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TABLE OF CONTENTS

1.
2.
3.
4.
5.
6.
7.
8.

Introduction...2
Board of Directors.3
Roles and responsibilities of BOD....3
Fiduciary duties of board of directors...4
Independent Directors...5
Shareholders rights and duties..5
Gatekeepers importance to companies..5
Audit Committee...6
9. Audit committees roles and responsibilities..6
10. Internal and external auditors and their roles and responsibilities7
11. How corporate governance best practice may achieve proper check and balance9
12. Conclusion....12
13. Reference...13

1. INTRODUCTION
A company is a congregation of various stakeholders, namely, customers, employees,
investors, vendor partners, government and society. A company should be fair and
transparent to its stakeholders in all its transactions. With the opening of the economy
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towards globalization, our corporate world requires a world-class governance system.


The essence of the corporate world lies in promoting compliance of the law in letter and
in spirit, with transparency and accountability, and above all, fulfilling the fair
expectations of all the stakeholders. Unless a corporation embraces and demonstrates
ethical conduct, it will not be able to succeed. Corporate governance is one such tool to
achieve this goal.
According to Organisation for Economic Corporation Development (OECD) (2004)
Corporate Governance was defined as involving a set of relationship, between a company
management, its board of directors, its shareholder and other stakeholder and provides
structure through which the objectives of the company are set and the means of attaining
those objectives and monitoring performance are determined. It is the way in which top
managers execute their responsibilities and authority and how they account for that
authority in relation to those that have entrusted them with assets and resources
Thus, Corporate governance is important to all the Public and private companies for their
day to day management by Business Executives, to find a way in which the interest of
shareholders, directors and other interested groups and a good corporate governance is
good for the companies and corporations that support the economy to show that corporate
governance and practices are being carried out by the Board of Directors and the
Participants.
Therefore poor corporate governance is not only the cause of financial failure or
collapses, although it can result eventually in a falling share price and large losses for
shareholders as well as stakeholders. One of such instance is the Tyco international,
whose share price had halved over a short period of time and faced huge financial
difficulty.

Corporate Governance has become the latest buzzword today. Almost every country has
institutionalized a set of Corporate Governance codes, spelt out best practices and has
sought to impose appropriate board structures. Despite the Corporate Governance
revolution there exists no universal benchmark for effective levels of disclosure and
transparency. There are several corporate governance structures available in the
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developed world but there is no one structure, which can be singled out as being better
than the others. There is no "one size fits all" structure for corporate governance.

2. Board Of Directors
Board of directors and individuals appointed by the share holders vote to resolve the
agency problems associated with the separation of a companys controls from decision
controls. The board's key purpose is to ensure the company's prosperity by collectively
directing the company's affairs, whilst meeting the appropriate interests of its
shareholders and stakeholders.

3. Roles & responsibilities of BOD


-

The roles and responsibilities of board directors are:


Represent shareholders and create shareholder value.
Align the interests of management with those of shareholders while protecting the

interests of other stakeholders (customers, creditors, suppliers)


Define the missions and goals
Appoint senior executives to manage the company in accordance with the established

strategies, plans, policies, and procedures.


Oversee the companys performance by setting objectives, and assessing the
performance and long-term strategies to achieve these objectives, and assessing the
performance of senior executives in fulfilling their responsibilities without

micromanaging
Approve major business transactions and corporate plans, decisions, and actions
according to the law.

4. Fiduciary duties of Board of Directors


Fiduciary duty means that, as shareholders guardians, directors must be trustworthy,
acting in the best interest of shareholders, and investors in turn have confidence in the
directors actions (Rezaee, 2009)
One of the duties that company directors need to comply with is fiduciary duties. This is
so as company directors are said to be in a fiduciary relationship with the company. When

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directors are in a fiduciary relationship with the company, they are prohibited from doing
any acts deemed prejudicial to the company.
In Tyco former CEO, CFO and companys chief legal officer neglected their fiduciary
duties and millions of company money were used for their own uses. This was concealed
from the board and its relevant committees, since Tyco have not being practiced
corporate governance as mandatory. As a result of Tycos practices, most of the members
of the companys board of directors have benefited personally in one way or another and
was in a financial crisis.
In Malaysia all directors of publicly listed companies now are required to attend a
mandatory training program known as the Mandatory Accreditation Program (MAP). The
curriculum covers topics on corporate governance, duties, responsibilities and liabilities
of directors, risk management and the legal framework, amongst others. In addition to
MAP, the Listing Rules require companies with financial year end of 31 December 2005
onward to disclose in the annual report the training attended by directors apart from the
MAP (World Bank, 2005)

