CH10 Corporate governance

- Corporate governance: encompass the combination of laws, regulations, listing rules

and voluntary private sector, practices that enable the corporation to attract capital,
perform efficiently, generate profit and meet both legal obligations and general societal
expectations.
- Corporate governance: is a set of systems, processes and principles which ensure that a
company is governed in the best interest of all stakeholders, corporate managers and
directors
- Corporate governance requirements:-
A. At the micro level it needs to ensure that the firm, as a productive organization,
functions in pursuit of its objectives.
B. At the macro level corporate governance has evolved to more effectively promote the
allocation of the nation’s savings to its most productive use. Thus in financing corporate
activity, whether through equity or debt, savings are channeled into productive
activities, the return on which ultimately determines national prosperity.
- Principles of corporate governance:-
 Rights and Equitable treatment of shareholders
 Accountability
 Disclosure and transparency
 Integrity and ethical behavior
 Interest of other stakeholders
 Role and responsibilities of the Board
 Transparency
- The responsibilities of directors/senior executives
1. They must lead the business and set out its strategic aims and plans.
2. They must ensure that the management of the business is carrying out its role
correctly.
3. The board must consist of a chief executive, chairman and a suitable mix of
executive and non-executive members who are appointed and selected
appropriately following the company’s procedure for appointment.
4. They must make sure that the business has appropriate risk management
techniques and necessary internal controls to reduce the risk of inappropriate
activities taking place.
5. Shareholders’ and other stakeholders’ needs must be met by the company.
6. They must meet regularly and keep minutes of all decisions.
7. Directors must have a clear list of their responsibilities.
8. Their pay should be decided by the remuneration committee with their
9. pay linked in to their abilities and performance.
10. The role of the chairman and chief executive should be separated.
11. There should be a strong presence of non-executive directors on the board.
12. The chairman and non-executive directors need to meet regularly to review board
performance and the non-executive directors need to review the performance of
the chairman.
13. All board members have a duty to update their skills on a regular basis.
14. They should receive information in a timely and efficient manner.
 15. The board should review the effectiveness of their performance on a regular basis.
16. New directors should be brought in regularly and re-elected every three years,
with long service contracts discouraged (12 months being optimal)
- Corporate governance and other stakeholders:-
 The OECD principles help to clarify exactly what a business needs to consider with
their corporate governance activities to look after their stakeholders and the
concepts are summarized below:
o The rights of stakeholders protected by law need to be respected within the
corporate governance framework.
o With any stakeholder interest protected by the law, stakeholders need to have the
opportunity to obtain effective redress for violation of their rights.
o Performance-enhancing mechanisms for stakeholder participation need to be
included in the corporate governance framework.
o Relevant information needs to be provided to stakeholders who participate in the
corporate governance process.

- - Corporate Social Responsibility: refers to organizations considering and

managing their impact on a variety of stakeholders.
- Corporate governance is all about how an organization is governed in pursuit of its
objectives.
- Corporate Social Responsibility is all about how a company will manage the impact of
their operations on the economy, society and the environment, over and above the
requirements imposed by regulation.