatives that they have, that managers are
opportunistic, that they will organize their
transactions to pursue their own convenience.
Stakeholder theory, management has a duty of
care, not just to the owners of the company in terms
of maximizing shareholder value, but also to the
wider community of interest, or stakeholders.
Stakeholder theory proposes corporate
accountability to a broad range of stakeholders. In
case of conflict of interest, the managers are
responsible to mediate between these different
stakeholders’ interest.
Fernando Zobel De Ayala, President & COO of
Ayala Corporation said,
“We do not work in isolation. [It is] important to
support the very ecosystem that makes us
successful.”
Mendelow Matrix
Mendelow classifies stakeholders on a matrix
whose axes are power held and likelihood of
showing an interest in the organization’s activities.
Key players are found in Segment D. The
organization’s strategy must be acceptable to them,
at least. An example would be a major customer.
These stakeholders may participate in decision-
making.
Stakeholders in Segment C must be treated with
care. They are capable of moving to Segment D.
They should therefore be kept satisfied. Large
institutional shareholders might fall into Segment C.
Stakeholders in Segment B do not have great ability
to influence strategy, but their views can be
important in influencing more powerful
stakeholders, perhaps by lobbying. They should
therefore be kept informed. Community
representatives and charities might fall into
Segment B.
Minimal effort is expended on Segment A. An
example might be a contractor's employees.
Underlying Principles of Corporate Governance
Good corporate governance allows company to reap
the full benefits of international and local capital
markets, improve investors’ confidence, reduce cost
of capital, and induce stable sources of financing.
However, there is no one size fits all framework of
corporate governance. Rather, it must be
principles-based to allow a company certain degree
of flexibility in shaping its own best practices based
on the company’s age, size, complexity, extent of
internal operations, and other factors. Smaller
companies may consider the cost and benefit of
implementing certain policies and procedures or
decide that those are less relevant in their case.
According to Teresita J. Herbosa, Chairperson of
Securities and Exchange Commission,
“strong corporate governance is founded on the
principles of fairness, accountability, and
transparency.”
Fairness means equal treatment. This principle
requires that everyone who has legitimate interest in
the company must be taken into account and their
rights and views be respected.
Corporate accountability means acceptance of full
responsibility for the powers and authority granted
to those charged with governance and of obligation
to explain one’s action in carrying out its
responsibilities. It requires the board to present
assessment of the company’s position and how the
company is achieving its objectives.
Transparency means open and clear, timely and
accurate disclosure of relevant information,
financial or non-financial, to shareholders and other
stakeholders, as well as not concealing material In addition, the interests of the stakeholders create
information. Transparency reduces the information the ecosystem within which the company operates.
gap between directors and stakeholders. It ensures Hence, their role is to raise their voices to the
that stakeholders can have confidence in the company, and their voices should be heard.
decision-making and management processes of a
And while corporate governance is a flexible
company. It can come in the form of annual report
concept, it must always adhere to principles
or well-documented policies that reader can
consistent with the wide interests of stakeholders. In
understand.
this manner, each stakeholder’s action is guided by
common principles, which action balances
shareholders’ interests.
Guided by these principles, the SEC adopted the
Code of Corporate Governance for Public
Companies and Registered Issuers (the Code) to
Finally, it is the view of the author that corporate
promote the developments of a strong corporate
governance should address the issues arising from
governance culture and keep abreast with recent
separation of ownership and control, balancing
developments in corporate governance best
stakeholders’ interest, and the adoption itself of
practices. The Code is consistent with the
corporate governance principles.
G20/OECD Principles of Corporate Governance
and other internationally recognized corporate
governance principles.
-END OF DISCUSSION -
The G20/OECD Principles of Corporate
Governance laid down the six building blocks for a
sound corporate governance framework.
1. Ensuring the basis for an effective corporate
governance framework
2. The rights and equitable treatment of
shareholders and key ownership functions
3. Institutional investors, stock markets, and
other intermediaries
4. The role of stakeholders
5. Disclosure and transparency
6. The responsibilities of the board
The author submits the principle of shared
responsibility and accountability among
shareholders, board directors, and other
stakeholders. Corporate governance is primarily
about how the board steers the company. However,
the shareholders have the power to elect
directors and remove them when directors
contravene their duties or act contrary to the
principles, values, and ethics of the company.
The shareholders must exert effort and be held
accountable in the long-term value creation for all
shareholders. The shareholders’ role cannot be
undermined.