5. Independent Directors
The board independence is associated with the entry of outsiders into the board. The
literature suggested that increases in the proportion of outside directors on the board
should increase firm performance as they are more effective monitors of managers
(Adams and Mehran, 2003)

6. Shareholders' rights and duties


Shareholders of a company are grouped into 4 categories, which are institutional
shareholders, small private shareholders, large private shareholders and corporate
shareholders. An important aspect of the balance and power between the directors and the
shareholders is the authority of directors to issue new shares and the rights of
shareholders in any new share issue. Shareholders can make the directors accountable for
their doings by a vote in annual general meeting. Also the shareholder has the right to
receive a copy of the companys annual report accounts and its the duty of the
shareholder to exercise the right in accordance with good governance.
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Shareholders have the right to approve or disapprove any large transactions detrimental to
the companys financial positions before entered into.

7. Gatekeepers: its importance to companies


Gatekeepers are the persons who are responsible for protecting investors from obtaining
misleading financial information disseminated to the capital market by public companies
in their public filling. Gatekeepers are people who provide important services that benefit
investors--for instance, credit rating agencies that evaluate a company's creditworthiness,
outside auditors who provide independent assurance that its financial condition is
portrayed fairly, and securities analysts who assess its business prospects. They play
crucial roles in our capital markets because they are far better equipped to gather
information about companies than most investors, and their investors trust and rely on
them. When their independence and integrity become compromised, market confidence
suffers.

8. Audit committees
An audit committee is a selected number of members of a companys board of directors
whose responsibilities include helping auditors remain independent of management. Most
audit committees are made up of three to five or sometimes as many as seven directors
who are not a part of company management.

9. Audit committees roles and responsibilities


The audit committees responsibility is to oversee and monitor the integrity, quality, and
reliability of the financial reporting process without stepping into the managerial
functions and decisions relating to the preparation of financial statements. Members of
the audit committee must be financially literate, professionally qualified, operationally
knowledgeable, and functionally independent to effectively fulfill their vigilant oversight
responsibility. The audit committee should meet regularly and as needed with the board
of directors, CEO, CFO, treasurer, controller, director of the internal audit function, and
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external auditors as a group, and also in private with each individual to review and assess
the integrity, and reliability of financial reports.
Rezaee et al. (2003) state that the evolution of audit committees shows many companies
voluntarily establishing audit committees in the mid-twentieth century to provide more
effective communication between the board of directors and external auditors

An added requirement from SOX is that audit committees have at least one member who
is a financial expert. Establishing an independent majority at Enron could have been
achieved by adding 12 new independent directors or replacing 12 board members with
potential conflicts of interest. At the same time, however, the board was comprised of
directors who arguably had the skills to monitor management, yet they did not

10.

Internal & External auditors and their roles and

responsibilities
As an important component of corporate governance, the internal audit function should
provide objective and independent assurance and consulting services for all of the
companys activities, including risk management, internal controls, financial reporting
and other corporate governance functions. The responsibilities of internal auditors are:
- Developing a flexible audit plan using an appropriate risk-based methodology
- Implementing the annual audit plan
- Maintaining a professional staffs who are capable and with sufficient knowledge,
experience.
- Issue periodic reports to audit committee
- Consider the scope of work of the external auditors and regulators.
According to Rezaee 2009, the WorldCom which bankrupted, the internal audit
department was ineffective as evidenced as the director of internal audit reported to the
companys CFO rather than to the audit committee, also all the internal audits budgets,
staffing, compensation and bonuses were controlled by the companys CEO, and the

