CORPORATE GOVERNANCE

Mai Phuong Thao

Faculty of Accounting and Auditing
University of Economics and Law
 Contents
1. Overview of Corporate Governance
2. Board of Directors and related issues
3. Approaches to Corporate Governance
4. Corporate Social Responsibility & Corporate Governance

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CHAPTER 4

OVERVIEW of CORPORATE
GOVERNANCE

3
 Contents
4.1. Theory of governance
4.1.1. Company ownership and control
4.1.2. Definition, purpose, objectives & key concepts of
corporate governance
4.1.3. Operational areas affected by issues in corporate
governance
4.1.4. Internal and External corporate governance
stakeholders
4.1.5. Agency theory and key concepts of agency theory
4.1.6. Principal-agent relationships and corporate
governance
4.1.7. Transaction cost theory
4.1.8. Stakeholder theory
4
 Contents
4.2. Development of corporate governance
4.2.1 Influences on corporate
4.2.2. Development of corporate governance codes

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 4.1. Theory of governance
4.1.1. Company ownership and control
SHAREHOLDERS DIRECTORS
DELEGATION
OF CONTROL

COMPANY

OWNERSHIP CONTROL

OBJECTIVES OBJECTIVES
≠
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 4.1. Theory of governance
(cont.)
4.1.2. Definition, purpose, objectives & key concepts of
corporate governance

• Definition: Corporate governance (“CG”) is the system by

which companies are directed and controlled (Cadbury
Report, 1992);

• In Vietnamese: “Quản trị công ty là hệ thống các quy tắc

để đảm bảo cho công ty được định hướng điều hành
và được kiểm soát một cách có hiệu quả vì quyền lợi
của cổ đông và những người liên quan đến công ty” (QĐ
số 12 ngày 13/03/2007-BTC).
7
 4.1. Theory of governance
(cont.)
• Purpose: ?

• Objectives: ?

8
 Differences between Management and
Governance
• Management is concerned with running
business operation of a company
• >> routine decisions and administrative
work related to the daily operations of
the organization
• Governance is about giving the lead to
the company and monitoring and
controlling management decisions >>
oversight and decision-making related
to strategic direction, financial planning,
and bylaws- the set of core policies that
outline the organization's purpose,
values, and structure.
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 Question 1:
What makes a good company?

Which of the following characteristics would

you consider to be a feature of a ‘good’
company?
1. A company that earns good profits
2. A company that responds to the needs of its
customers
3. A company that is a good employer
4. A company that is environmentally-friendly

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 4.1. Theory of governance
(cont.)
4.1.2. Definition, purpose, objectives & key concepts of
corporate governance (cont.)
- Fairness: refers to the principle at all stakeholders should
receive fair treatment from the director.
- Openness/Transparency: means ‘not hiding anything’.
Intentions should be clear, and information should not be
withheld from individuals who ought to have a right to
receive it.
- Independence: freedom from the influence of someone
else. A principle of good CG is that a substantial number of
directors of a company should be independent, which means
that they are able to make judgment and give options that
11 are in the best interest of the company, without bias.
 4.1. Theory of governance
(cont.)
4.1.2. Definition, purpose, objectives & key concepts of corporate
governance (cont.)

- Probity/honesty: essential quality for directors and advisors

- Responsibility & Accountability: The directors are given most of
the power for running company. Many of these power are delegated
to executive managers, but the directors remain responsible for the
way in which those power are used. The board of directors should be
accountable to the shareholders.
- Reputation: good or bad, based on a combination of several
qualities including commercial success and management
competence.
- Judgment: Director make judgment in reaching their opinion.

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 Question 2:
Key concepts-Fred’s case

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 Key concepts-Fred’s case (cont.)

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 4.1. Theory of governance
(cont.)
4.1.3. Operational areas affected by issues in corporate governance

AREAS OF ORGANISATION AFFECTED BY

CORPORATE GOVERNANCE

BOARD OF DIRECTORS’ RELATIONS W ACCOUNTABILITY AND

DIRECTOR REMUNERATION SHAREHOLDERS AUDIT

BOARD INSTITUTIONAL PRIVATE RISK & AUDIT

COMMITEES INTERNAL
CONTROL

DUTIES AND
FUNCTIONS

COMPOSITION

REPORTING

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 4.1. Theory of governance
(cont.)
4.1.4. Internal and External corporate governance
stakeholders

 The term “stakeholder” is used to describe a person or

an organization with an interest or concern in a company.

 Stakeholders of a company include stockholders,

bondholders, customers, suppliers, employees, and so
forth.

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 4.1. Theory of governance
(cont.)

 Financial stakeholders are those with a financial

relationship with the organization. In other words, should
financial problems occur to the organization then the
stakeholders will suffer.

 Interest stakeholders are interested in how the

organization behaves and are very often more powerful
than the financial stakeholders due to the influence they
have over it.

