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1.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.

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Introduction to Corporate Governance:

Corporate is a single word used for multiple

components and working together and providing

direction is governance. The CEO with corporate

executive’s assistance has to make maximum efforts

to satisfy all types of stakeholders.

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• There are three broad categories of corporate and
each one has its own method of governance and
fair-unfair practices:
• (i) Private Corporations:
• Some companies are very tightly held by individuals
or family members. Both small and big companies
are in this category and managed under
authoritative leadership. There will be many types
of unfair practices pertaining to statutory payments,
disparity in payments, hiring-firing and
opportunism. There is heavy emphasis to business
and profits and no emphasis to society related
activities. 4
• (ii) Public Corporations:
• This category consists of state owned, central
government owned public sector enterprises,
some of the very old private companies running on
the lines of Public Sector Enterprises.
• This is almost opposite type of private
corporations. Lack of accountability more concern
for employee welfare and lack of competitiveness in
product and marketing.
• There will be many cases of bribery and unethical
practices in various corporate related activities.

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 (iii) Professional Corporations:
There are MNCs and other private and
public limited companies where
promoter’s and other directors are all
professionally qualified and competent.
They are competent in their industry,
do-well, grow well and take care of the
Corporate Social Responsibilities to the
maximum possible extent. The morale of
employees is very high and job
satisfaction is yet to achieve. 6
• The key issues that guide a company as to how
and who are managing is based on the finance
structure of the company which has direct
bearing on ownership or who is the boss? This
leads to the board composition and it’s
working. The institutional environment inside
and outside the organisation plays a crucial
role in decision making issues.

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• Indian corporate is yet to achieve success in
corporate governance, setting values and
flextime working. This is due to the facts that
Indians follow discipline under regulations of
rules. Ethical values cover various aspects like
fair competition, social responsibility,
consumer care and corporate image.

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 2.Corporate governance: Objectives and
guiding principles
• There are inherent conflicts of interest in
corporations in which the ownership and
management are separate.
• 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.
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 Meaning
Corporate governance is the system of
rules, practices and processes by which a
company is directed and controlled.
Corporate governance essentially
involves balancing the interests of a
company's many stakeholders, such as
shareholders, management, customers,
suppliers, financiers, government and the
community.
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 The purpose of corporate governance is to
facilitate effective, entrepreneurial and
prudent management that can deliver the
long-term success of the company. Corporate
governance is the system by which companies
are directed and controlled. Boards of
directors are responsible for the governance of
their companies. 13
 corporate governance principles for public
companies, their board of directors and their
shareholders. These principles are intended
to provide a basic framework for sound,
long-term- oriented governance.

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 Corporate governance is intended to
increase the accountability of your
company and to avoid massive disasters
before they occur. Failed energy giant Enron,
and its bankrupt employees and
shareholders, is a prime argument for the
importance of solid corporate governance.
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 Importance of Corporate Governance. OECD Principles
describe corporate governance in terms of relationship
between management of company, its shareholders, its
board and other stakeholders. It is a system which is used
for the purpose of controlling and directing the
companies.

Organisation for Economic Co-operation and

Development
The mission of the Organization for Economic Co-operation and
Development (OECD) is to promote policies that will improve the
economic and social well-being of people around the world.
The OECD provides a forum in which governments can work together
to share experiences and seek solutions to common problems.

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Members and partners. The OECD's origins
date back to 1960, when 18 European
countries plus the United States and
Canada joined forces to create an
organisation dedicated to economic
development. Today, our 35 Member
countries span the globe, from North and
South America to Europe and Asia-Pacific.

