Module 7

Although Corporate Governance is a complex issue that is still in need of a clear definition, the
principles of the concept and those who are responsible for its implementation are clear. Corporate
Governance is the idea behind effective management relationships among shareholders, the board,
and the executive of a corporation. Although many Corporate Governance guidelines vary in their
implementation and execution, for the most part, they subscribe to the same basic principles of
accountability, transparency, responsibility, and fairness. In this module, we will discuss the
different theories that served as the basis for corporate governance. Next, we will explore the basic
principles that must be observed in the development and implementation of corporate governance.
Finally, we look at the elements of good corporate governance.
After successful completion of this module, you should be able to:

➢ Determine the theories of corporate governance
➢ Understand the principles of good governance
➢ Identify different elements of corporate governance
Theories of Corporate Governance

There are many theories of corporate governance that addressed the challenges of governance of
firms and companies from time to time. As defined in the previous module, Corporate Governance
is the process by which decisions are implemented in large businesses. There are various theories
that describe the relationship between various stakeholders of the business while carrying out the
activity of the business.
Agency Theory
Agency theory defines the relationship between the principals (such as shareholders of the
company) and agents (such as directors of the company). According to this theory, the principals of
the company hire the agents to perform work. The principals delegate the work of running the
business to the directors or managers, who are agents of shareholders. The shareholders expect the
agents to act and make decisions in the best interest of the principal. On the contrary, agent doesn't
need to make decisions in the best interests of the principals. The agent may succumb to self-
interest, and opportunistic behavior and fall short of the expectations of the principal. The key
feature of agency theory is a separation of ownership and control. The theory prescribes that people
or employees are
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held accountable for their tasks and responsibilities. Rewards and Punishments can be used to
correct the priorities of agents.
Stewardship Theory
Stewardship theories argue that the managers or executives of a company are stewards of the
owners, and both groups share common goals. Therefore, the board should not be too controlling,
as agency theories would suggest. The board should play a supportive role by empowering
executives and, in turn, increasing the potential for higher performance. The stewards are satisfied
and motivated when organizational success is attained. It stresses the position of employees or
executives to act more autonomously so that the shareholders’ returns are maximized. The
employees take ownership of their jobs and work at them diligently.
Resource Dependency Theory
Resource-dependence theories argue that a board exists as a provider of resources to executives to
help them achieve organizational goals. Resource-dependence theories recommend interventions
by the board while advocating for strong financial, human, and intangible support to the executives.
For example, board members who are professionals can use their expertise to train and mentor
executives in a way that improves organizational performance. Board members can also tap into
their networks of support to attract resources to the organization. Resource-dependence theories
recommend that most of the decisions be made by executives with some approval of the board.
Principles of Good Governance

Corporate Governance is a concept that is best served by focusing on the end rather than the means.
Put another way, because the rules and guidelines of Corporate Governance are always changing
and evolving, it is important that we do not get so caught up in the procedures that we forget the
goal. The goal of good Corporate Governance is to establish an effectively organized management
structure and activity system that will facilitate the corporation’s ability to meet the needs of
stakeholders and any other pressing needs that may arise. A company that follows the hardcore
core fundamentals of good corporate governance will generally surpass other companies in terms
of financial advancement. The core principles of sound corporate governance include
accountability, transparency, responsibility, and fairness.
Accountability
Corporate accountability is an act of responsibility and obligation to provide an explanation for
the company’s actions and activities. Corporate Accountability includes the following:
• Presentation of a balanced and simple analysis of the company’s orientation and prospects.
• Responsibility for determining the character and extent of the adopted risks by the
company.
• Maintenance of adequate risk management and internal control structure.
• Setting up formal and unclouded arrangements for corporate reports and a suitable
relationship with the company’s auditor.
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• Proper communication with shareholders regarding diversification, progress, and
financial reports at frequently.
To facilitate this principle, it is advisable that corporations establish clear codes of ethics and job
descriptions so that all corporate members have clear ideas of their expectations.
Transparency
Transparency means a company should reveal an informative piece of data about its activities to
shareholders and other stakeholders. It also includes the open-mindedness and willingness to
divulge financial figures that are genuine and correct in reality. The unveiling of reports regarding
the organization’s accomplishments and activities should be on time and strive for accuracy. Such
steps ensure the investors’ access to transparent and factual data which finely mirrors the financial,
environmental, and social position of the organization.
Responsibility
The CEO and Board of Directors are accountable to the shareholders on behalf of the company
regarding the execution of responsibilities. Thus, they should exercise their authority with full
responsibility. The Board of Directors is responsible for conducting the management of the
business, appointing a suitable CEO, overseeing the affairs of the company, and keeping an eye on
the performance of the company. This means that it is their responsibility to ensure that they have
all of the necessary information required to make the right decisions or complete their tasks
successfully.
Fairness
Fairness touches on the points of uniform and equal treatment of all the shareholders about
receiving of considerations regarding shareholdings. The fairer the company appears to
stakeholders, the more likely it is that it can endure in the league.
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Elements of Corporate Governance
There is no single model of good corporate governance. However, some common elements
underlie good corporate governance. The following are the basic elements of good corporate
governance:
Good Board Practices

