Introduction to GOVERNANCE

Topics:
 Governance in 21st Century
 Values and Ethics
 Corporate Governance in a Shareholding
Organization

Prepared by:
Eng. Hani Oteifa _ GRC SME

Session 4
16, 17 Oct 2014
Introduction to GOVERNANCE 1
 Agenda
Session 3 – 9 , 10 Oct 2014

3 Good Governance in 21st Century
• Government Vs Governance
• Governance as a Process
• The Players Landscape
• The Zones of Governance
• The 5 Principles of Good Governance
• Business Case
• Values and Ethics
Corporate Governance in a
4
Shareholding Organization
• Role of the Board of Directors in
Wealth Creation
• Forms of Business Ownership
• Conflict of Interests
• Benefits of Good Corporate
Governance
• The Proper Environment for
Corporate Governance

Introduction to GOVERNANCE 2
 CONFIDENTIALITY NOTE
• The information contained in this document contain information that is
privileged, confidential and exempt from disclosure under applicable
laws.

• If the reader of this message is not the intended recipient, you are
hereby notified that any dissemination, distribution or copying of this
communication is strictly prohibited. If you have received this
Message/Document in error, please immediately notify the sender and
delete the mail.

• Ideas; Plans; Opinions & Conclusions and/or any other information in

this Presentation that do not relate to the official business of initiator
shall be understood as neither given nor endorsed by Owner
Introduction to GOVERNANCE 3
 Learning Objectives

 Understand what is corporate governance and why it

matters
 Understand the relationship between shareholders,
management and the board
 Understand why corporate governance is necessary
to incentivize good business practices
 Appreciate how to go about implementing corporate
governance in the most effective way
 The relevance of good CG practices for Mongolian
Companies

Introduction to GOVERNANCE 4
Good Governance

The Principles of
Good Governance
in the
21st Century

Introduction to GOVERNANCE 5
 Governance ….. WHY ?

• Governance has become a “hot” topic as evidence

mounts on the critical role it plays in determining
public well-being.
• It reflects a growing consensus when UN Sec.
General states that:
“Good governance is perhaps the single most
important factor in eradicating poverty and
promoting development” Kofi Annan.
• Governance as a term has progressed from
shadows to widespread usage, particularly in the
last decade (20xx)

Introduction to GOVERNANCE 6
 GOVERNANCE
Can’t be distinguished From Governments
 A public policy issue where the heart of the matter is
a problem of “Governance”, Governance becomes
defined as “Problem of government”
with the effect that the obligation for “fixing” it
necessarily rests with government.
 Since Governance is not about Government, what is
it about?
Fairly it is about “How Government and other social
organizations interact, how they are related and how
they Serve citizens, also; how critical decisions are taken
moderately in a complex world”

Introduction to GOVERNANCE 7
 Governance Vs Government
 "Governance" is the concrete activity that reproduces
a formal or informal organization.
 If the organization is a formal one, Governance is
primarily about what the relevant "governing body" does.
 If the organization is an informal one, such as a market,
Governance is primarily about the Rules and Norms that
guide the relevant activity, and Government is the
guardian.
 Whether the organization is a geo-political entity (nation-
state), a corporate entity (business entity), a socio-
political entity (tribe, family, etc.), or an informal one
(Markets), its Governance is the way the rules and
actions are produced, sustained, and regulated.
Introduction to Governance 8
 GOVERNANCE is a Process

 Governance is a process whereby societies or

organizations make their important decisions,
determine whom to involve in the process and how
they bring accountability.
 Governance process is hard to observe, students of
governance tend to focus attention on the
governance system or framework upon which the
process rests.
 It is the consensus, procedures, principles or
policies that define who gets power, how decisions
are taken and how accountability is delivered.
Introduction to GOVERNANCE 9
 The Players - Landscape

Who are the players? Who

has influence? Who decides? CITIZENS
The concept of governance
may be usefully applied
in different contexts – global,

CITIZENS
CITIZENS
national, institutional
Armed Forces
and community wise.
Private
SectorMedia
Understanding governance at Government
the national level is made Civil
easier if one considers the Society
different kinds of entities that Culture Traditions
occupy the social and
economic landscape.
CITIZENS

Figure: Illustrates five sectors of society, situated among citizens at large: business, the institutions of
civil society (including the voluntary or not-for profit
Introduction sector), Military, government and media
to GOVERNANCE
10
 The zones of Governance:
who decides and in what capacity?

