EXPLAIN THE PRINCIPLES

AND THEORIES OF
CORPORATE GOOD
GOVERNANCE
WEEK 5-7
METALANGUAGE
• Shareholder- This refers an individual or organization that owns shares in a publicity-traded
or privately held company and , therefore has an interest in its profitability

• Stakeholder- This pertains to any individual or entity with an intense in how well a
company-or project- is doing as its performance has a direct or indirect effect on them

The Concept of Governance

Effective citizen participation are indeed practices regarding good governance. In distinguishing
between government activity and governance, we will first state what governance comprises.
 Governance: Operation of 3 Key Actors
Governance: Goes beyond the Government

State: Creating a favorable

political legal & economic
environment
State

Civil Society Market

Civil Society: Mobilizing Market: Creating

people participation opportunities for people
Management vs. Governance
Management deals with daily operations, while governance is about the underlying ethics of a
corporation.

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Good
Governance: Elements of Good Governance
Components
1. Legitimacy
2. Accountability
3. Competence
4. Respect for law Transparency,
Security of persons Constitutionalism Accountability, Ethics
and protection of
and Property and Integrity
human rights

Rule of Law Good Informed

Governance
Justice
Equity
A decent standard of
Respect o human
living
rights and basic Effective and efficient
delivery of public services
Electoral and
partipatory
 Signs of Poor Governance

Priorities inconsistent Excessive

with development Regulation

Failure to distinguish
Failure to establish
between public and
the rule of law private interest

Corporate governance generally speaks of the mechanics, relations and processes by which a corporation
is controlled and is directed. It also includes considering the various concerns and interest of its
stakeholders.
THE NEED FOR CORPORATE GOVERNANCE
1. Enriches company performance – sustainability
2. Promote the trust if investors
3. Better firm assessment, judgement and share performance
4. Lessens risk of corporate financial crunch, crisis and scandals
5. Upholds corporate integrity and manage the risk of corporate fraud, battling against management
misconduct and corruption
6. Good corporate governance has a positive link to economic development
7. Corporate governance enhance the legal framework
WHAT CORPORATE GOVERNANCE IS NOT
• Corporate Governance ; Corporate Social Responsibility
• Corporate Governance ; Business Ethics
• Corporate Governance ; Corporate Financial Management

Four Fundamental Pillars of Corporate Governance

1. Accountability
2. Fairness
3. Transparency
4. Independence
ACCOUNTABILTY
• Ensure the Management is accountable to the board

• Ensure that the board is accountable to Shareholder

FAIRNESS
• Protect Shareholder rights

• Treat all Shareholder equitably

TRANSPARENCY
• Ensure timely, accurate disclosure on all material matters, including financial situation, performance, ownership, and
corporate governance

INDEPENDENCE
• Procedure and structures are in place so as to minimize or avoid conflict of interests

• Independent directors and advisers- to be free the influence of others

Good Board & Commitment Well-defined Shareholder Rights

Elements of Corporate
Governance

Control Environment Transparent Disclosure

• Good Board Practices
1. Well-structured Board with clearly defined roles and authorities
2. Appropriate composition and mix of skills
3. Evaluation and training in the line with best practices
4. Code of corporate governance and ethics is being practiced
5. Formal policies and procedures have been implemented accordingly
6. Appropriate resource are committed to carry out corporate governance
7. Improvement for corporate governance plan
Well- Defined Shareholder Rights
8. Formalized shareholder rights including those of minorities
9. Regularly conduct well-organized shareholder meetings
10. Discuss policies on related party transactions
11. Discuss policies on extra ordinary transactions
12. Clearly defined and explicit dividend policy
• Control Environment
1. Internal control procedure
2. Presence of risk management framework
3. Disaster recovery system in place
4. Use of media management techniques
5. Establish independent control committee
6. Internal audit function
7. Establish management information system
8. Compliance fuction
• Transparent Disclosure
1. Disclosure Financial report
2. Disclosure non-financial report
3. Prepare financial reports according to international financial Reporting Standard
( IFRS )
4. Up-to-date corporate
5. Publish accurate and quality annual report
6. Web- based disclosure
 Tax Evasion or
Money Laundering

Poor treatment of
Conflicts of interest
employees

Poor
corporate
governance
Corruption and Fraud can lead to: Disregard for the
environment
POOR CORPORATE GOVERNANCE CAN LEAD TO:

Corruption and Fraud

• Corruption is dishonest activity in which a person abuses his/her position of trust in
order to achieve some personal gain or advantage for themselves, or provide an
advantage/disadvantage for another person or entity.
• Fraud is any purposeful communication that deceives, manipulates, or conceals facts
in order to create a false impression.

Conflict of Interest
• A conflict of interest in business normally refers to a situation in which an
individuals’ personal interest conflict with the professional interests owned to their
employer or the company in which they are invested.
POOR CORPORATE GOVERNANCE CAN LEAD TO:

Tax Evasion or Money Laundering

• Tax Evasion is an attempt to reduce your tax liability by deceit, subterfuge, or
concealment.
• Money Laundering is the processing of criminal proceeds to disguise their illegal
origin.

