Introduction to Corporate

Governance
MGT 103
What is Corporate Governance?

• a system of rules
• practices by which businesses are directed and
• processes controlled.

• a SYSTEM OF STEWARDSHIP AND CONTROL to guide

organizations in fulfilling their long-term economic,
moral, legal, and social obligations toward their
stakeholders.
 Purpose of Corporate Governance

In simpler terms, the purpose of the corporate governance is to

enhance shareholders’ value and protect the interests of other
stakeholders by improving the corporate performance and
accountability.
 The their
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 institution
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 What is a Well-governed Organization?

Internal Control
Risk Management internal events
Governance external events

A well-governed organization is one which implements

effective risk management and internal control systems.
 ACCOUNTABILITY
TRANSPARENCY AND FULL DISCLOSURE
Is the board taking responsibility?
Is the board telling what is going on?

GOOD AND EFFECTIVE

GOVERNANCE

CORPORATE CONTROL
Is the board doing the right thing?

Principles of Effective Corporate

Governance
Illustrative Application of Principles:
• Structure the BOD to add value.
(a) BOD should have independent directors.
(b) Roles of Chairperson and CEO should not be exercised by the same person

• Promote ethical and responsible decision-

making.
(a) Establish a code of conduct as a guide.

• Safeguard the integrity in financial reporting.

(a) Establish an audit committee
(b) Require to state in writing that the company’s financial reports present a true and fair view,
in all material respects, of the company’s financial condition and operational results and are
in accordance with relevant accounting standards.
 PARTIES INVOLVED IN CORPORATE
GOVERNANCE 2
The essence of any system of good corporate governance is
to allow the board and management
the freedom to drive their organization forward and
to exercise that freedom within a framework of effective accountability.
 Stockholder Theory vs. Stakeholder Theory
STOCKHOLDER THEORY
suggests that the corporation
exists for the benefit of the
shareholders or stockholders.
THEREFORE, corporate managers
have the duty to maximize returns
to the benefit of the stockholders.
STAKEHOLDER THEORY
states that the corporation exists
not only for the benefit of the
stockholders but also for the
benefit of other stakeholders.
THEREFORE, while corporate
managers have the duty to
maximize shareholders’ returns,
they also have a duty to the
society as a whole.
 Agency Problem

exists when the “agents” of the corporation use their

authority for their own benefit and not for the benefit of the “principal”.