BBA VI Semester

Business and Society

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Unit V: Corporate Governance 7 hours

Concept, scope and significance of corporate

governance; Theories governing corporate
governance - Agency theory, transaction cost
economics, stewardship theory; Governance of
corporate entities; Challenges for good corporate
governance; Impact of governance on business,
society and the economy.
 Corporate governance
Refers to the process by which a company is controlled, or
governed to the goals for which it is being governed
Corporate governance is concerned with the relative roles, rights, and
accountability of such stakeholder groups as owners, boards of directors,
managers, employees, and others who assert they are stakeholders.

Board of directors
An elected group of individuals who have a legal duty to
establish corporate objectives, develop broad policies, and
select top-level personnel to carry out these objectives and
policies

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 scope and significance of corporate
governance
Set of relationships between a company’s management, its boards, its
shareholders and other stake holders (OECD Principles)

Scope:
1.Accountability: of BoD and their constituent responsibilities to the
ultimate owners-the shareholders.
2.Transparency i.e. right to information, timeliness and integrity of the
information provided.
3.Clarity in responsibility to enhance accountability.
4.Quality and competence of directors and their track record
5.Checks and balances: in the process of governance
6.Adherence to rules, law and spirit of codes

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Significance of Corporate Governance
Significance:
•Business system stability is important for economic growth,
•Good corporate governance (CG) is required to achieve good
CG in the firms.
•Corporate houses have wider stakeholders-business relations.
•Promotes market confidence, helps to attract additional
capital, and fosters market discipline through good disclosure
and transparency.
•Helps ensure that company takes into account the interest of
not only of a group of people but also of the communities
within which they operate.
•Good corporate governance practices can strongly contribute
to economic development and financial stability.

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Significance of Corporate Governance

•Good corporate governance ensures corporate success

and economic growth.
• Strong corporate governance maintains investors'
confidence, as a result of which, company can raise
capital efficiently and effectively.
• It lowers the capital cost.
•There is a positive impact on the share price.
• Good corporate governance also minimizes wastages,
corruption, risks and mismanagement.
•It ensures organization in managed in a manner that fits
the best interests of all.

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 Theories governing corporate Governance
Agency Theory:
The economic relationship that arises between two individuals
• Principal
• Agent
Three conditions to operate relationship
• The agent has the freedom to choose between various course of
actions
• Actions of agent influence their own growth as well as the principals
• Difficult for the principal to observe the actions of the agent as
information is not enough
• The supplier of finance need return on their investment
• Principal needs assurance that agent does not steal the investment
• Principal needs to control the agent
• Control is dispersed and less effective
Problems with agency theory
• Utility maximizer (agent will not act in the best interest of the principal
• Unequal sharing of information
• Element of risk (judge performance based on annual reports )
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Stewardship Theory
Stewardship theory holds that ownership doesn’t really own a company; it’s
merely holding it in trust. This shows itself in the way it does business.
Assumes that managers are basically trustworthy and attach significant value
to their own personal reputations.
•Built on premise that directors will fulfill their duties towards the shareholders
•Assumes that human are good and directors are trustworthy
•Directors are stewards ( person who manage another's property) whose
motives are aligned with the objectives of the principles
Eg: Stewardship models may include environmental concerns, where a company believes it should operate
with as little impact as possible on the earth.
Effects On Clients: Customers also like to feel like they’re part of
something, and may stay with a stewardship-driven business even if its
price for goods or services is higher.
Effects On Employees: A solid sense of stewardship improves company
morale when the workers feel they’re part of something bigger.
Transaction Theory
•This theory attempts to view the firm as an organization comprising
people with different views and objectives.
• Assumption is that firms have become so large they in effect substitute
for the market in determining the allocation of resources. In other
words, the organization and structure of a firm can determine price and
production.
•Therefore, the combination of people with transaction suggests that
transaction theory managers are opportunists and arrange firms’
transactions to their interests (Williamson, 1996).
•Selfishly driven to undertake transaction that benefits them personally
•Make transaction without study as the money invested is not their own
•Strengths / weaknesses
• Shareholders are residual receivers , concern about safety of
investment
The sociological theory
•Composition of the board, transparency of the
financial reporting, disclosure and auditing are
considered central to realizing the socio-economic
objectives
•Strengths / weaknesses
• Based on fair distribution of wealth in society
• The challenge is that the board should not have
absolute powers
• Government control, interference may increase
leading to constraints
Governance of corporate entities
Classroom Discussion

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 Challenges for good corporate
governance
•Lack of institutional capacity for enforcement of laws, regulations
•Enforcement authorities themselves lack good governance.
•Lack of accountability of employees of regulating bodies (need to have internal rules)
•Lack of resources within regulator
•Transparent and scientific licensing policy
•Lack of political and leadership will
•Court have frequently intervened in regulatory enforcement
Board members are inclined to authenticate the minutes after
finishing the vested interest
The company enjoying the practice of CEO and Chairperson by the
same gentle man are ahead in noncompliance activities

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Impact of governance on business, society and the economy.
• Stakeholders theory is integral to corporate governance in
addition to shareholders value
• General acceptance that government cannot mange all needs of
society and companies have to involve themselves for the
welfare of stakeholders
• Corporations have the following responsibility
• Economic
• Legal
• Ethical
• Honor trust
• Be culture sensitive to provide the right services
• Discretionary
• Undertake voluntary activities and expenses, keeping
the greater good of society in mind
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