6- • What is Corporate Governance?

2
• And why does it matter?.........................................................................................................................................2
8 - • Is it just about established / mature firms?.............................................................................................................2
• What about startups?..............................................................................................................................................2
• What about non-for-profit firms?...........................................................................................................................2
14 - • Is it relevant?....................................................................................................................................................... 3
1. Protecting the rights of shareholders:..............................................................................................................3
2. Enhancing transparency and accountability:...................................................................................................3
3. Improving risk management:..........................................................................................................................3
4. Promoting long-term sustainability:................................................................................................................3
34 - Four perspectives of CG:.....................................................................................................................................3
• Financial perpective of CG.....................................................................................................................................3
• Market or managerial myopia / short termism perspective of CG..........................................................................4
• Stakeholders perspective of CG.............................................................................................................................4
• Executive power abuse control perspective of CG.................................................................................................4
31 - The Financial perpective of CG holds that CG relates to the existence of conflicts of interest.......................5
1. Between Shareholders and Managers:........................................................................................................5
2. Between Different Financing Entities:.........................................................................................................5
2.1 Shareholders versus Debtholders:..................................................................................................................5
2.2 Minority versus Majority Owners:.................................................................................................................5
2.3 Senior versus Junior (Subordinated) Debtholders:.........................................................................................5
2.4 Banks versus Bondholders:............................................................................................................................5
32 - Regarding the first, this assertion of CG assumes that conflicts of interest between shareholders and
managers arise for reasons related to:.......................................................................................................................6
1. Time Horizon:.................................................................................................................................................6
2. Compensation:................................................................................................................................................6
3. Risk-Taking:...................................................................................................................................................6
4. Investment Decisions:.....................................................................................................................................6
5. Financial Policies:...........................................................................................................................................6
6. Dividends/Stock Repurchases:........................................................................................................................6
7. Capital Structure/Cash Holdings:....................................................................................................................6
85 - The Financial perspective of CG also holds that there may be conflicts of interest between :........................7
1. Managers/Shareholders versus Debtholders:...................................................................................................7
2. Majority versus Minority Shareholders:..........................................................................................................7
90 - Market or managerial myopia / short termism perspective of CG...................................................................7
94 - Stakeholders perspective of CG..........................................................................................................................8
99 - Executive power abuse control perspective of CG.............................................................................................9
119 - some of the principles of corporate governance...............................................................................................9
1. ensuring the basis for an effective corporate governance framework;.............................................................9
2. the rights and equitable treatment of shareholders and key ownership functions;.........................................10
3. institutional investors, stock markets, and other itermediaries;.....................................................................10
4. the role of stakeholders in corporate governance;.........................................................................................10
5. disclosure and transparency; the responsibilities of the board.......................................................................10
1 . Principles of Corporate Governance

6- • What is Corporate Governance?

Corporate governance is a system of processes, policies, and structures that guide and control
the way an organization is managed and operated. It involves a set of rules, practices, and
principles that aim to balance the interests of different stakeholders, including shareholders,
management, employees, customers, suppliers, and the community. The primary goal of
corporate governance is to enhance long-term shareholder value while promoting
accountability, transparency, and ethical behavior.

• And why does it matter?

Corporate governance matters for several reasons. Firstly, it helps to establish a framework of
accountability between the board of directors, management, and shareholders, thereby
ensuring that the company is managed in the best interests of all stakeholders. Secondly, it
helps to mitigate risks and protect the interests of shareholders and other stakeholders,
especially in situations where there is a conflict of interest between management and
shareholders. Thirdly, it helps to enhance the company's reputation and public trust by
promoting transparency and ethical behavior, which is critical in attracting and retaining
investors and customers. Finally, corporate governance is a legal requirement in many
countries and can lead to legal and financial penalties if not properly adhered to.

8- • Is it just about established / mature firms?