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AUSTRALIA 7 June 1971
AUSTRIA 29 September 1961
BELGIUM 13 September 1961
CANADA 10 April 1961
CHILE 7 May 2010
CZECH REPUBLIC 21 December 1995
DENMARK 30 May 1961
ESTONIA 9 December 2010
FINLAND 28 January 1969
FRANCE 7 August 1961
GERMANY 27 September 1961
GREECE 27 September 1961
HUNGARY 7 May 1996
ICELAND 5 June 1961
IRELAND 17 August 1961
ISRAEL 7 September 2010
ITALY 29 March 1962
JAPAN 28 April 1964
KOREA 12 December 1996
LATVIA 1 July 2016
LUXEMBOURG 7 December 1961
MEXICO 18 May 1994
NETHERLANDS 13 November 1961
NEW ZEALAND 29 May 1973
NORWAY 4 July 1961
POLAND 22 November 1996
PORTUGAL 4 August 1961
SLOVAK REPUBLIC 14 December 2000
SLOVENIA 21 July 2010
SPAIN 3 August 1961
SWEDEN 28 September 1961
SWITZERLAND 28 September 1961
TURKEY 2 August 1961
UNITED KINGDOM 2 May 1961
UNITED STATES 12 April 1961
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 Public governance is an interdisciplinary field of study
centering on relationships of power between
government authorities, civil society and the market, in
a context of transformations in the ability of political
communities to legitimately govern themselves and act
effectively.

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 Corporate Governance: Academic Definitions

corporate governance system is the combination of mechanisms

which ensure that the management (the agent) runs the firm for
the benefit of one or several stakeholders (principals). Such
stakeholders may cover shareholders, creditors, suppliers, clients,
employees and other parties with whom the firm conducts its
business.  — Goergen and Renneboog, 2006

…. deals with the conflicts of interests between the providers of

finance and the managers; the shareholders and the stakeholders;
different types of shareholders (mainly the large shareholder and
the minority shareholders); and the prevention or mitigation of
these conflicts of interests. — Marc Goergen, 2012.

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Corporate Governance: Practitioner Definitions

…. is the relationship between corporate managers,

directors and the providers of equity, people and
institutions who save and invest their capital to earn a
return. It ensures that the board of directors is
accountable for the pursuit of corporate objectives and
that the corporation itself conforms to the law and
regulations. – International Chamber of Commerce

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 Corporate Governance: Legal Definitions

American corporate governance doctrine primarily describes the control rights

and related responsibilities of three principal groups:
1.the firm’s shareholders, who provide capital and must approve major firm
transactions,
2.the firm’s board of directors, who are elected by shareholders to oversee the
management of the corporation, and
3.the firm’s senior executives who are responsible for the day today operations of
the corporation.
As the Delaware Supreme Court has stated, “the most fundamental principles of
corporate governance are a function of the allocation of power within a
corporation between its stockholders and its board of directors.” (J. Robert
Brown, Jr. and Lisa L. Casey, Corporate Governance: Cases and Materials, 2012)23
• ROLE OF LA W IN CORPORATE GOVERNANCE
Law can only provide a minimum code of conduct for proper regulation of human being or
company.
• Law is made not to stop any act but to ensure that if you do that act, you will face such
consequences i.e. good for good and bad for bad. Thus, in the same manner, role of law in
corporate governance is to supplement and not to supplant.
• It can not be only way to govern corporate governance but instead it provides a minimum
code of conduct for good corporate governance.
• Law provides certain ethics to govern one and all so as to have maximum satisfaction and
minimum friction. It plays a complementary role.
• Role of law in corporate governance is in Companies Act which imposes certain
restrictions on Directors so that there is no misrepresentation of documents, there is no
excessive of power, so that it imposes duty not to make secret profit and make good losses
due to breach of duty, negligence, etc, duty to act in the best interest of the company etc.

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PERSPECTIVES OF CORPORATE GOVERNANCE
Before dealing with ‘perspectives’ of corporate governance lets understand what is meant by the
term ‘perspective’. Oxford Advanced Learner Dictionary defines the term perspective as:-
1.    ‘The Art of drawing solid objects on a flat surface so as to give the right impression of their
relative height, width, depth, distance, etc.’
2.   Apparent relation between different aspects of a problem.
In simple terms it means ‘the right impression’.

Mainly we will deal with the perspectives of corporate governance from three points of view:
1.   Shareholders (Capital Market) – Control perspective
2.   Organization (Management) – Control perspective
3.   Stakeholders –  Control perspective
1. Shareholders: as providers of a risk capital have final control on resource allocation
decisions.

2. Organization: have the main purpose is to control i.e. through skills, intelligence, innovation,
ideas, professionalism etc. Therefore, here in this perspective, resource allocation decision
should rest with them.