Poor Treatment of Employees

Disregard for the Environment
• The more we disregard the environment, the more it will become polluted with
contaminants and toxins that have a harmful impact on our health.
 THEORIES ON GOOD GOVERNANCE

1.Agency Theory
Also known as the Principal-Agent theory, the focus which as it affect contemporary corporation is to
strike a balance to harmonize the opposing concern of the principal and the agent. One of the constraints of
this theory is the restriction of the principal to the owners and take up just the owners’ interest. Then again
there are other participants who have interest in the deal that should be given consideration.

• Assumption: owners interest may differ from managers interest

• Main Board Function : Conformance- safeguard owners resources and interest; supervise
management and staff.
• Key Issues: emphasis on control may stifle innovation and risk taking and reduce staff motivation.
AGENCY THEORY
THEORIES ON GOOD GOVERNANCE

2.Stakeholder Theory
Dr . Edward Freeman stakeholder theory claims that a
firms stakeholder embrace just about anyone affected by
the business and its ventures.
STAKEHOLDER THEORY VS. SHAREHOLDER THEORY

• Milton Friedman, an Economist, whose work fashioned much of

20th -century corporate America, was a believer in the free-
market system and no government intervention. This belief
helped shape his Shareholder Theory of capitalism: that a
company’s sole responsibility is to make money for its
shareholders.

• For Friedman, in capitalism, the only stakeholder a company

should care about are its shareholders. His view is centered on
companies being compelled to generate more earnings, to gratify
their shareholders, and to carry on progressive development.
STAKEHOLDER THEORY VS. SHAREHOLDER THEORY
• Stakeholder theory opposes the view of Milton Friedman’s Shareholder theory. Dr. Freeman implies that a
company’s stakeholders are “those groups without whose support the organization would cease to exist.”

• These groups would include:

a. Customers
b. Employees
c. Suppliers
d. Political action groups
e. Environmental groups
f. Local communities
g.Media
h.Financial institutions
i. Governmental groups
j. others
 Milton Friedman vs. Edward Freeman

Milton Friedman Edward Freeman

The only group that has a moral claim on Many groups have a moral claim on the
the corporation are the people who own corporation because the corporation has
shares of stock – the shareholders. the potential to either harm or benefit
them – the stakeholders.
Assumptions: Various stakeholders have legitimate but different interests in
the organization.
Main Board Function: Represent and balance various stakeholders’ interests
through policies, implementation, and executive control.
Key Issues: Corporate objectives may be in conflict with some of the
stakeholders’ interests.

3. Stewardship Theory
Stewardship theory is a theory that administrators, left their own discretion, will most
likely act as responsible stewards of the assets they control. This theory is an
alternative view of agency theory, in which managers are assumed to act in their own
self-interests at the expense of shareholders.
The Objective of Stewardship Governance
A steward is marked as somebody who safeguards and takes care of the needs of
others. Under this specific theory, business executives look after the interests of the
shareholders and make decisions on their behalf. The solidarity intention is to generate
and uphold a thriving organization so the shareholders flourish as well. Organizations
that incorporate stewardship take on the responsibilities of both the Chief Executive
Officer and Chairman under one executive, with a board comprised mostly of in-house
associates. This permits for familiar knowledge of organizational operation and a
profound commitment to success.
The stewardship theory of governance as one voice of the organization has a welldefined objective of
shareholder satisfaction. Having a specific chief to spearhead the
company forms a single channel to correspond business needs to the shareholders
and vice-versa. This also circumvents bewilderment as to who is in command when a
firm needs to weather a storm. Of course, it is expected that Stewardship governance
compels that a Chief Executive Officer be reliable and ready to put personal gains
aside for the good of the organization.

Assumptions: Owners and managers have similar interests

Main Board Function: Improving performance – add value to top

decisions/strategy; partner management.

Key Issues: Management plans and routines may not be given ample
examination
4. Resource Dependency Theory

Also known as Resource Dependence Theory (RDT). Organizational success in

RDT is defined as organizations maximizing their power (Pfeffer 1981).

RDT suggests that performs deficient in needed resources will pursue to corroborate
affiliations with (that is to say, be dependent upon) others in order to acquire required
resources. Likewise, institutes make an effort to modify their independence
relationships by curtailing their own dependence or by snowballing the dependency of
other outfits on them. Within this perspective, firms are seen as alliances alerting their
network and arrays of behavior to obtain and sustain required peripheral resources.
Assumptions:
1. Organizational endurance and survival depend on maintaining coalition of
support to obtain resources and legitimacy
2. Organizations are assumed to consist of both internal and external coalitions
which arise from social interactions that are molded to manipulate and govern
behavior
3. The environment is assumed to include limited and treasured resources
important to organizational survival. Per se, the environment proffers the
dilemma of organizations confronting ambiguity in resource procurement.
4. Organizations are assumed to operate toward dualistic correlated objectives:
a. Acquiring control over resources that minimize their dependence on
other organizations and
b. Control over resources that maximize the dependence of other
organizations on themselves.
Realizing whichever objective is supposed to have an effect on the exchange amongst
organizations, thus affecting an organization’s sovereignty.
Main Board Function: External influence:

- Secure resources
- Improve stakeholder relations
- Bring external perspective

Key Issues: External focus of board members may mean internal supervision is
neglected. Board members may lack expertise.