Corporate governance is not limited to established or mature firms. It is equally important for
all firms, regardless of their size or age. Effective corporate governance helps to ensure that a
company is managed in the best interests of its stakeholders, including shareholders,
employees, customers, and the wider community.

• What about startups?

Startups also need to focus on good corporate governance practices from the beginning. As
startups seek funding and grow, having effective corporate governance practices in place can
help to build credibility, attract investors, and ensure long-term success. Some key practices
that startups can adopt include establishing a board of directors, setting clear policies and
procedures, and being transparent in their operations.

• What about non-for-profit firms?

Non-for-profit firms also require good corporate governance practices to ensure that they are
serving the best interests of their stakeholders and achieving their mission. Effective corporate
governance can help non-for-profits to build trust and credibility with donors and
stakeholders, establish sound financial controls, and ensure accountability and transparency in
their operations.

In summary, corporate governance is a critical aspect of business management and applies to

all types of organizations, including established firms, startups, and non-for-profit
organizations. Adopting effective corporate governance practices can help to promote
transparency, accountability, and ethical behavior, and enhance the long-term success of an
organization.
14 - • Is it relevant?
principles of corporate governance are relevant for any organization that is publicly
traded, privately held, or a non-profit. Corporate governance refers to the system of
rules, practices, and processes by which a company is directed and controlled. The
principles of corporate governance are designed to ensure that companies operate in an
ethical and transparent manner, that they are accountable to their stakeholders, and that
they are managed in a way that promotes long-term sustainability and success.

Effective corporate governance is important for a number of reasons, including:

1. Protecting the rights of shareholders: Shareholders are the owners of a

company, and as such, they have the right to know how the company is being
run and to have a say in its decision-making processes.
2. Enhancing transparency and accountability: Companies that operate in a
transparent manner are more likely to inspire trust and confidence among
stakeholders, which can help to attract investors and other sources of capital.
3. Improving risk management: Effective corporate governance can help
companies to identify and manage risks more effectively, reducing the
likelihood of costly mistakes and reputational damage.
4. Promoting long-term sustainability: Companies that are managed in a
responsible and sustainable manner are more likely to succeed over the long
term, creating value for all stakeholders, including shareholders, employees, and
the wider community.

In summary, principles of corporate governance are relevant and important for any
organization that wants to operate in an ethical, transparent, and sustainable manner,
and that wants to build trust and confidence among its stakeholders.

34 - Four perspectives of CG:

• Financial perpective of CG

Financial perspective of CG: This perspective focuses on the financial performance of

the company and the effectiveness of the governance system in creating shareholder
value. It involves ensuring that the company's financial reporting is accurate and
transparent, that financial risks are identified and managed, and that the board of
directors has effective oversight over the company's financial operations.

In this perspective, the effectiveness of the governance system is measured by the

financial performance of the company. The focus is on maximizing shareholder value,
and the board of directors is responsible for making sure that the company is financially
sound and that the interests of the shareholders are protected. This perspective
emphasizes the importance of financial transparency, accurate financial reporting, and
the effective management of financial risks. The board of directors must ensure that the
company has a sound financial strategy and that financial decisions are made with a
long-term view in mind.
• Market or managerial myopia / short termism perspective of CG

Market or managerial myopia/short-termism perspective of CG: This perspective

focuses on the potential for companies to prioritize short-term gains over long-term
sustainable growth, often at the expense of other stakeholders. It involves ensuring that
the company's decision-making process is aligned with its long-term strategic
objectives, and that management is held accountable for the long-term performance of
the company.

In this perspective, the emphasis is on sustainable long-term growth rather than short-
term gains. The board of directors must ensure that the company's management has a
long-term strategic vision and that its decision-making process is aligned with that
vision. The board must also ensure that management is held accountable for the long-
term performance of the company and that they are not focused solely on short-term
gains. This perspective emphasizes the importance of stakeholder engagement and
ensuring that the interests of all stakeholders are taken into account in decision-making.