3. Stakeholders: here, it says that for long term business, only shareholders value maximization
should not be seen as sole goal but it should be for well being of all groups with stake of long
run of business and it should be goal of corporate governance.

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IMPORTANT ISSUES IN CORPORATE GOVERNANCE

There are several important issues in corporate governance and they

play a great role, all the issues are inter related, interdependent to deal
with each other. Each issues connected with corporate governance have
different priorities in each of the corporate bodies.
The issues are listed as below:
1.       Value based corporate culture
2.       Holistic view
3.       Compliance with laws
4.       Disclosure, transparency, & accountability
5.       Corporate governance and human resource management
6.       Innovation
7.       Necessity of judicial reforms
8.       Globalization helping Indian companies to become global giants
based on good corporate governance. 26
1.  Value based corporate culture: For any organization to run in effective way, it needs to have
certain ethics, values. Long run business needs to have based corporate culture. Value based
corporate culture is good practice for corporate governance. It is a set of beliefs, ethics,
principles which are inviolable. It can be a motto i.e.  A short phrase which is unique and helps in
running organization, there can be vision i.e. dream to be fulfilled, mission and purpose,
objective, goal, target.

2.  Holistic view: This holistic view is more or less godly, religious attitude which helps in running
organization. It is not easier to adopt it, it needs special efforts and once adopted it leads to
developing qualities of nobility, tolerance and empathy.

3.  Compliance with laws: Those companies which really need progress, have high ethical values
and need to run long run business they abide and comply with laws of Securities Exchange
Board Of India (SEBI), Foreign Exchange Regulation Act, Competition Act 2002, Cyber Laws,
Banking Laws etc. 27
4.  Disclosure, transparency, and accountability: Disclosure, transparency and accountability are
important aspect for good governance. Timely and accurate information should be disclosed on
the matters like the financial position, performance etc. Transparency is needed in order that
government has faith in corporate bodies and consequently it has reduced corporate tax rates
from 30% today as against 97% during the late 1970s. Transparency is needed towards corporate
bodies so that due to tremendous competition in the market place the customers having choices
don’t shift to other corporate bodies.

5.  Corporate Governance and Human Resource Management: For any corporate body, the
employees and staff are just like family. For a company to be perfect the role of Human Resource
Management becomes very vital, they both are directly linked. Every individual should be
treated with individual respect, his achievements should be recognized. Each individual staff and
employee should be given best opportunities to prove their worth and these can be done by
Human Resource Department. Thus in Corporate Governance, Human Resource has a great role.
6.  Innovation: Every Corporate body needs to take risk of innovation i.e. innovation in products,
in services and it plays a pivotal role in corporate governance.
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7.  Necessity of Judicial Reform[5]: There is necessity of judicial reform for a good economy and
also in today’s changing time of globalization and liberalization. Our judicial system though
having performed salutary role all these years, certainly are becoming obsolete and outdated
over the years. The delay in judiciary is due to several interests involved in it. But then with
changing scenario and fast growing competition, the judiciary needs to bring reforms
accordingly. It needs to speedily resolve disputes in cost effective manner.

8.  Globalization helping Indian Companies to become global giants based on good
governance: In today’s age of competition and due to globalization our several Indian Corporate
bodies are becoming global giants which are possible only due to good corporate governance.

9.  Lessons from Corporate Failure[6]:  Every story has a moral to learn from, every failure has
success to learn from, in the same way, corporate body have certain policies which if goes as a
failure they need to learn from it. Failure can be both internal as well as external whatever it
may be, in good governance, corporate bodies need to learn from their failures and need to
move to the path of success.
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 CORPORATE GOVERNANCE IN INDIA PAST, PRESENT & FUTURE

Good corporate governance in the changing business environment has emerged as powerful
tool of competitiveness and sustainability. It is very important at this point and it needs
corporation for one and all i.e. from CEO of company to the ordinary staff for the maximization
of the stakeholders’ value and also for maximization of pleasure and minimization of pain for the
long term business.
Global competitions in the market need best planning, management, innovative ideas,
compliance with laws, good relation between directors, shareholders, employees and customers
of companies, value based corporate governance in order to grow, prosper and compete in
international markets by strengthen their strength overcoming their weaknesses and running
them effectively and efficiently in an efficient and transparent manner by adopting the best
practices.

