BBA3102:COPORATE

GOVERNANCE
ABOUT THE LECTURER

Dr Kakuba Sultan Juma

0781968753/0705166461

 Email: [email protected];
[email protected]
LEARNING OBJECTIVES

1. To the roles and functions of

corporations and to provide a
context within which to evaluate
corporate activity, accountability
and impact.

2. The course is designed to provide

an introduction to theories of
corporate governance and the
practical means of regulating and
LEARNING OUTCOMES
1. Explain the effects of corporate
governance on directors’ behavior and
their fiduciary duty

2. Explain different board structures, the

role of the board and corporate
governance issues;

3. Describe the types of policies and

procedures that best practice companies
introduce; explain the regulatory
governance framework for companies
 INTRODUCTION: WHAT IS CORPORATE GOVERNANCE?
 Corporate governance is the system of
principles, policies, procedures, and clearly
defined responsibilities and accountabilities used
by stakeholders to overcome the conflicts of
interest inherent in the corporate form.
 Hence, the importance of understanding the
different forms of business.
 Corporate governance affects the operational
risk and, hence, sustainability of a corporation.
 The quality of a corporation’s corporate of
governance affects the risks and value of the
corporation.
 Effective, strong corporate governance is
essential for the efficient functioning of
markets.
WHAT IS CORPORATE GOVERNANCE? CONTD…
‘Corporate governance is the mechanism by which companies
are rationalized, directed, controlled and monitored.
Corporate Governance coordinates different types of
stakeholders such as shareholders, directors, managers,
employees, creditors, customers, global environment and the
rest of the society to enhance corporate performance and
wellbeing as a common goal. Major considerations of a system
of corporate governance are:
 how successfully companies formulate the rational;
the reason for existence & future direction
 how effectively corporate decisions are made;
guidelines and procedures
 how well the board on behalf of shareholders
appraise managers’ decision making, and monitor
the execution
 how fruitfully the different stakeholders are
facilitated to achieve the goals’
Dissa 6
(Dissa Bandara, 2006)
 CONT.
 Corporate Governance (CG): The set
of mechanisms used to manage the
relationship among stakeholders and to
determine and control the strategic
direction and performance of
organizations.

 Concerned with identifying ways to

ensure that strategic decisions are
made effectively and facilitate the
achievement of strategic
competitiveness.
 CONT.
 Corporate governance is:

 A relationship among stakeholders used

to determine and control the strategic
direction and performance of organizations

 Concerned with making strategic

decisions more effectively.

 Used to establish order between a firm’s

owners and its top-level managers whose
interests may be in conflict.
 Cont.
 Organisation for Economic Cooperation
and Development (OECD) defines
Corporate Governance as the system by
which business corporations are directed
and controlled.

 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.
 CONT.
It also spells out the rules and
procedures for making decisions on
corporate affairs.

Specifies the distribution of rights and

responsibilities among different
participants in the corporation, such as
the board, managers, shareholders and
other stakeholders.

It
spells out the rules and procedures for
making decisions on corporate affairs.
 CONT.
Itprovides the structure through which the
company objectives are set, and the means
of attaining those objectives and
monitoring performance (Source: OECD
April 1999).
 CONT.
 It also provides the structure through
which the company objectives are set, and
the means of attaining those objectives and
monitoring performance.

 Corporate Governance involves a set of

relationships between a company’s
management, its board, its shareholders
and other stakeholders.
 Top-level managers are expected to make
decisions that maximize company value
and owner wealth
CONT.
 Effective governance can lead to a competitive
advantage.

 The quality of corporate of governance affects

the risks and value of the corporation.

 Effective, strong corporate governance is

essential for the efficient functioning of
markets.

 Corporate governance is also looked at as the

policies and procedures a company
implements to control and protect the
interests of internal and external business
stakeholders.
 OBJECTIVES OF CORPORATE GOVERNANCE
 Objectives of corporate governance:
 To eliminate or mitigate conflicts of
interest.
 Particularly those between corporate
managers and shareholders; and

 To ensure that the assets of the

company are used efficiently and
productively and in the best interests of
its investors and other stakeholders.
 OBJECTIVES OF CORPORATE GOVERNANCE

 Another primary objective of

Corporate Governance is to align the
interests of managers and
shareholders
IMPORTANCE OF CORPORATE GOVERNANCE

 Corporate Governance also plays an

important role in maintaining
corporate integrity and managing
the risk of corporate fraud,
combating against management
misconduct and corruption

 Promote the efficient use of scarce

resources.
IMPORTANCE OF CORPORATE GOVERNANCE
 Ensures that the management of a
company considers the best interests of
everyone;

 Helps companies deliver long-term

corporate success and economic growth;

 Maintains the confidence of investors

and as consequence companies raise
capital efficiently and effectively;
IMPORTANCE OF CORPORATE GOVERNANCE
 Has a positive impact on the price of
shares as it improves the trust in the
market;

 Improves control over management and

information systems (such as security or
risk management)

 Gives guidance to the owners and

managers about what are the goals
strategy of the company;
IMPORTANCE OF CORPORATE GOVERNANCE
 Minimizeswastages, corruption, risks,
and mismanagement;

 Helps to create a strong brand

reputation;

 Most importantly–it makes companies

more resilient.
 IMPORTANCE OF CORPORATE GOVERNANCE

 Shapes the growth and future of

capital market & economy.