• Stakeholders perspective of CG

Stakeholders perspective of CG: This perspective focuses on the interests of all

stakeholders, including shareholders, employees, customers, suppliers, and the wider
community. It involves ensuring that the company's governance system takes into
account the interests and concerns of all stakeholders, and that the board of directors
acts in the best interests of the company as a whole, not just the shareholders.

In this perspective, the focus is on ensuring that the company operates in a socially
responsible manner and that the interests of all stakeholders are taken into account. The
board of directors must ensure that the company is run in an ethical and sustainable
manner and that its operations are aligned with the interests of all stakeholders. This
perspective emphasizes the importance of stakeholder engagement and the need to
balance the interests of all stakeholders.

• Executive power abuse control perspective of CG

Executive power abuse control perspective of CG: This perspective focuses on

preventing executive power abuse and ensuring that the company's management acts in
the best interests of the company and its stakeholders. It involves ensuring that the
board of directors has effective oversight over the company's management, that
executive compensation is aligned with company performance, and that there are
mechanisms in place to prevent conflicts of interest and unethical behavior by
executives.

In this perspective, the focus is on preventing executive power abuse and ensuring that
the company's management acts in the best interests of the company and its
stakeholders. The board of directors must ensure that executives are held accountable
for their actions and that there are effective mechanisms in place to prevent conflicts of
interest and unethical behavior. This perspective emphasizes the importance of
transparency and accountability in corporate governance, and the need for effective
oversight by the board of directors to prevent abuses of power by executives.
31 - The Financial perpective of CG holds that CG relates to the
existence of conflicts of interest •1. Between Shareholders and Managers, or •
2.Between Different financing entities: • Shareholders versus Debtholders • Minority
versus majority owners • Senior versus junior (subordinated) debtholders • Banks versus
bondholders

The financial perspective of corporate governance (CG) acknowledges that conflicts of

interest can arise within a company, and it focuses on ensuring that the governance
system effectively addresses these conflicts. There are several conflicts of interest that
can arise within a company, including:

1. Between Shareholders and Managers: This conflict of interest arises because

shareholders, who own the company, want to maximize their return on
investment, while managers may have personal interests that are not aligned
with the interests of the shareholders. For example, managers may prioritize
their own compensation or job security over the long-term interests of the
company and its shareholders. CG must ensure that managers are held
accountable for their decisions and that their interests are aligned with the
interests of the shareholders.
2. Between Different Financing Entities: This conflict of interest arises when a
company has multiple financing sources, such as shareholders, debtholders, and
other lenders. These financing entities may have different interests, which can
create conflicts within the company. For example:

2.1 Shareholders versus Debtholders: Shareholders want the company to take on more
risk to maximize returns, while debtholders want the company to minimize risk to
protect their investment. CG must ensure that the company's financing decisions
balance the interests of both shareholders and debtholders.

2.2 Minority versus Majority Owners: Minority owners may have different objectives
than majority owners, which can lead to conflicts within the company. CG must ensure
that the interests of all owners are taken into account and that decisions are made in the
best interests of the company as a whole.

2.3 Senior versus Junior (Subordinated) Debtholders: Senior debtholders have priority
over junior debtholders in the event of a default, which can create conflicts of interest
between the two groups. CG must ensure that the company's financing decisions are
transparent and that the interests of all debtholders are taken into account.