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Corporate India must commit itself as reliable, innovative and prompt service provider to their
customers and should also become reliable business partners in order to prosper and to have
all round growth.
Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking
having certain ethics, values, principles etc which gives direction and shape to its people,
employees and owners of companies and help them to flourish in global market.
Indian Corporate Bodies having adopted good corporate governance will reach themselves to a
benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate
governance lays down ethics, values, and principles, management policies of a corporation
which are inculcated and brought into practice. The importance of corporate governance lies in
promoting and maintains integrity, transparency and accountability throughout the
organization.

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Corporate governance has existed since past but it was in different form. During Vedic times

kings used to have their ministers and used to have ethics, values, principles and laws to run

their state but today it is in the form corporate governance having same rules, laws, ethics,

values, and morals etc which helps in running corporate bodies in the more effective ways so

that they in the age of globalization become global giants.

Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of the

global giants which have their flag of success flying high in the sky due to good corporate

governance.

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Today, even law has a great role to play in successful and growing economy. Government and

judiciary have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition

laws etc and have brought several amendments and repeal the laws in order that they don’t act

as barrier for these corporate bodies and developing India. Judiciary has also helped in great

way by solving the corporate disputes in speedy way.

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Corporate bodies have their aim, values, motto, ethics and principles etc which guide them to

the ladder of success. Big and small organizations have their magazines annual reports which

reflect their achievements, failure, their profit and loss, their current position in the market. A

few companies have also shown awareness of environment protection, social responsibilities

and the cause of upliftment and social development and they have deeply committed

themselves to it. The big example of such a company can be of Deepak Fertilizers and

Petrochemicals Corporation Limited which also bagged 2nd runner up award for the corporate

social responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to shareholders, they

even get chance to attend, vote at general meetings, make observations and comments on the
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performance of the company.
Corporate governance from the futuristic point of view has great role to play. The corporate
bodies in their corporate have much futuristic approach. They have vision for their company, on
which they work for the future success. They take risk and adopt innovative ideas, have futuristic
goals, motto, and future objectives to achieve.

With increase in interdependent and free trade among countries and citizens across the globe,
internationally accepted corporate governance standards are of paramount importance for
Indian Companies seeking to distinguish themselves in global footprint. The companies should
always keep improving, enhancing and upgrading themselves by bringing more reliable
integrated product and service quality. They should be more transparent in their conduct.

Corporate governance should also have approach of holistic view, value based governance,
should be committed towards corporate social upliftment and social responsibility and
environment protection. It also involves creative, generative and positive things that add value
to the various stakeholders that are served as customers. Be it finance, taxation, banking or legal
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framework each and every place requires good corporate governance.
 Three Types of Corporate Governance Mechanisms

• Effective corporate governance is essential if a business wants to

set and meet its strategic goals.

• A corporate governance structure combines controls, policies and

guidelines that drive the organization toward its objectives while

also satisfying stakeholders' needs.

• A corporate governance structure is often a combination of various

mechanisms 36
Internal Mechanism
• The foremost sets of controls for a corporation come from its internal
mechanisms

• These controls monitor the progress and activities of the organization

and take corrective actions when the business goes off track.

• Maintaining the corporation's larger internal control fabric, they serve

the internal objectives of the corporation and its internal stakeholders,
including employees, managers and owners.

• These objectives include smooth operations, clearly defined reporting

lines and performance measurement systems.

• Internal mechanisms include oversight of management, independent

internal audits, structure of the board of directors into levels of
responsibility, segregation of control and policy development
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External Mechanism
• External control mechanisms are controlled by those outside an organization and serve the

objectives of entities such as regulators, governments, trade unions and financial

institutions. These objectives include adequate debt management and legal compliance.

• External mechanisms are often imposed on organizations by external stakeholders in the

forms of union contracts or regulatory guidelines.

• External organizations, such as industry associations, may suggest guidelines for best

practices, and businesses can choose to follow these guidelines or ignore them.

• Typically, companies report the status and compliance of external corporate governance

mechanisms to external stakeholders.

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Independent Audit

• An independent external audit of a corporation’s financial statements is part of the overall

corporate governance structure.

