Unite 6

Corporate Governance and Leadership

Concept, scope significance and theories of corporate governance

What is Corporate Governance?

Corporate Governance refers to the way a corporation is governed. It is the technique by which
companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It
is actually conducted by the board of Directors and the concerned committees for the company’s
stakeholder’s benefit. It is all about balancing individual and societal goals, as well as, economic and
social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors,
and company’s management) in shaping corporation’s performance and the way it is proceeding towards.
The relationship between the owners and the managers in an organization must be healthy and there
should be no conflict between the two. The owners must see that individual’s actual performance is
according to the standard performance. These dimensions of corporate governance should not be
overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a
fair return on their investment. Corporate Governance clearly distinguishes between the owners and the
managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of
owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate
authority and complete responsibility to the Board of Directors. In today’s market- oriented economy, the
need for corporate governance arises. Also, efficiency as well as globalization are significant factors
urging corporate governance. Corporate Governance is essential to develop added value to the
stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic
development. This also ensures that the interests of all shareholders (majority as well as minority
shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the
organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate
Governance encourages a trustworthy, moral, as well as ethical environment.

Benefits of Corporate Governance

1. Good corporate governance ensures corporate success and economic growth.
2. Strong corporate governance maintains investors’ confidence, as a result of which, company can
raise capital efficiently and effectively.
3. It lowers the capital cost.
4. There is a positive impact on the share price.
5. It provides proper inducement to the owners as well as managers to achieve objectives that are in
interests of the shareholders and the organization.
6. Good corporate governance also minimizes wastages, corruption, risks and mismanagement.
7. It helps in brand formation and development.
8. It ensures organization in managed in a manner that fits the best interests of all.
corporate governance failures

It doesn’t happen overnight and there are several warning signs which a firm must take note of in
order to avoid such failures.Some of the governance issues faced by the firms which eventually
lead to corporate governance failures are –
 Ineffective governance mechanisms, for example, lack of board committees or
committees consisting of few or a single member.
 Non-independent board and audit committee members, for example where a CEO
fulfilled multiple roles in various committees
 Management, who deliberately undermines the role of the various governance
structures by circumventing the internal controls and making misrepresentations to
auditors and the Board.
 Inadequately qualified members, for example,audit committee members not having
appropriate accounting and financial qualifications or experience to analyse key business
transactions, family members holding board positions without appropriate knowledge or
qualifications.
 Ignorance by regulators,auditors, analysts etc of the financial results and red flags.

Challenges to good corporate governance

Corporate governance is the term used to describe the balance among participants in the corporate structure
who have an interest in the way in which the corporation is run, such as executive staff, shareholders and
members of the community. Corporate governance directly impacts the profits and reputation of the company,
and having poor policies can expose the company to lawsuits, fines, reputational damage, and loss of capital
investment. Here are five common pitfalls your corporate governance policies should avoid.

1) CONFLICTS OF INTEREST
Avoiding conflicts of interest is vital. A conflict of interest within the framework of corporate governance
occurs when an officer or other controlling member of a corporation has other financial interests that directly
conflict with the objectives of the corporation. For example, a board member of a solar company who owns a
significant amount of stock in an oil company has a conflict of interest because, while the board he or she
serves on represents the development of clean energy, they have a personal financial stake in the success of the
oil industry. When conflicts of interest are present, they deteriorate the trust of shareholders and the public
while making the corporation vulnerable to litigation.

2) OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight of the company’s
procedures and practices. Oversight is a broad term that encompasses the executive staff reporting to the board
and the board’s awareness of the daily operations of the company and the way in which its objectives are being
achieved. The board protects the interests of the shareholders, acting as a check and balance against the
executive staff. Without this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the public.  
3) ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level executives to lower-tier
employees, each level and division of the corporation should report and be accountable to another as a system
of checks and balances. Above all else, the actions of each level of the corporation is accountable to the
shareholders and the public. Without accountability, one division of the corporation might endanger the
success of the entire company or cause stockholders to lose the desire to continue their investment.

4) TRANSPARENCY
To be transparent, a corporation must accurately report their profits and losses and make those figures
available to those who invest in their company. Overinflating profits or minimizing losses can seriously
damage the company’s relationship with stockholders in that they are enticed to invest under false pretenses. A
lack of transparency can also expose the company to fines from regulatory agencies.