2.4 Banks versus Bondholders: Banks and bondholders may have different interests in a
company, which can create conflicts of interest. For example, banks may be more
interested in short-term profitability, while bondholders may be more interested in long-
term sustainability. CG must ensure that the company's financing decisions are aligned
with its long-term strategic objectives and that the interests of all financing entities are
taken into account.
32 - Regarding the first, this assertion of CG assumes that
conflicts of interest between shareholders and managers arise for
reasons related to:

1. Time Horizon: Shareholders and managers may have different time horizons
when it comes to decision-making. Shareholders may be more focused on long-
term growth and profitability, while managers may prioritize short-term
objectives that boost their performance metrics or compensation. CG must
ensure that the company's decision-making process takes into account the
interests of all stakeholders and that decisions are aligned with the company's
long-term objectives.
2. Compensation: Managers' compensation packages can create conflicts of
interest between them and the shareholders. If managers are incentivized to
prioritize their own compensation over the long-term interests of the company,
this can lead to decisions that benefit them personally but harm the company's
performance. CG must ensure that managers' compensation packages are aligned
with the interests of the shareholders and the company as a whole.
3. Risk-Taking: Shareholders and managers may have different risk appetites.
Shareholders may be more risk-averse, while managers may be more willing to
take risks to achieve growth and profitability. CG must ensure that the
company's risk management policies and practices strike a balance between the
interests of the shareholders and the company's long-term objectives.
4. Investment Decisions: Shareholders and managers may have different
investment preferences. Shareholders may want the company to invest in certain
areas that have the potential for long-term growth, while managers may
prioritize investments that benefit them personally or boost their performance
metrics in the short term. CG must ensure that the company's investment
decisions are aligned with the interests of the shareholders and the company's
long-term objectives.
5. Financial Policies: Shareholders and managers may have different preferences
for financial policies, such as debt financing, dividend payouts, or stock
buybacks. Shareholders may want the company to prioritize debt reduction or
dividend payouts, while managers may prioritize share buybacks to boost stock
prices. CG must ensure that the company's financial policies are aligned with the
interests of the shareholders and the company's long-term objectives.
6. Dividends/Stock Repurchases: Shareholders may want the company to pay
out dividends or repurchase shares to boost stock prices, while managers may
prioritize other uses of cash, such as investments or debt reduction. CG must
ensure that the company's decision to pay out dividends or repurchase shares is
aligned with the interests of the shareholders and the company's long-term
objectives.
7. Capital Structure/Cash Holdings: Shareholders and managers may have
different preferences for the company's capital structure and cash holdings.
Shareholders may want the company to maintain a certain level of cash reserves,
while managers may want to invest excess cash or use it for other purposes. CG
must ensure that the company's capital structure and cash holdings are aligned
with the interests of the shareholders and the company's long-term objectives.
85 - The Financial perspective of CG also holds that there may be
conflicts of interest between : • 1. Managers/Shareholders versus Debtholders
• 2. Majority versus Minority Shareholders

The financial perspective of corporate governance also recognizes that there may be
conflicts of interest between different financing entities, such as:

1. Managers/Shareholders versus Debtholders: Conflicts of interest can arise

between managers/shareholders and debtholders because they have different
priorities and levels of risk exposure. Managers/shareholders may prioritize
growth and increasing the value of the company's shares, while debtholders may
prioritize stability and the repayment of their loans. This can create conflicts if
the company takes on too much debt or if the managers/shareholders prioritize
their interests over those of the debtholders.
2. Majority versus Minority Shareholders: Conflicts of interest can also arise
between majority and minority shareholders because majority shareholders may
be able to control the company's decision-making processes, while minority
shareholders may not have the same level of influence. This can create conflicts
if the majority shareholders prioritize their interests over those of the minority
shareholders or if they engage in actions that harm the company's long-term
prospects. CG should ensure that the rights of minority shareholders are
protected and that decisions are made in the best interests of the company as a
whole.

In both cases, CG can help to mitigate these conflicts by establishing clear rules and
regulations that balance the interests of all stakeholders. For example, CG can require
companies to disclose information about their financial positions and decision-making
processes, which can help to ensure that all stakeholders are aware of the company's
activities and can hold the managers/shareholders accountable. CG can also establish
mechanisms for resolving disputes between stakeholders, such as arbitration or
mediation, which can help to prevent conflicts from escalating and damaging the
company's long-term prospects.