• An audit of the company's financial statements serves internal and external stakeholders at

the same time.

• An audited financial statement and the accompanying auditor’s report helps investors,

employees, shareholders and regulators determine the financial performance of the

corporation.

• This exercise gives a broad, but limited, view of the organization’s internal working

mechanisms and future outlook.

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Small Business Relevance
• Corporate governance has relevance in the small business world as well. Internal mechanisms
of corporate governance may not be implemented on a noticeable scale by a small business,
but the functions can be applied to many small businesses nevertheless.

• Business owners make strategic decisions about how workers will do their duties, and they
monitor their performance; this is an internal control mechanism -- part of business
governance.

• Likewise, if a business requests a loan from a bank, it must respond to that bank’s demands
to comply with liens and agreement terms -- an external control mechanism. If the business
is a partnership, a partner might demand an audit to place reliance on the profit figures
provided -- another form of external control.

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 The Advantages of Corporate Governance

If you’re not a legal expert, you might be surprised by how many rules, regulations and laws

you might break during the operation of your business without even knowing it. One way to

avoid running afoul of local, state and federal agencies is to work with an attorney to

determine your obligations and then put rules and regulations in place that your employees

and contractors must follow to keep you compliant. Adding corporate governance

procedures will help you stay out of hot water while you focus on your money-making

concerns.

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Corporate Governance

Corporate governance is often associated with public companies, but small businesses can also

benefit from this practice. Corporate governance consists of rules that direct the roles and

actions of key people rather than processes. Unlike simple policies and procedures, such as a

dress code or expense reimbursement procedure, corporate governance rules focus on creating

better management and fewer ethical or legal problems.

Examples of corporate governance include setting rules for using business funds for personal

use; serving on a board of directors; hiring family members; conflicts of interest; notifying

owners, investors and partners of key meetings and decisions; and disbursing profits.

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Improved Reputation

A corporate governance program can boost your company's reputation. If you publicize your

corporate governance policies and detail how they work, more stakeholders will be willing to

work with you. This can include lenders who see you have strong fiscal policies and internal

controls, charities you might partner with to promote your business, government agencies,

employees, the media, vendors and suppliers. The practice of sharing internal information with

key stakeholders is known as transparency, which allows people to feel more confident you have

little or nothing to hide

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Fewer Fines, Penalties, Lawsuits

Corporate governance includes instituting policies that require the company to take specific

steps to stay compliant with local, state and federal rules, regulations and laws.

For example, as part of corporate governance, an executive management team or board of

directors might conduct a review of the company’s hiring practices if it falls under the

guidelines of the Equal Opportunity Employment Commission. You might require that your

accounting department undergo an external audit by an independent auditor every quarter or

year. 45
Decreased Conflicts and Fraud

Corporate governance limits the potential for bad behavior of employees by instituting rules to

reduce potential fraud and conflict of interest.

For example, the company might draft a conflict of interest statement that top executives must

sign, requiring them to disclose and avoid potential conflicts, such as awarding contracts to

family members or contracts in which an executive has an ownership interest. The company

might forbid loans to officers and family members or the hiring of family members. External

audits or requiring checks over a certain amount to be approved and signed by two people help
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 The Disadvantages of Corporate Governance

Corporations are separate legal entities, wholly distinct from their shareholders. Shareholders

elect the board of directors which, in turn, manages the business. Usually the board employs

officers and managers to run the daily operations of the corporation. However, in small

corporations, all of these -- shareholders, board, officers and managers -- may be one and the

same. The related governance requirements have several disadvantages.

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Corporations Governed by Statutes

Corporations are governed by federal and state statutes. One major reason business

owners form corporations is to limit the owners' liability to the amount of their

investments. Another reason founders form corporations is because corporations are

permitted to raise capital by selling stock to investors and have a long legal and case

history to support this. With this corporate structure comes certain requirements.

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Fiduciary Duty of Board

Officers and the board of directors have fiduciary duties to act in the best interest of

the corporation. If they breach those duties by not exercising honest and prudent

care, they can be held liable. This is why companies where shareholders elect non-

shareholder directors often provide directors and officers, or D&O;, insurance. D&O;

insurance does not protect against outright fraud, but it does protect against fallout

from bad business decisions.