5) ETHICS VIOLATIONS
Members of the executive board have an ethical duty to make decisions based on the best interests of the
stockholders. Further, a corporation has an ethical duty to protect the social welfare of others, including the
greater community in which they operate. Minimizing pollution and eschewing manufacturing in countries that
don’t adhere to similar labor standards as the U.S. are both examples of a way in which corporate governance,
ethics, and social welfare intertwine.

Corporate governance practices and leadership in Nepalese organizations

Many believe that only public companies or large, established companies with many
shareholders need to be concerned about, or can benefit from, implementing corporate
governance practices. The reality is that all companies – big and small, private and
public, early stage or established – compete in an environment where good governance
is a business imperative. One size doesn’t fit all, but right-sized governance practices
will positively impact the performance and long-term viability of every company.

This belief that corporate governance “doesn’t apply” comes from a view that it’s only
theoretical and doesn’t impact the bottom line or performance, is costly to implement, is
“bureaucratic” (and slows decision-making), it can’t be tailored to a company’s size and
stage of development – or all of these. But in reality, all companies compete in an
environment where good governance is a business imperative in relation to things like:

 raising capital;
 securing debt;
 attracting and maintaining talented, qualified directors;
 meeting the demands and expectations of sophisticated shareholders;
and
 preparing for potential acquisition / exit or next phase of growth.

CORPORATE GOVERNANCE BASICS

“Corporate governance” doesn’t have a single accepted definition.Broadly, the term
describes the processes, practices and structures through which a company manages
its business and affairs and works to meet its financial, operational and strategic
objectives and achieve long-term sustainability.

Law. Corporate governance is generally a matter of law based on corporate legislation,

securities laws and policies, and decisions of the courts and securities regulators. 
Generally, directors owe a duty of loyalty to the companies they serve, and have a
fiduciary duty to act honestly, in good faith and in the company’s best interests.
Corporate governance is also shaped by other sources, like stock exchanges, the
media, shareholders and interest groups. Corporate governance practices help directors
meet their duties and the expectations of them.  

Relevant Factors. The objective of corporate governance is to promote strong, viable

competitive corporations accountable to stakeholders. But one size doesn’t fit every
company, and there’s no uniform, comprehensive set of policies or practices: the “right”
ones depend on several factors, including:

 the nature of the business;

 the company’s size and stage of development;
 availability of resources;
 shareholder expectations; and
 legal and regulatory requirements.

Benefits. Proponents of corporate governance say there’s a direct correlation between

good corporate governance practices and long-term shareholder value.  Some of the
key benefits are:

 high performance Boards of Directors;

 accountable management and strong internal controls;
 increased shareholder engagement;
 better managed risk; and
 effectively monitored and measured performance.

TOP 5 CORPORATE GOVERNANCE BEST PRACTICES

Right-sized governance practices will positively impact long-term corporate performance

– but companies must design and implement those that both comply with legal
requirements and meet their particular needs. Here are the top 5 corporate governance
best practices that every Board of Directors can engage – and that will benefit every
company.

1. 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 and are
qualified and competent, and have strong ethics and integrity, diverse
backgrounds and skill sets, and sufficient time to commit to their duties.
How do you build – and keep – such a Board?
o Identify gaps in the current director complement and the ideal
qualities and characteristics, and keep an “ever-green” list of
suitable candidates to fill Board vacancies.
o The majority of directors should be independent: not a member of
management and without any direct or indirect material
relationship that could interfere with their judgment.
o Develop an engaged Board where directors ask questions and
challenge management and don’t just “rubber-stamp”
management’s recommendations.
o Educate them. Give new directors an orientation to familiarize
them with the business, their duties and the Board’s expectations;
reserve time in Board meetings for on-going education about the
business and governance matters.
o Regularly review Board mandates to assess whether Directors
are fulfilling their duties, and undertake meaningful evaluations of
their performance. 
 
2. Define roles and responsibilities. Establish clear lines of
accountability among the Board, Chair, CEO, Executive Officers and
management: 
o Create written mandates for the Board and each committee
setting out their duties and accountabilities.
o Delegate certain responsibilities to a sub-group of directors.
Typical committees include: audit, nominating, compensation and
corporate governance committees and “special committees”
formed to evaluate proposed transactions or opportunities.
o Develop written position descriptions for the Board Chair, Board
committees, the CEO and executive officers.
o Separate the roles of the Board Chair and the CEO: the Chair
leads the Board and ensures it’s acting in the company’s long-
term best interests; the CEO leads management, develops and
implements business strategy and reports to the Board.
  