(UN , EU, African Union ... etc Global

Governance

Community Zones of National

Governance Governance Governance

Social Groups, NGO’s Governments, states, Municipal ... etc

Organizations
Governance Banks, Telecom, Industries .. etc

Introduction to GOVERNANCE 11
 The Five Principles of good Governance
• Participation: All citizens have a voice in Decision-Making
Legitimacy and
Voice • Consensus orientation: difference in opinions, Compromise is for the
best of all (Moderate Culture)

• Strategic vision: Broad and long term perspective

Direction
• Understanding Requirements

• Responsiveness: Develop Processes to Serve all Stakeholders

Performance • Effectiveness and efficiency: Results oriented, making the best use of
resources

• Accountability: decision-makers are accountable to the public

Accountability
• Transparency: free flow of information

• Equity: All Citizens have equal and fair chances for well-being
Fairness
• Rule of Law: Fairly enforced
Introduction to GOVERNANCE 12
 Business Case: Understanding the Vision for change –
A FRAMEWORK of an NGO Organization
Mission statement:
Vision for Change:-
• Inclusive and accountable decision-making
• Equitable civic participation and voice
• Effective public service delivery and
government responsibility
The Three Principles (Orange Triangle):
Essential behaviours that guide healthy
interaction between everyone involved in the
process.
The Sectors: (White Circle):
The dynamic interaction among stakeholders in these three sectors is critical to
achieving positive, sustainable change.
The Outer Ring:
Conditions in the external environment that are necessary to sustain secure,
productive and just communities.
Introduction to GOVERNANCE 13
 Importance of business ethics

 Business ethics is a sort of Corporate Governance that is essential and

directly affected by the moral values of managers.
 Transparency: Business Managers are obliged to be transparent in their
business dealings and general Practices.
 Customers Preferences and Trust should be considered.
 It also considers the interest of other stakeholders in the business.
Values and Ethics in general

Ethics are the general code of behavior that is supposed to observe

while living in the society. The purpose of ethical behavior is to
improve moral value in the society. The word “Ethics” means moral
philosophy or moral principal and standards of conduct. Ethics has
science of morals, moral principles and whole field of moral science
and morality is the collection of values that guides our behavior.
 Benefits of good business ethics
Goodwill is that intangible asset
Good business ethics that a company has earned
Why should we brings much goodwill to over a period of operation as a
follow good a company that will in result of being perceived by
business ethics? the long run translate business associates and other
into tangible benefits. third parties as being
transparent, reliable,
straightforward, trustworthy etc.
How does our
company earn
‘goodwill’?

Let us see about the other benefits in the next few slides
Golden rules of general ethics
Sources of values for business ethics
There are four sources of values for business ethics :-

Environment and Community -

Legal regulation

Professional code of ethics

Culture
Organizational code of ethics

Individual values
Values and Ethics in business

Values and Ethics in business

refers to the principle or the
code of conduct which we
follow during our day to day
business transactions.
It also covers the individuals
who work in an organization,
their code of conduct and that
of organizations as a whole.
 Professional code of ethics

Another important source of business ethics comes from the

historic tradition of the professional codes of ethics.
Professionals such as law and medicine have long traditions of
codes of ethical conduct. Other professions and more recently
business and industry in general, have developed and adopted
codes of ethical conduct.
 Organizational code of ethics
The codes are obviously an important source of business ethics. The business
roundtable, a national group of senior business leaders, has identified a general
list of topics that organizational codes of business ethics should cover. These
includes

Health and
Fundamental Conflicts of
Product safety safety at
honesty interest
workplace

Pricing, billing
Fairness in Financial Suplier
and
selling reporting relationships
contracting

Acquiring and Intellectual

Protection of
using Political property/pro-
the
information activities prietary
environment
about others information
Legal regulations

Legal regulation is a significant source of values for

business ethics. In fact, many business and professional
organizations look to the law when drawing up their
codes of ethical conduct. At least five major ethical rules
can be drawn from the law. These include:
Respect for the liberty and rights of others.

The importance of acting in good faith.

The importance of exercising due care.