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Increased Costs

Corporations have higher administrative costs because of greater administrative requirements

than those required of LLCs and limited partnerships. Corporate boards must either meet or

create resolutions to enter into financial arrangements or contractual arrangements.

Corporations must maintain corporate documentation, including stock purchases and sales,

legal compliance and annual registration.

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Maintenance of Separation

Corporations, shareholders and board directors and officers must follow all the corporate

formalities, including keeping annual meeting minutes for both shareholders’ meeting and

board of directors’ meetings, documenting major decisions as board-approved. Even

corporations owned and governed by one shareholder in multiple director roles must

adhere to all formalities. Shareholder-owners must sign all documents as their position, for

example, “John Smith, President, ABC Company." Failure to adhere to these rules could

result in a creditor getting a judge to pierce the corporate veil. When a court or judge

“pierces the corporate veil,” the court sets aside the corporate protection and allows the

creditors to go after the personal assets of the shareholders.

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Principal Agent Conflict

Conflicts arise when a corporation’s shareholders do not actively participate in the

business and instead hire professional management to run the business. The manager

represents the shareholders but often has different goals and perspectives. The manager

acts in his best interest as an employee but not in the best interest of the shareholders.

For example, a manager may make decisions that help him keep his job and a nice salary

but that reduce the amount of profits that go to the shareholders. Shareholders must

structure employment agreements to reduce or eliminate this conflict.

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(i) People:
It is people who run any company. The people are its stakeholders like investor,
customers, employees, lenders, suppliers, government and society at large. The inside
stakeholders in a company should be capable, talented for their jobs, purpose oriented
workers and ethical in their approach.
The management should be fair, equitable and result oriented. The company
management must incorporate ethical practices in the company like transparency and
integrity. Cordial relationships with different stakeholders and their involvement in
decision making process reduce conflict areas.

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(ii) Purpose:

The management of a company should be clear in the purpose of a company. The purpose

should be communicated and known to all. The purpose should be altered as time and

conditions change. The established purpose should be measurable and actionable.

Purpose definition leads to vision and mission of a company. In turn setting path for

strategic and detailed action plans of a company processes.

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(iii) Process:

The process management in a company be defined and documented. The process

management has subgroups resource management, organisation management, supply

chain management, energy management, marketing management, information

management, risk management and the lie

The processes management include how these will coordinate and bring the preset

results. The control parameters and mechanisms will show the areas of deficiencies in

these processes. The plant and processes are governed by various rules and laws of the

country which need compliance. 82

(iv) Performance:

The performance levels should be set and communicated so that all in chain know what is

expected. What is acceptable and what is not. The performance should be measurable.

Regular measurement leads to finding operation efficiencies and shortcomings at

different levels. The performance measurement can be fixed on the monetary

transactions in a company like asset efficiency or supply chain expenditure

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Global and Regional Trends in
Corporate Governance

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 Core Attributes of an effective corporate
governance system

Clearly defined manager and Identifiable and measureable

director governance accountabilities
responsibilities
Delineation of rights of
shareholders and other
stakeholders

Fairness and equitable Transparency and accuracy in

treatment in dealings disclosures

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 Forms of business
and conflicts of interest
The form of business will dictate, in part, the
relationship between the owners of the business
and management.
– The degree of separation may be minimal (e.g., sole
proprietorship), or significant (e.g., large corporation).
– When there is a separation between owners and
managers, there is a potential for agency problems,
which may affect the value of the business.
– We will examine three business forms: the sole
proprietorship, the partnership, and the corporation.
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 Sole proprietorship
• A sole proprietorship is owned and operated by a
single person
• Sole proprietorships are the most numerous in
terms of number of businesses.
• Who bears governance risk in a sole proprietorship?
– There are few risks with respect to governance from the
perspective of the owner.
– Creditors, including trade creditors, have the highest risk
with respect to governance.

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 Partnership
• A partnership has two or more
owner/managers.
• Who bears governance risk in a partnership?
– There are few risks with respect to governance
from the perspective of the owners, with
ownership rights and responsibilities detailed in
the partnership agreement.
– Creditors, including trade creditors, have the
higher risk with respect to governance.