 Instrument of investor's protection.

 Protecting the interest of

Shareholders and all other
stakeholder.
 IMPORTANCE OF CORPORATE GOVERNANCE
 Contributes to the efficiency of the
business enterprise.

 Creation of wealth.

 Enables firm to compete

internationally in sustained way.

 Keeps an eye on the issues of insider

training.
CONT.

 Promote the trust of investors

 Good corporate governance has a

positive link to economic
development and good corporate
performance.

 Funds will flow to entities which

are seen to have internationally
accepted standards of corporate
governance
CONT.

Avoidance of costly litigation through

adherence to laws and regulations

Improving Access to Capital Markets

 Transparency, accessibility,
efficiency, timeliness, completeness,
and accuracy of information critical
CONT.

Stimulating Performance and

Improving Operational Efficiency

 Better oversight and accountability

 Improved decision making

 Better compliance and less conflict

CORE VALUES OF THE OECD CORPORATE
GOVERNANCE FRAMEWORK
 Fairness: The corporate governance
framework should protect shareholder
rights and ensure the equitable
treatment of all shareholders, including
minority and foreign shareholders.

 Responsibility:
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.
 CONT.
 Transparency: The corporate governance
framework should ensure that timely
and accurate disclosure is made on all
material matters regarding the
company, including its financial
situation, performance, ownership, and
governance structure.

 Accountability: The corporate

governance framework should ensure the
strategic guidance of the company, the
effective monitoring of management by
the board, and the board’s accountability
to the company and shareholders.
THE OECD PRINCIPLES OF CORPORATE
GOVERNANCE
1. Ensuring the basis for an
effective corporate governance
framework.

2. The rights of shareholders and

key ownership functions.

3. The equitable treatment of

shareholders.

4. The role of stakeholders in

corporate governance.
 CONT.
5. Disclosure and transparency.

6. The responsibilities of the board:-

The corporate governance framework
should ensure the strategic guidance of
the company, the effective monitoring of
management by the board, and the
board’s accountability to the company
and the shareholders.
CORPORATE GOVERNANCE FUNCTIONS
 CORPORATE GOVERNANCE FUNCTIONS
 OVERSIGHT FUNCTION. The board of
directors should provide strategic advice
to management and oversee managerial
performance, yet avoid micromanaging.

 MANAGERIAL FUNCTION. The

effectiveness of this function depends on
the alignment of management’s interests
with those of shareholders.
 CORPORATE GOVERNANCE FUNCTIONS
 COMPLIANCE FUNCTION. The set of
laws, regulations, rules, standards, and
best practices developed by state and
federal legislators, regulators, standard-
setting bodies, and professional
organizations to create a compliance
framework for public companies in which to
operate and achieve their goals.
 CORPORATE GOVERNANCE FUNCTIONS
 INTERNAL AUDIT FUNCTION: Assurance
and consulting services to the company in
the areas of operational efficiency, risk
management, internal controls, financial
reporting, and governance processes.

 LEGAL AND FINANCIAL ADVISORY

FUNDTIONS. Legal advice and assists the
company, its directors, officers, and
employees in complying with applicable laws
and other legal obligations and fiduciary
duties.
 CORPORATE GOVERNANCE FUNCTIONS
 EXTERNAL AUDIT FUNCTION. External
auditors lend credibility to the company’s
financial reports and thus add value to its
corporate governance through their
integrated audit of both internal control over
financial reporting and financial statements.

 MONITORING FUNCTION. Shareholders,

particularly institutional shareholders,
empowered to elect and, if warranted,
remove directors.
SUMMARY
 Corporate governance is the system of principles,
policies, procedures, and clearly defined
responsibilities and accountabilities.

 The objectives of a corporate governance system are

(1) to eliminate or mitigate conflicts of interest
among stakeholders, particularly between
managers and shareholders, and (2) to ensure that
the assets of the company are used efficiently and
productively and in the best interests of the
investors and other stakeholders.

 The failure of a company to establish an effective

system of corporate governance represents a major
operational risk to the company and its investors.
SUMMARY (CONTINUED)
 Companies committed to corporate
governance often provide a statement of
corporate governance policies. Analysts
should assess:
 the code of ethics; statements of the
oversight, monitoring, and review
responsibilities of directors;

 statements of management’s
responsibilities with respect to
information and access of directors to
internal company functions;

 reports of directors’ examinations,

evaluations, and findings;
SUMMARY (CONTINUED)
 board and committee self-
assessments; management self-
assessments; and
 training policies for directors.

Weak corporate governance systems

give rise to risks including
accounting risk, asset risk, liability
risk, and strategic policy risk.