CHAPTER 1

Introduction to Corporate Governance

Lesson Summary:

Introduction to Corporate Governance

Generally, governance refers to a process in which elements of society exercise

control, power, authority and influence and implement policies and decisions relating to
public life and social upliftment.

It involves all the processes of governing a social structure by the laws, norms,
power or language of an organized society, whether conducted by the government of a
nation, by a market or by a network.

Governance therefore means the process of decision-making and the process by

which decisions are implemented (or not implemented) through the exercise of power or
authority by leaders of the country and / or organizations.

Governance can be used in several contexts such as corporate governance

international governance, national governance and local governance.

Corporate Governance: An Overview

Corporate governance is defined as the system of rules, practices and

processes by which business corporations are directed and controlled. It basically
involves balancing the interests of a company's many stakeholders, such as
shareholders, management, customers, suppliers, financiers, government and the
community.

Corporate governance is a topic that has received growing attention in the

public in recent years as policy makers and others become more aware of the
contribution good corporate governance makes to financial market stability and
economic growth. Good corporate governance is all about controlling one's business
and so is relevant and indeed vital, for all organizations, whatever size or structure.
The corporate governance structure specifies the distribution of rights and
responsibilities among different participants in the corporation, such as the board,
managers, shareholders, and other stakeholders, and spells out the rules and
procedures for making decisions on corporate affairs. By doing this, is also provides the
structure through which the objectives are set and the means of attaining those
objectives and monitoring performance.

Purpose of Corporate Governance

The purpose of corporate governance is to facilitate effective, entrepreneurial

and prudent management that can deliver long-term success of the company. In simple
terms, the fundamental aim of corporate governance is to enhance shareholders' value
and protect the interests of other stakeholders by improving the corporate performance
and accountability. It is also about what the board of directors of a company does, how
it sets the values of the business firm.

Objectives of Corporate Governance

The following are the basic objectives of corporate governance:

1. Fair and Equitable Treatment of Shareholders

A corporate governance structure ensures equitable and fair treatment of all

shareholders of the company. In some organizations, a group of high net-worth
individual and institutions who have a substantial proportion of their portfolios
invested in the company, remain active through occupation of top-level positions
that enable them to guard their interest. However, all shareholders deserve
equitable treatment and this equity is safeguarded by a good governance structure
in any organization

2. Self-Assessment

Corporate governance enables firms to assess their behavior and actions before
they are scrutinized by regulatory agencies. Business establishments with a strong
corporate governance system are better able to limit exposure to regulatory risks
and fines. An active and independent board can successfully point out deficiencies
or loopholes in the company operations and help solve issues internally on a timely
basis.
3. Increase Shareholder’s Wealth

Another corporate governance’s main objective is to protect the long-term

interests of the shareholders. Firms with strong corporate governance structure are
seen to have higher valuation attached to their shares by businessmen. This only
reflects the
positive perception that good corporate governance induces potential investors to
decide to invest in a company.

4. Transparency and full disclosure

Good corporate governance aims at ensuring a higher degree of transparency in

an organization by encouraging full disclosure of transactions in the company
accounts.

Characteristics of Good Governance

Participation

Rule of Law Accountability

GOOD Effectiveness
Transparency
GOVERNANDCE and Efficiency

Equity and
Responsiveness
Inclusiveness

Consensus
Oriented
CHARACTERISTICS OF GOOD GOVERNANCE

 Participation- by both men and women is a key of cornerstone of good

governance. Participation should be either direct or through legitimate institutions
or representatives. It is important to point out that representative democracy
does not necessarily mean that the concern of the most vulnerable in society
would be taken into consideration in decision making. Participation needs to be
informed and organized. This means freedom of association and expression on
one hand and an organized civil society on the other hand.

 Rule of Law- good governance requires fair legal frameworks that are enforced
impartially. It is also requiring full protection of human rights, particularly those of
minorities. Impartial enforcement of laws requires an independent judiciary and
an impartial and incorruptible police force.

 Transparency-means that the decisions taken, and their enforcement are done in
a manner that follows rules and regulations. It means that information is freely
available and directly accessible to those who will be affected by such decisions
and their enforcement. It is also means that enough information is provided and
that it is provided in easily understandable forms and media.

 Responsiveness- good governance requires that institutions and processes try to

serve the needs all stakeholders within a reasonable timeframe.

 Consensus Oriented- good governance requires mediation of the different interest

in society to reach a broad consensus on what is in the best interest of the whole
community and how this can be achieved. It is also requiring a broad and long-
term perspective on what is needed for sustainable human development and how
to achieve the goals of such development. This can only result from an
understanding the historical, cultural, and social contexts of a given society or
community.

 Equity and Exclusiveness – ensures that all its members feel that they have a
stake in it and do not feel excluded from the mainstream of society. This requires
all groups, but particularly the most vulnerable, have opportunities to improve or
maintain their well-being.

 Effectiveness and Efficiency- good governance means that processes and

institutions produce results that meet the needs of society while making the best
use of resources at their disposal. The concept of efficiency in the context of
good governance also covers the sustainable use of natural resources and the
protection of the environment.
  Accountability- is a key requirement of good governance. Not only
governmental institutions but also the private sector and civil society
organizations must be accountable to the public and to their institutional
stakeholders. Who is accountable to whom varies depending on whether
decisions and actions taken are internal or external to an organization or
institution. In general, an organization or an institution is accountable to those
who will be affected by its decisions or actions. Accountability cannot be
enforced without transparency and the rule of law.

Basic Principles of Effective Corporate Governance

Effective corporate governance is transparent, protects the rights of shareholders and

includes both strategic and operational risk management. It is concerned in both the
long–term earning potential as well as actual short-term earnings and holds directors
accountable for their stewardship of the business.

Positive answers to the following questions indicate a firm’s conformance and

compliance with the basic principles of good corporate governance.

Corporate Control
(Is the board
doing the right
Transparency and Full thing?)
Accountability
Disclosure
(Is the boad taking
(Is the board telling us
responsibility?)
what is going on?)
Good and
Effective
Governance
MARIA REMEDIOS IRMA ANICETO-DIZON, MBA