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 Corporation
• A corporation is a legal entity that has rights
similar to an individual.
– For example, a corporation can enter into contracts.
• Corporations account for most business revenue
around the world.
– Corporations around the world: Limited Company
(U.K.), Gesellschaft (German); Societé Anonyme
(France), 公司 (China); şirket (Turkey); บริษัท
(Thailand)

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 Advantages of the corporate form
1.A corporation can raise capital.
– Grant ownership stakes (that is, issue stock) or
borrow (that is, issue bonds).
2.Owners need not know how to run the
business.
– The corporation hires experts to manage the
business.
3.Ownership interests are transferrable.

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 Disadvantages of the corporate form
1.Corporations are more highly regulated than are partnerships or
sole proprietorships.
– For example, in the U.S. there are State laws pertaining to corporations
and the Securities and Exchange Commission requires specific disclosures.
2.Separation of owners and managers.
– This is the agency relationship, in which someone (the agent) acts on
behalf of another person (the principal).
– The potential conflict between owners and managers is the agency
problem or principal-agent problem,
• Principals: shareholders
• Agents: Management and members of the board of directors
– There are costs to this agency relationship arising from conflicts of
interest.

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 Forms of business and
conflicts of interest
Characteristic Sole Proprietorship Partnership Corporation
Ownership Sole owner Multiple owners Unlimited ownership
Legal requirements and regulation Few; entity easily Few; entity easily Numerous legal
formed formed requirements
Legal distinction between owner None None Legal separation
and business between owners and
business
Liability Unlimited Unlimited but shared Limited
among partners
Ability to raise capital Very limited Limited Nearly unlimited
Transferability of ownership Non-transferable Non-transferable Easily transferable
(except by sale of
entire business)
Owner expertise in business Essential Essential Unnecessary

Exhibit 1-1, page 4

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 Specific sources of conflict:
Agency relationships
Management–Shareholder
Management–Shareholder conflicts
conflicts

Board
Board of
of
Managers
Managers Shareholders
Shareholders
directors
directors

Director–Shareholder conflicts

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 Management–Shareholder Conflicts
• Shareholders entrust management with funds from reinvested
earnings or newly issued stock, which management invests.
• The overarching objective is to maximize shareholders’ wealth.
• Issue: Managers are human
– Managers may be more interested in expanding the size of the business,
bonuses based on earnings, taking on excessive risks, or job security.
– Managers may consume excessive perquisites, or in effect, take advantage
of their position to spend excessively on things for themselves.
– Bottom line: there may be agency costs in terms of the explicit and implicit
costs when managers do not act in the best interest of shareholders.
• Effective corporate governance guards against agency costs.

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 Director–shareholder conflicts
• The board of directors are an intermediary between the
shareholders and management, and represent shareholders’
interests by:
– Monitoring managers;
– Approving strategies and policies;
– Approving mergers and acquisitions;
– Approving audit contracts;
– Reviewing audit contracts and financial contracts;
– Establishing management compensation;
– Disciplining poorly performing managers.
• A conflict may arise if the board members align with
management.

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 Responsibilities of the
Board of Directors
• Establish corporate values and governance structures for the company;
• Ensure that all legal and regulatory requirements are met and complied with
fully and in a timely fashion;
• Establish long-term strategic objectives for the company;
• Establish clear lines of responsibility and a strong system of accountability and
performance measurement;
• Hire the chief executive officer, determine the compensation package, and
periodically evaluate the officer’s performance;
• Ensure that management has supplied the board with sufficient information for
it to be fully informed and prepared to make the decisions that are its
responsibility, and to be able to adequately monitor and oversee the company’s
management;
• Meet regularly to perform its duties;
• Acquire adequate training.

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 Corporate Governance Evaluation:
Board of director Attributes
• The board should be comprised primarily of independent
directors (that is, not insiders)
• The Chairman of the Board should be independent;
• Directors should be qualified;
• There should be a regular election of members of the Board;
• There should be a regular self-assessment of the Board;
• The board should hold separate meetings of the independent
directors;
• The board should require audit oversight by independent
directors who have sufficient expertise in finance, accounting,
and the law.