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internal auditor focused primarily on operation and efficiency audits of cost savings and
finding additional revenues to gain management acceptance.
External auditors are responsible for auditing the companys financial statements and
providing reasonable assurance that they are presented fairly and in conformity with
GAAP and they reflect true representation of the companys financial position and results
of operations (Rezaee 2009).
Auditor effectiveness hinges on the auditor's ability to be an independent gatekeeper. The
independence of Arthur Andersen, Enron's auditor, has been questioned on at least three
grounds. First, because accountants rely on repeat business, simply accepting the audit
engagement may compromise auditor objectivity and independence (O'Connor, 2002).
The conventional counter argument is that auditors would not risk their reputation on a
single client's indiscretions for the modest fees involved (Coffee, 2002). Yet, evidence
from the 1990's suggests that auditors have knowingly certified fraudulent accounts, even
though the financial gains appear to be dwarfed by reputation loss (Prentice, 2000).
Secondly For two years Andersen served as Enron's internal and external auditor.
Essentially, when Andersen performed the external audit it was reviewing its own work.
In addition, Andersen advised Enron on the structure of many of its SPEs, received
consulting income for doing so, and then audited transactions between Enron and the
SPEs (Powers et al., 2002). Third, during this period audit firms routinely earned
consulting income from their audit clients. This raised questions as to whether or not the
magnitude of consulting fees, relative to those received for audit services, might
compromise the integrity of the audit.
Third, during this period audit firms routinely earned consulting income from their audit
clients. This raised questions as to whether or not the magnitude of consulting fees,
relative to those received for audit services, might compromise the integrity of the audit.

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11.

How Corporate Governance best practice may

achieve proper check and balance

One of the challenges that could occur within organizational behaviour in any business is
managing the uncertainty, diverse workforce, conflicts and complex organizational
issues. Today management needs to think out of the box and understand the importance
of corporate governance and ethical behaviour that require leadership management. The
unethical accounting practices and mismanagement occurred within organizations, should
be todays managers avoidance guide in order to keep away from fraud and other
business risks. What happened in Tyco is the failure of management checking unethical
practices. All organizations have ethics code in place but it is merely a guideline
organization should monitor how actively ethical code is followed. (Tyco International
Business Failure, n.d.)
To achieve proper check and balance the companies need to practice good corporate
governance. Hence it encourages transparency and accountability in the management of
companies. Companies like Enron, WorldCcom and Tyco, corporate governance was not
properly followed, as a result the company faced bankruptcy. These companies would
have been avoided the situation if they had practiced responsibility, reliability,
accountability and transparency.
Combined Code is one of the best practices that would have been practiced in the
companies, which sets out the principles of good governance and a code of best practices
for companies and for institutional shareholders. The set of principles and the code of
best practices will promote good governance in the belief that the code will support a
long term success of the company. The principles of the code are intended to encourage
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appropriate board behaviour. (ICSAIQS, 2006) The primary responsibility of the board of
directors is to ensure that the company assets are safeguard and that managerial decisions
and actions are made in a manner of maximizing shareholder wealth while protecting
interest of other stakeholders. (Rezaee, 2009) According to the combined code principles
D.2 states that, the board should maintain a sound system of internal control to safeguard
shareholders investment and the companys assets. (ICSAIQS, 2006) In Tyco corporate
governance was not mandatory; hence Tyco shareholders had lost 77% of their equity
investment value in just six months. (Levensohn, 2002)