• Build a strong, qualified board of directors and evaluate performance. Boards should be
comprised of directors who are knowledgeable and have expertise relevant to the business
are qualified and competent, and have strong ethics and integrity, diverse backgrounds and
skill sets, and sufficient time to commit to their duties.
• Clearly defined roles and responsibilities. Establish clear lines of accountability among the
Board, Chair, CEO, Executive Officers, and management.
Control Environment
Control Environment is the set of standards, processes, and structures that provide the basis for
carrying out internal control across the organization. The board of directors and senior
management establish the tone at the top regarding the importance of internal control including
expected standards of conduct. Management reinforces expectations at the various levels of the
organization.
• Emphasize integrity and ethical dealing. Not only must directors declare conflicts of
interest and refrain from voting on matters in which they have an interest, but a general
culture of integrity in business dealings and of respect and compliance with laws and
policies without fear of recrimination is critical.
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• Effective risk management. Companies should regularly identify and assess the risks they
face, including financial, operational, reputational, environmental, industry-related, and
legal risks.
Transparent Disclosures
Good corporate governance should ensure that timely and accurate disclosure is made regarding
all material matters concerning the corporation, including its financial situation and results. It is in
the interest of each organization to provide clear, timely, and reliable information that is adequately
prepared, and to make relevant information equally accessible to all stakeholders. Strong
disclosure promotes transparency in addition to being an important aspect of good governance.
• Non-financial reporting. Both financial and non-financial information must be disclosed.
Sustainability reporting is a process of gathering and disclosing data on non-financial
aspects of a company’s performance, including environmental, social, employee, and
ethical matters, and defining measurements, indicators, and sustainability goals based on
the company’s strategy. Integrated reporting is a process of building an integrated report
by combining financial statements and sustainability reports into a coherent whole that
explains the company’s ability to create and sustain value.
Well-Defined Shareholder Rights

Shareholders are given certain rights as owners of corporations. These rights are protected by law,
and honoring them is one of the objectives of corporate governance. The following are some of
the fundamental rights of shareholders:
• Voting Power on Major Issues. Shareholders have right to vote on company decisions.
They can vote on a variety of corporate matters including voting in officers, company
acquisitions, and mergers or liquidations of company assets. Voting on these matters
generally takes place when corporations have their annual meetings.
• Inspecting. Shareholders also have right to inspect their corporation’s financial
information. Inspecting the books gives shareholders a chance to view how their
corporations are performing. This can be critical to shareholders’ decisions to buy more
shares or sell off what they already own.
• Dividend Entitlement. If corporations are distributing profits in the form of dividends, each
shareholder has the right to receive them. Dividend amounts are determined by the
corporate officers and not by the ownership interests of the shareholders. These amounts
can fluctuate yearly based on the corporations’ earnings for that year. With that in mind,
corporations with low earnings, net losses, or have other plans with the profits to improve
their businesses may not pay out dividends. However, corporations must pay every
shareholder a dividend if they’re distributing them and cannot select just a few to pay
profits to and neglect the rest.
• Right to Sue. Shareholders who have been wronged by their corporations also have the
right to sue. For example, if shareholders didn’t receive their entitled share of dividends or
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were denied access to their corporations’ financial information, they can bring legal
action against their corporations. Shareholders seeking to sue their corporations should
check with their local authorities first on how to proceed.
• Right to transfer ownership. The right to transfer ownership means shareholders are
allowed to trade their stock on an exchange.
Board Commitment
This means that the board of directors discusses corporate governance issues and has created
an improvement plan or initiative where appropriate resources are committed for its
implementation. These plans or initiatives must be formalized and distributed to the staffs,
as appropriate.

Module 7

Uploaded by

Module 7

Uploaded by

Although Corporate Governance is a complex issue that is still in need of a clear definition, the

After successful completion of this module, you should be able to:

Theories of Corporate Governance

Principles of Good Governance

Good Board Practices

Well-Defined Shareholder Rights

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