The importance of honoring confidentiality.

Avoidance of conflicts of interest.

 Individual values
The ultimate source of ethical values for business decision making
comes from individuals. Others can tell you what is right or wrong.
They can sanction you for failing to live up to their expectations. But
only you can make your behavior ethical. Only you can intend your
actions to be honest and fair or to serve the common good.
How to act ethically in every business situation is beyond the scope
of education. Business life is just too complex. There is no way to
create enough rules to cover all possible ethically significant
situations, even if they could be identified in advance. However,
there are 5 elements, (Questions) that you can ask yourself that will
help you explore your ethical values before making personal or
business decisions about what to do.
oHave I thought about whether the action I may take is right or
wrong?
oWill I be proud to tell my action to my family? Or employer?
oTo the news media?
oAm I prepared to accept everyone to act as I am acting?
oWill my decision cause harm to others or to the environment?
oWill my actions violate the law?
 Corporate Governance
Role of the Board and Implications on
Shareholder Wealth Creation

Introduction to GOVERNANCE 24
 A Working definition of Corporate
Governance
Corporate Governance involves a set of
relationships and the networks between a
company’s management, its board of
directors, its shareholders and stakeholders.

Good corporate governance practice

ensures the shareholders a fair rate of
return on their investments ($).

Introduction to GOVERNANCE 25
 Stakeholders in Corporate Governance

Primary Other
Stakeholders Stakeholders

•Shareholders •Customers
•Board of Directors •Suppliers
Stakeholders
•Executive Management of the Firm •Community at large
•Government
•Financial Markets
• Managers •Environmentalists
• Employees

Introduction to GOVERNANCE 26
Corporate Governance Associates

Introduction to GOVERNANCE 27
FORMS OF BUSINESS OWNERSHIP

Introduction to GOVERNANCE 28
 Implications of the Legal Form of the Firm

Corporate Form
The nature of Governance implies that when an entity adopts the legal form of a
“corporation” it has shareholders, a board, and a separate management.

Essential Attributes of a Corporation

Centralized Interests are freely
Separate Identity Limited Liability
management transferable

Broad Application
The term “corporate governance” is applicable to include all types and sizes of
enterprises so long as they have owners, managers, and a business interest.

Introduction to GOVERNANCE 29
 Conflict of Interests:
The heart of the matter in Corporate Governance
The Principal – Agent Dilemma
(Ownership & Control)

Shareholders’
Interests Managers’
Interests

The Board is responsible for resolving the “conflict of interest”

issue between shareholders and managers

Introduction to GOVERNANCE 30
The Four Basic Values of Corporate Governance

TRANSPARENCY ACCOUNTABILITY RESPONSIBILITY FAIR TREATMENT

Ensures CEO Recognize the

timely, Protect SH
Accountable legal rights of
material & rights
to the BOD all SHs
accurate
information is
available
Encourage Treat all SHs
BOD cooperation and
accountable to between minorities
the SH company and
Info on with equitably
Finance, stakeholders
Performance,
Ownership,
Provide
Governance effective
restores for
violations

Introduction to GOVERNANCE 31
 Main Governing bodies in the company

Executive
Shareholders Board
Management
Represents SH Helps formulate
Provides capital
and Execute
(Funding)
Strategy
Sets strategy

Provides
Provides
guidance to CEO
Elects or transparent
dismisses BOD reporting and
Monitors CEO disclosure

Introduction to GOVERNANCE 32
Degree of Board Involvement in Management

Passive Certifying Engaged Intervening Operating

1- Certifies to 1- Provides
1- Intensely
1- At the SH that CEO insight &
involved in 1- Makes key
discretion of meets Support
decision making decisions, and
CEO expectations 2- Understands
on key issues management
2- Limited 2- Takes its monitoring
2- Responsive: implements
Activity & corrective action role
Frequent and 2- Fills gaps in
Participation 3- Understands 3- Guides and
intense management
3- Limited role of judges the CEO
meetings—on experience.
Accountability independent 4- Has the right
short notice
directors skills mix