Adopting Internal control facilitates the effectiveness and efficiency of operations; helps
ensure the reliability of internal external reporting and assist compliance with laws and
regulations. Effective financial controls, including the maintenance of proper accounting
reports, are an important element of internal control. They help ensure that the company
is not unnecessarily exposed to avoidable financial risks and that financial information
used within the business and publication is reliable. They also contribute to the
safeguarding of assets, including the prevention and detection of fraud. (ICSAIQS, 2006)
One of the best practices that could avoid such incidents from happening is, that
organization should obtain a fairness opinion from a qualified and independent third party
in the event of any material transaction involved a potential conflict of interest, such as an
insider loan, purchase or sale, or a material merger or acquisition. Investment bankers and
other qualified third parties rendering fairness opinion should not receive a percentage of
the transaction consideration for rendering the fairness opinion. (Lipman, 2006)
The corporate governance practices developed under Sarbanes Oxley Act 2002 enacted
by US government, in their financial statements. It proposed in section 303 regarding
improper influence on code of Audit states that it shall be unlawful for any officer or
director of an issuer to take any action to fraudulently influence, coerce, manipulate, or
mislead auditors in the performance of the financial statements. (Rezaee, 2009)
Furthermore Oxley Act states that in section 302 regarding Corporate Responsibility for
Financial reports that the signing officers (example. CEO, CFO) shall certify in each
annual or quarterly report filed with the SEC that, the report does not contain any untrue
statement of a material fact or omitted material facts that cause the material to be
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misleading. Besides that it says financial statements and disclosures fairly present, in all
material respect, the financial condition and results of operations of the issuer. The
signing officers are responsible for establishing and maintaining adequate and effective
controls to ensure reliability of financial statements and disclosures. The signing officers
are responsible for proper design and periodic assessment of the disclosure of material
deficiencies in internal controls to external auditors and the audit committee. (Rezaee,
2009) If these rules should have been followed by Tyco and Enron, the companies would
have not been in deep financial crisis.
Companies also should be concerned on is its shareholders rights. The board of directors
should govern their company in the best interests of its owners, the shareholders. The
main objective of a company should be to maximise the wealth of its shareholders, in the
form of share price growth and dividend payment. The directors should be accountable to
their shareholders who should have the power to remove them from office if their
performance is inadequate. Similarly stakeholders should be equally important as
shareholders. (ICSAIQS, 2006)

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12.

Conclusion

Good corporate governance is a must for todays complex and dynamic business
environment to ensure long-term sustainability. So, it should be cultivated and practiced
regularly within the current structure of the business. We may institute international
awards for good corporate behavior, and promote a global corporate governance ranking
system for Fortune 500 corporations and alike. If, as corporations, we ignore the lessons
that companies like Enron, WorldCom and Tyco have to offer, we will fail to regain the
public trust that is so essential to our long-term success and survival. Corporations that
genuinely recognize and embrace the principles of good governance will derive
enormous benefits, the availability and lower cost of capital, the ability to attract talent
clients and business partners, improved competitiveness and financial performance, and
truly sustainable long term growth. And, undoubtedly, accounting will show us the way to
proceed with corporate governance where bad governance generally comes from
financial dissatisfaction and over exercising of power. It is under the duty of the
management to safeguard the public interest of the company and work for best interest of
shareholders and stakeholders. Companys needed to adopt corporate governance best
practices, such as combined code and Oxley Act, and should monitor how actively the
best practices are followed. Moreover, be accountable and transparency, and make the
company more reliable to its investors. If corporate governance is followed accordingly,
the company would not have being suffered from corporate scandals and fraud.

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13.
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References
Adams, R., and Mehran, H. (2002) Board Structure And Banking Firm
Performance, Working Paper, Federal Reserve Bank of New York
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high

Coffee, 2002 J.C. Coffee Jr., Understanding Enron: It's about the gatekeepers,
stupid, Columbia Law School, The Center for Law and Economic Studies, Working
Paper vol. 207 (2002) (July 30).

Elsevier 2007 , Corporate governance post-Enron: Effective reforms, or closing the


stable door? [online]

ICSA IQS, 2006. Text book Corporate Governance. Version 2

Lipman, F. D & Lipman, L. K, 2006, Corporate Governance best practices, 11th ed.
New Jersey: John Wiley & Sons, Inc.

O'Connor, 2002 O'Connor, S.M., 2002. The inevitability of Enron and the
impossibility of auditor independence under the current audit system, University of
Pittsburgh School of Law, Unpublished paper.

Powers et al., 2002 W.C. Powers Jr., R.S. Troubh and H.S. Winokur Jr., Report of the
Special Investigative Committee of the Board of Directors of Enron Corporation

(2002).
Prentice, 2000 R.A. Prentice, The case of the irrational auditor: a behavioral insight
into securities fraud litigation, Northwestern University Law Review 95 (2000), p.
1333.

Rezaee, Z., 2009. Corporate Governance and Ethics, United States: John Wiley &
Sons, Inc.

World Bank (2005). Corporate Governance Country Assessment: Malaysia. Report on


the Observance of Standards and Codes (ROSC). June

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Z. Rezaee, K. Olibe and G. Minmier 2003, Improving corporate governance, The role
of audit committee, Managerial Auditing Journal 18 (6/7), pp. 530537.

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