3. 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
 dealing and of respect and compliance with laws and policies without
fear of recrimination is critical.  To create and cultivate this culture:
o  Adopt a conflict of interest policy, a code of business conduct
setting out the company’s requirements and process to report and
deal with non-compliance, and a Whistleblower policy.
o Make someone responsible for oversight and management of
these policies and procedures.
  
4. Evaluate performance and make principled compensation
decisions. The Board should:
o Set directors’ fees that will attract suitable candidates, but won’t
create an appearance of conflict in a director’s independence or
discharge of her duties.
o Establish measurable performance targets for executive officers
(including the CEO), regularly assess and evaluate their
performance against them and tie compensation to performance.
o Establish a Compensation Committee comprised of independent
directors to develop and oversee executive compensation plans
(including equity-based ones like stock option plans).
  
5. Engage in effective risk management. Companies should regularly
identify and assess the risks they face, including financial, operational,
reputational, environmental, industry-related, and legal risks:

o The Board is responsible for strategic leadership in establishing

the company’s risk tolerance and developing a framework and
clear accountabilities for managing risk. It should regularly review
the adequacy of the systems and controls management puts in
place to identify, assess, mitigate and monitor risk and the
sufficiency of its reporting.
o Directors are responsible to understand the current and emerging
short and long-term risks the company faces and the performance
implications. They should challenge management’s assumptions
and the adequacy of the company’s risk management processes
and procedures.

Leadership in Nepali Context

6. Whenever we talk about leadership in Nepal, the immediate image that comes to mind is of
politicians, who make promises but never deliver. The discourse of leadership in Nepal has
been judged not by performance, but by the number of titles one carries on one’s business
 card, or the number of sycophants that hang out with one, the number of interviews and
pictures that one sees in the newspaper or the minutes of exposure on television.
7. Leadership in Nepal is still represented by the badges with ribbons that people wear at
functions, the sofa seats placed on the stage, or the individuals seated in the first rows, that
people crowd around. Leadership in Nepal is still defined by how late one can attend events
and how far one can exceed the allotted speaking time at meetings. It is still seen as a feudal
phenomenon whereby there has to be a significant gap between the leader and the follower.
8. The concept of leadership especially in a democratic set up is something that has flowered in
the West. The advent of corporations, the emergence of family trusts and foundations and the
start of the concept of not- for-profits brought about the concept of an organization that
polychromic societies found alien. People had to understand the rationale of having a chair-
man elected in a board of directors rather than nominating one’s son or relative, when looking
for someone to head a philanthropic organization, instead of appointing the eldest son to take
over.
9. One of the Rotary Clubs in Nepal is identified with a mother, whose daughter is identified
with another rotary club. The democratic substitution to leadership, contrary to hierarchy, is
still seen as unacceptable. The Alumni of Hubert Humphrey Fellows, a US based fellowship
elects its President based on seniority, therefore one can only head the organization once one
has passed the most active part of one’s life.
10. Because of the political influence associated with leadership in Nepal, one visualizes having
more than 10,000 people at Tundikhel listening in rapt attention while one speaks. The
linking of a leader to a patron is another outcome of our feudal past, which makes it even
more difficult to come out of the rut of the lopsided view of leadership.
11. The big question we forget to ask in Nepal, something that even our religions support, is to
ask ourselves: “Who am I?” Am I the person in the business card, whose identity is defined
by the name of the organization or the designation? If the name and designation is taken
away, who am I? Do I have followers then? The answer is most pertinent to persons such as a
recently retired bureaucrat or Minister who used to have hundreds of people hounding at their
door while they held that position. A leader is someone who still has the respect and
following, even without the label of an organization or designation.
12. In Nepal, the culture of doing and delivering without noise is not seen as a leadership trait,
while globally, leadership credibility is about constant and consistent delivery. Therefore,
work of people like Dr Ram Shrestha of Dhulikhel Hospital, who created one of Nepal’s
finest institutions in 15 years, goes unnoticed.
13. It is individuals like Dr Ram Shrestha that keep societies going. In every family, society and
community, we find individuals, who would take the initiative to reach out to those in need,
whenever there is grief or sickness in the family. There are these familiar faces that we find
at hospitals, bringing new patients every time or at the cremation ghats of Pashupati, helping
people in the execution of their final journey. Even though they have been helping for
decades, these people are never noticed. The same goes for teachers, who believe in
imparting education, unlike many others whose primary focus is on maintaining a smart face
for a newspaper interview to show their dedication to education. Leadership is about
replacing one’s desire for publicity with real action.

Impact of corporate governance practices on business and society