90 - Market or managerial myopia / short termism perspective of

CG • Argues that pressure from financial markets (and also biased compensation
systems) may incentive a short-term perspective from managers, requiring appropriate
correcting action from corporate governance devices

The market or managerial myopia/short termism perspective of corporate

governance argues that financial markets and biased compensation systems may
incentivize managers to prioritize short-term gains over long-term value creation. This
perspective is often associated with activist investors like Carl Icahn, who have been
vocal about the need for corporate governance mechanisms to address this issue.

From this perspective, the pressure from financial markets can lead managers to focus
on short-term metrics such as quarterly earnings or stock price, rather than the long-term
health of the company. This can result in decisions that sacrifice long-term investments,
research and development, or sustainable growth opportunities for short-term gains,
such as cost-cutting measures or stock buybacks. Biased compensation systems can also
contribute to this problem by incentivizing managers to prioritize short-term goals that
maximize their own compensation, rather than the long-term success of the company.

To address this issue, corporate governance devices such as boards of directors and
independent auditors can play a role in ensuring that managers are held accountable for
their decisions and actions. For example, boards can establish long-term goals and
metrics for the company, provide oversight of management decisions, and ensure that
executive compensation is tied to long-term performance. Independent auditors can
provide unbiased assessments of the company's financial health and help to ensure that
managers are not manipulating financial metrics to meet short-term goals.

Activist investors like Carl Icahn have also been known to use their influence as
shareholders to push for changes in corporate governance that promote long-term value
creation. For example, they may advocate for changes in board composition, executive
compensation structures, or shareholder rights that promote greater accountability and
transparency. By doing so, they aim to align the interests of managers and shareholders
with the long-term success of the company, rather than short-term gains that may come
at the expense of sustainable growth.

94 - Stakeholders perspective of CG “The Social responsibility of managers

is to increase profits”

The stakeholder perspective of corporate governance involves considering the interests

and needs of all stakeholders affected by a company's actions, rather than solely
focusing on maximizing profits for shareholders.

Stakeholders can include customers, employees, suppliers, local communities, and the
environment, among others. The stakeholder perspective recognizes that a company's
actions can have significant impacts beyond just financial performance, and that a
company's success is intertwined with the well-being of its stakeholders.

"The Social Responsibility of Managers is to Increase Profits," presents a perspective

that is often associated with the shareholder primacy model of corporate governance.
This model holds that the sole responsibility of a company's management is to
maximize profits for shareholders, even if it means ignoring the interests of other
stakeholders.

However, this perspective has been increasingly challenged in recent years, as the
negative impacts of corporate activities on stakeholders have become more apparent.
For example, companies that prioritize short-term profits over the long-term interests of
their employees or the environment can create significant risks for both the company
and society as a whole.

In contrast, the stakeholder perspective of corporate governance recognizes that

companies have a broader responsibility to society, and that long-term success is often
achieved by balancing the needs and interests of all stakeholders. By considering the
impacts of their actions on all stakeholders, companies can build stronger relationships
with customers, employees, and communities, and create more sustainable and resilient
business models.
99 - Executive power abuse control perspective of CG
CG aims to establish a system of checks and balances within an organization to ensure
that executives act in the best interest of the company and its stakeholders.

One of the primary ways that CG controls executive power abuse is by implementing
effective board oversight. The board of directors is responsible for monitoring executive
actions and ensuring that they are acting ethically and within the law. The board should
be independent and have the power to question executives and hold them accountable
for their actions.

Another way that CG controls executive power abuse is by establishing sound risk
management practices. Effective risk management practices can help identify and
mitigate potential abuses of power, such as fraud or insider trading. By implementing
internal controls and conducting regular audits, companies can prevent and detect
misconduct before it occurs.

CG also controls executive power abuse by ensuring that executive compensation is

aligned with company goals and objectives. Compensation committees should oversee
executive pay practices, and executive pay should be tied to performance metrics such
as long-term shareholder value and sustainable growth. By linking compensation to
performance, executives are incentivized to act in the best interests of the company and
its stakeholders.