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 4.1. Theory of governance
(cont.)
Financial stakeholders Interest stakeholder

Shareholder and other investors- Media-publicity and reporting events

investment
Employees-job and wages Non-government organisations-impact
on their activities
Customers-own or have ordered goods Activists group-environmental impact
and services
Suppliers-owned money for goods and Competitors-strategy and development
services supplied

Government/community-taxation Regulators-Fair trading, stock exchange

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 Biết được mối quan tâm của các đối tượng đó là gì
Biết được mức độ ảnh hưởng đến DN

4.1. Theory of governance

External Party Main role Interest and claims in
(cont.) Auditors
company
Independent review of company  Fee
reported financial position  Reputation
 Quality of relationship
 Compliance with audit
requirements
ngân hàng, cty bảo hiểm, NCC, Tax
Regulators Implementing and monitoring  Compliance with
regulations regulations
 Effective of regulations

External Government Implementing and maintaining  Compliance with laws

laws which all companies must  Payment of taxes
stakeholders comply  Level of employment
 Level of imports/exports

Stock Implementing and maintaining  Compliance with rules

exchange rules and regulations for and regulations
companies listed on the  Fee
exchange
Small Limited power of use of vote  Maximisation of
investors shareholder value
Institutional Through considered use of their  Value of shares and
investors votes can beneficially influence dividend payments
19 corporate policy  Security of fund invested
 Timeliness of information
 4.1. Theory of governance
(cont.) board of directors
Stakeholder Corporate governance role Main interest in company
Directors Control company in best interest of  Pay
stakeholders  Performance linked bonuses
 Share options
 Status
 Reputation
 Power

Company Secretary Advise board on corporate governance  Pay

matters  Performance linked bonuses
 Job stability
 Career progression
 Status
Sub-board Management Identify and evaluate risks faced by company  Working conditions
Enforce controls
Monitor success
Report concerns

Employees Comply with internal controls

Report breaches
kế toán, bảo vệ
Employee Highlight and take action against breaches in  Power
representatives eg trade governance requirements  Status
unions
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Internal stakeholders
 4.1. Theory of governance
(cont.)
4.1.5. Agency theory
is a group of concepts describing the nature of agency
relationship deriving from the separation between ownership
and control.
PRINCIPAL

E.G. SHAREHOLDERS

EMPLOYS ACCOUNTABLE FOR

AGENT
ON BEHALF OF
E.G. DIRECTORS

TO PERFORM

TASK

E.G. MANAGING THE COMPANY

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 4.1. Theory of governance
(cont.)
Agency theory & Corporate Governance
COMPANY OWNED AND MANAGED BY SAME
PEOPLE

EXPANSION REQUIRED INVESTORS

(SHAREHOLDERS-LIMITED LIABILITY)

DELEGATE RUNNING OF COMPANY TO

MANAGERS (AGENTS)

SEPERATION OF GOALS

22 AGENCY PROBLEMS
 4.1. Theory of governance
(cont.)
Agency theory & Corporate Governance
Key concepts
• Agent: An agent is employed by a principal to carry task
on their behalf.
• Agency: refers to the relationship between a principal and
their agent.
• Agency cost: are incurred by principles in monitoring
agency behavior because of a lack of trust in a good faith
of agents
• Accountable: by accepting to undertake a task on their
behalf, an agent becomes accountable to the principal by
whom they are employed. The agent is accountable to
23 that principle.
 4.1. Theory of governance
(cont.)
Agency theory & Corporate Governance
Key concepts
• Fiduciary responsibility: Directors (agents) have a
fiduciary responsibility to the shareholders (principal) of
their organization.
• Stakeholders: are any person or group that can have
affect or be affected by the policies or activities of an
organization.
• Agent objectives (such as a desire for high salary, large
bonus and status for director) will differ from the
principal’s objectives (wealth maximization for
shareholders)
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 4.1. Theory of governance
(cont.)
Agency costs

They arise largely from principals monitoring activities of

agents
• Incentive schemes and remuneration packages for
directors
Cost of management providing annual report data
• Cost of meetings
• Cost of accepting high risk
• Residual loss: relates to directors furnishing themselves
with expensive cars and planes etc
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 4.1. Theory of governance
(cont.)
4.1.7. Transaction cost theory
is an alternative variant of the agency understanding of
governance assumptions. It describes governance
frameworks as being based on the net effect of internal and
external transactions, rather than contractual relationships
outside the firm.

Sources:
Uncertainty cost
Opportunity cost

Link between agency cost theory and transaction cost theory

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 4.1. Theory of governance
(cont.)
Transaction Cost Theory Agency theory
Focuses on individual transaction Focuses on individual agent

Manager may arrange transactions Looks at tendency directors to act in

in an opportunistic way their own best interests, pursuing
salary and status

Effective and efficient Protection of ownership rights of

accomplishment of transactions by shareholders
firms

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 4.1. Theory of governance
(cont.)

4.1.8. Stakeholder theory

The stakeholder theory is a theory of organizational

management and business ethics that addresses morals
and values in managing an organization, such as those
related to corporate social responsibility, market economy,
and social contract theory.

Company should fulfill accountability to many more sectors

of society than solely their shareholders
28 Agency theory is a narrow form of stakeholder theory.
 4.1. Theory of governance
(cont.)

Reasons for development of corporate government

• Reduce fraud and corruption

• Investors pay premium
• Reduce risks

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 4.1. Theory of governance (cont.)

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 4.1. Theory of governance
(cont.)
Development of corporate governance
USA:
CG rules have developed from relative little to the complex
Sarbanes-Oxley Act of 2002. Main drivers:
Active management
Increasing shareholder activism from institutional investors.
Enron, Arthur Andersen and Worldcom:
The collapses of Enron and Worldcom encouraged the US
government to take action to restore public confidence and
trust in large company.
Close relationships between auditors and clients: Enron
31 case
 4.1. Theory of governance
(cont.)
Development of corporate governance codes
UK

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 Q&A

Thank you!

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