Low High
Introduction to GOVERNANCE
33
 Role of Stakeholders

Stakeholders cannot have claims on

the firms except those specified by
laws

Firms have a social responsibility

to fulfill so they must act in the
broad interests of the society at
large

Introduction to GOVERNANCE 34
The Separation of Ownership and Control

Introduction to GOVERNANCE 35
 The Board is the Representative of Shareholders

• The main role of the board is to monitor Management

performance in order to reduce total agency costs, compliance to
regulations and codes, and maximization of SH’s wealth.
• Shareholders may Call for a General Assembly in case of urgency.
• Regulated Under Egyptian Law – Private Companies , Section 5,
clauses 140 to 153.
Introduction to GOVERNANCE 36
 General Assembly
Objectives and Roles:
A gathering that Involves all shareholders

 Shareholders formal Voice

 Selection and isolation of Board Members through a regulated
voting procedures.
 Monitor and judges Board performance.
 Release BOD from its responsibilities in case of failure to
achieve objectives or major Violations
 Approves Budget, Profit and Loss
 Approves BOD Plans, Strategy and Activities
 Approves Board incentives and Salaries
 Assigns Financial Auditor
 Shareholders May Assign representatives for attendance and
voting.
 Committees
Objectives and Roles:
Limited roles , No Authority

 Selection based on Expertise

 Well defined scope, time frame
and outcome.
 Reports its output to Chairman
 Assigned by BOD – Chairman
 Formally headed by a non
Executive board member
BENEFITS OF GOOD CORPORATE
GOVERNANCE

Introduction to GOVERNANCE 39
Good Corporate Governance Attracts Capital

• Good corporate governance helps improve

access to capital investment and finance
with better terms and lowers cost of
capital for good firms

Introduction to GOVERNANCE 40
Benefits of Good Corporate Governance

5. Shareholder wealth creation assured

4. Improved operational efficiency

increases competitiveness

3. Public recognition results in better

access to finance

2. Improved CG structure lowers the cost

of capital – Enterprise Risks elimination

1. Basic legal compliance improves

company reputation

Introduction to GOVERNANCE 41
 Good CG ensures better access to capital

Material Share-
Good board Investor -
and Holders
guidance & friendly
timely rights
oversight company
disclosure protected

Access to
Financing
facilitated

Introduction to GOVERNANCE 42
 Good Corporate Governance Practices
Stimulate Firm Performance
• Streamlining business process
• Improves operating performance
Efficiency • Lowers costs and capital expenditures

• Improving ROE
• Increase profitability
ROE • Improves the chances that SHs will receive sustainable dividends

• Profitability improves share price performance

• Firms gets better recognition as a good performing stock
Higher Share
Price • Attracts investor confidence, and new capital

Introduction to GOVERNANCE 43
Good Corporate Governance Increases Long Term Performance

Average premium investors would be willing to

% pay differs by country and regions
50
Average 30%

41% Morocco
40
Egypt
Average 22%
Russia
Average 22% Average 14%
30
China
25%
Average 13%
27% Turkey 24% Argentina Philippines 23% Poland

20 South Africa Thailand 19% Mexico

22% Columbia Italy
19% Taiwan 14% USA
13% Germany
Chile
18% 11% Canada
10 12% United Kingdom

E Europe/Africa Latin America Asia Western Europe Northern America

Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002

Introduction to GOVERNANCE 44
 Building the Business Case for Good CG
• Transparent • Investors are
• Responsible protected under
• Accountable the law
• Fair investment • Prudential
environment regulation
Open Rule of
Market Law

Lower
Investor
Confidence Systemic
• Increasing Risk • Transparency
investor improves
confidence attract market price
investments to discovery
the market mechanism
Introduction to GOVERNANCE 45
THE PROPER ENVIRONMENT FOR
CORPORATE GOVERNANCE

Introduction to GOVERNANCE 46
The Environment for Good
Corporate Governance

 Good CG helps make the company Competitive

 Competitiveness requires:
• Quality of the Business Environment
• The Quality of Business Strategy and Operations
• Ensuring sustainable productivity growth
• MACRO Economic Environment (Global Businesses)

Introduction to GOVERNANCE 47
Corporate Governance is the answer to
Corruption

Corporate Anti-
Governance corruption

Introduction to GOVERNANCE 48
Seeking Balance between the Interests of
Stakeholders

Proper legal and

regulatory frameworks
will provide stability
between shareholders,
other stakeholders and
the firm that is
sustainable over time.

Introduction to GOVERNANCE 49