Corporate Governance

enhancing the valuation

of stock holders
What is Corporate Governance?
 Corporate governance is commonly
referred to as a system by which
organizations are directed and controlled.
It is the process by which company
objectives are established, achieved and
monitored. Corporate governance is
concerned with the relationships and
responsibilities between the board,
management, shareholders and other
relevant stakeholders within a legal and
regulatory framework
 The case for good corporate governance
There are a number of sound business reasons
for improving the corporate governance system
in enterprises:
 Good corporate governance systems facilitates
access to capital
 Good corporate governance also contributes to
better performance. The modern corporation
has become more complex and cannot be
successfully managed without the systems and
processes that constitute good corporate
governance
 sound governance reduces the risk inherent
in running a business – an activity that is
particularly important in a modern corporate
structure

 role of governance in improving access for

emerging market companies to global equity.
 The Board of Directors and its Functions
 The monitoring role of the board of
directors is an important component of
corporate governance Board effectiveness
in its monitoring function is determined by
its independence, size, and composition.
 The board of directors is presumed to carry
out the monitoring function on behalf of
shareholders, because the shareholders
themselves would find it difficult to exercise
control due to wide dispersion of ownership
of common stock.
 The Board of Directors and its Functions
 A board of directors is key to the well-functioning of
corporate governance processes in company

 The board is the primary means through which

shareholders exercise control over management in
a company

 The size of the board, its composition, and

number of independent directors in board are
among the characteristics of the board that have
been tested in the literature, as determinants of
firm valuation and performance.
 Role of Debt in Corporate
Governance
 The presence of debt could also act as an
incentive for the company’s managers to
manage better as they plan to generate cash-
flows to service short-term debt.
 Lack of discipline and poor management may
eventually bankruptcy of the company, leading
to loss of employment and reputation risk.
Therefore the presence of debt in the capital
structure of the company enhances the
effectiveness of corporate governance
 Corporate Governance Guidelines

 Various corporate governance guidelines have

been developed around the world in response to
the corporate governance challenge. Such
guidelines include the King Report II (South
Africa), Cadbury Report (UK), Commonwealth
Corporate Governance guidelines, among
others.
 The guidelines recognize the fact that corporate
governance is not merely compliance, as it
works best when it is flexible
Overview of corporate governance
 Since the 1990’s, corporate governance has
attracted public interest because of its
importance for the economic health of
corporations and society as a whole.

 The 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
 The Rights of Shareholders
– The corporate governance framework should
protect shareholder rights.
Basic shareholder rights include the right
to: (a) secure methods of ownership
registration; (b) convey or transfer shares;
(c) obtain relevant information on the
corporation on a timely and regular basis;
(d) participate and vote in general
shareholder meetings; (e) elect members
of the board; and (f) share in the profits of
the corporation.
The Equitable Treatment of Shareholders
The corporate governance
framework should ensure the
equitable treatment of shareholders,
including minority and foreign
shareholders.
All shareholders should have the
opportunity to obtain effective redress
for the violation of their rights
 The Role of Stakeholders in
Corporate Governance
• Stakeholders may include employees, customers,
suppliers and the general community within which
the corporation has a major presence
• The corporate governance framework should
assure that the rights of stakeholders that are
protected by law are respected
The corporate governance framework
 The corporate governance framework should
recognize the rights of stakeholders as
established by law and encourage active co-
operation between corporations and
stakeholders in creating wealth, jobs and the
sustainability of financially sound enterprises
 Where stakeholders interests are protected
by law, stakeholders should have the
opportunity to obtain effective redress for
violation of their rights
Is workers’ influence in governance
desirable?
• Positive effects, if
– It restrains controlling shareholders or management
from excessive compensation, payouts, and/or
diversion of resources for private use
– Participation in governance improves morale and
team work, increasing worker productivity
• Negative effects, if value creation is sacrificed to
benefit worker welfare
• Net effects on
– Corporate decision making processes
– Long term welfare of workers and investors
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 Conclusion
 corporate governance as it impacts on the
valuation and performance of firms.

 Corporate governance then becomes the

mechanism for bridging the gap in this
separation between separation of ownership&
control.