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 5. CORPORATE GOVERNANCE EVALUATION:
BOARD OF DIRECTOR ATTRIBUTES (CONTINUED)
• The nominating committee should be comprised of independent directors;
• The compensation committee should be comprised of independent directors;
• The board should be able to hire outside counsel;
• The board should disclose governance policies;
• The board should ensure adequate disclosure and transparency;
• The board should require disclosure of any related-party transactions;
• The board should respond to shareholders’ non-binding proxy votes.

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 Monetary Authority of Singapore
Guidelines and Regulations
on Corporate Governance
Principle 1: Every Institution should be headed by an effective Board.
Principle 2: There should be a strong and independent element on the Board
which is able to exercise objective judgment on corporate affairs
independently from management and substantial shareholders.
Principle 3: The Board should set and enforce clear lines of responsibility
and accountability throughout the Institution.
Principle 4: There should be a formal and transparent process for the
appointment of new directors to the Board.
Principle 5: There should be a formal assessment of the effectiveness of the
Board as a whole and the contribution by each director to the
effectiveness of the Board.
Principle 6: In order to fulfill their responsibilities, Board members should be
provided with complete, adequate and timely information prior to
board meetings and on an on-going basis by the management.

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 Guidelines and Regulations on Corporate
Governance (continued)
Principle 7: There should be a formal and transparent procedure
for fixing the remuneration packages of individual
directors. No director should be involved in deciding his
own remuneration.
Principle 8: The level and composition of remuneration should
be appropriate to attract, retain and motivate the directors
to perform their roles and carry out their responsibilities.
Principle 9: The Board should establish an Audit Committee with
a set of written terms of reference that clearly sets out its
authority and duties.
Principle 10: The Board should ensure that there is an adequate
risk management system and sound internal controls.

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 GUIDELINES AND REGULATIONS ON CORPORATE
GOVERNANCE (CONTINUED)

Principle 11: The Board should ensure that an internal audit

function that is independent of the activities audited
is established.
Principle 12: The Board should ensure that management
formulates policies to ensure dealings with the
public, the Institution’s policyholders and claimants,
depositors and other customers are conducted fairly,
responsibly and professionally.
Principle 13: The Board should ensure that related party
transactions with the Institution are made on an
arm’s length basis.

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Organisation for Economic Co-Operation and Development (OECD)
Principles of Corporate Governance
• The rights of shareholders
I

• The equitable treatment of shareholders

II

• The role of stakeholders in corporate governance

III

• Disclosure and transparency

IV

• The responsibilities of the board

V

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 Environmental, social, and governance
factors
ESG risk exposure

• Environmental, social, and governance (ESG)

risk is the risk associated with the management
of environment, social, and governance issues.
– Involves mitigating risks
Environment
and managing
Social
these risks
Governance
when they arise. • Workplace issues • Effective
• Pollution

• ESG risk affects the company’s sustainability

• Disclosures • Product quality
and safety
governance

• Community
and valuation. interaction

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 Examples of ESG risks
• Legislative and regulatory risk (that is, the role
of governments)
• Legal risk (for example, lawsuits)
• Reputational risk
• Operating risk
• Financial risk

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Valuation implications of corporate
governance

Benefits from a strong

corporate governance

Risks of weak corporate

governance

107
 Risks of weak corporate governance

Strategic policy
Accounting risk Asset risk Liability risk
risk
• The risk that a • The risk that the • The risk that • The risk that
company’s firm’s assets may management managers may
financial be will enter into enter into
statement misappropriated excessive transactions or
recognition and by managers or obligations that incur other
related directors. destroy the business risks
disclosures are value of that are self-
incomplete, shareholders’ serving and may
misleading, or equity. not be in the
materially best long-term
misstated. interest of
shareholders.

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 Benefits from strong governance
Evidence suggests that:
– companies with strong governance had greater
investment performance.
– companies with strong shareholders’ rights
outperformed those with weak protections.

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 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.

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 Summary (continued)
• The specific sources of conflict in corporate
agency relationships are manager-shareholder.
• The responsibilities of board members, both
individually and as a group, are to establish
corporate values and effective governance
structures for the company.

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 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;
– 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.

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 ASSIGNMENT 1

http://www.russellreynolds.com/insights/thought-
leadership/global-and-regional-trends-in-corporate-
governance-for-2016

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