CG also fosters a culture of transparency and accountability, which can deter executives
from engaging in abusive behavior. Transparency includes providing clear and timely
disclosure of financial and non-financial information, such as executive compensation
and financial performance. Accountability includes establishing whistleblower
programs and encouraging an open dialogue between management and stakeholders.

Finally, CG controls executive power abuse by ensuring that there are consequences for
misconduct. This includes establishing clear policies and procedures for investigating
and disciplining executives who engage in abusive behavior. The consequences may
include removal from the company, financial penalties, or legal action, depending on
the severity of the misconduct.

In summary, CG plays a critical role in preventing and controlling executive power

abuse by implementing effective board oversight, establishing sound risk management
practices, aligning executive compensation with company goals, fostering transparency
and accountability, and ensuring consequences for misconduct. By doing so, companies
can promote ethical behavior, build trust and confidence among stakeholders, and
ultimately, maximize long-term value for all stakeholders.

119 - some of the principles of corporate governance

1. ensuring the basis for an effective corporate governance framework;
Ensuring the basis for an effective corporate governance framework involves establishing a set
of principles and practices that promote accountability, transparency, and ethical behavior.
This includes developing clear lines of responsibility and authority, establishing effective
systems of internal control and risk management, and ensuring that the board of directors has
the necessary skills, experience, and independence to provide effective oversight. Companies
should also establish mechanisms for monitoring and reporting on their performance, and for
ensuring that they comply with legal and regulatory requirements.

2. the rights and equitable treatment of shareholders and key ownership

functions;
The principle of ensuring the rights and equitable treatment of shareholders and key
ownership functions involves protecting the rights of shareholders and ensuring that they are
treated fairly. This includes ensuring that shareholders have access to accurate and timely
information about the company's performance, prospects, and risks, and that they have the
ability to participate in decision-making and hold the board accountable. Key ownership
functions include voting rights, the right to receive dividends, and the right to participate in
share offerings. Companies should establish mechanisms for ensuring that these functions are
exercised fairly and transparently.

3. institutional investors, stock markets, and other itermediaries;

The role of institutional investors, stock markets, and other intermediaries is critical to
promoting effective corporate governance. Institutional investors such as pension funds and
mutual funds have a significant influence on corporate behavior through their shareholdings
and voting rights. Stock markets provide a platform for companies to raise capital and for
investors to trade shares. Intermediaries such as investment banks and proxy advisors play a
key role in advising investors on their voting decisions and providing other support services.
Companies should engage with these stakeholders and seek to understand their views and
interests, and should take steps to ensure that they are aligned with the long-term interests of
the company and its stakeholders.

4. the role of stakeholders in corporate governance;

The role of stakeholders in corporate governance is increasingly recognized as important for
promoting long-term success and sustainability. This involves recognizing the interests of all
stakeholders, including employees, customers, suppliers, and the broader community, and
ensuring that these interests are taken into account in decision-making. Companies that adopt
a stakeholder-focused approach to governance are more likely to build strong and sustainable
relationships with their stakeholders, and to achieve long-term success. This may involve
establishing stakeholder engagement processes, such as advisory councils or stakeholder
surveys, and seeking to understand the views and interests of different stakeholder groups.

5. disclosure and transparency; the responsibilities of the board

Disclosure and transparency are critical to promoting effective corporate governance.
Companies should provide accurate and timely information about their performance, risks,
and prospects, and should ensure that this information is accessible to all stakeholders. This
may involve establishing clear reporting requirements and standards, such as the Global
Reporting Initiative or the Sustainability Accounting Standards Board. The board of directors
should oversee the company's disclosure practices and ensure that they meet legal and
regulatory requirements. Effective disclosure and transparency can help to build trust with
stakeholders and support long-term value creation.