Governance &

Social Responsibility
In Business
Separation of Ownership & Control
● Owners are not the same as those who run the company
● Usually in larger companies with many shareholders
● Specialist managers (directors) can run the business more efficiently
● Shareholders provide funds which a small group of managers can not provide

AGENCY PROBLEM

● Manager may run the business the way it suits them (for their own benefit)
Corporate Governance
A set of processes and policies by which a company is controlled (run /
administered)

Recommendations for Effective Corporate Governance

● Board of directors - Include both Executive & Non-Executive Directors

● How the remunerations (salary and benefits) of the directors will be decided
● Role of internal and external audit
● The right of the public to know how the company is governed (run)
● Part time (not full time)
● Do NOT have day-to-day
operations responsibility
● Hired on contract basis

Purpose Non - Executive Directors

● Strategic guidance
● Check performance of (NEDs)
management
● Check risk management
● Appointment of senior
management
● Appropriate levels of
remuneration
● Must not have been employee of
the same company in last 5
years Non - Executive Directors
● Must not have had material
business interest in the company (NEDs)
for last 3 years
● Must not participate in
company’s share options or
pension schemes How can they be effective?
● Must not have close relation
with directors or senior (How to ensure their independence)
employees
● Must not serve as NED for more
than 9 years with the same
company
 Types
Committees
● Executive Committees
A group of people who are appointed to With authority and power (BOD)
administer, discuss or make reports concerning a ● Standing Committees
given subject. For a particular purpose and long
term (remuneration committee)
Typical Functions:
● Ad hoc Committees
Temporary (for a specific task e.g.
● Usually permanent or long-term (for
investigating fraud in the company)
ongoing issues /areas)
● Have authority (take decisions at some ● Sub-Committees
level and their recommendations are given Works under a parent committee to
support and assist
weightage)
● Follow set procedures
● Specialist individuals are included to solve
a difficult situation
Advantages
● Pooling of expertise and knowledge
to solve a problem
● Decisions are made after good
consideration hence are effective
● There is representation of different
departments in the committee's
decision are accepted easily
● Can buy some time for the
companies (as a delaying tactics)
● Increased motivation as decisions
are participative
● It has collective responsibility
Disadvantages
● Slow decision- making
● No single individual is responsible
if a decision goes wrong
● Members may wish to get favours
for their own departments
● Committees may work on
compromise - actual good decision
may be sacrificed
● May not always be able to attend
committee meetings
Key Roles in a Committee
The Chairperson
● Has sound
● Keeps meeting on agenda knowledge
● Maintains order ● Is a good
● Is impartial communicator
● Has the skills of
● Sums up the meeting
summarizing
● Checks and signs minutes ● Ability to silence
others in friendly
but firm manner
● Is decisive
Key Roles in a Committee
The Secretary
Before the Meeting
● Fixing the date and time of
the meeting
● Booking the venue
● Preparing and issuing
agenda and other relevant
documents
During the Meeting After the Meeting
● Assisting the ● Preparing minutes of meeting
chairperson ● Acting on and communicating
● Making notes decisions
● Advising the ● Dealing with correspondence
chairperson of the
points and procedures

● It helps avoiding the agency
(Compensation) Committee
problem
● Leaves the BOD free to focus on
important strategic decisions
● Possible Risk: ‘you scratch my back,
I scratch yours’
● Costs involved in preparing and
holding committee meetings
Remunerations
● Made up of Non-executive directors
(NEDs)
● Responsible for deciding the pay
and incentives offered to Executive
Directors
● ONLY NEDs will be included in
Rem. Com.
● At least 3 members (can be two in a
smaller company)
● For deciding the remuneration of
NEDs, the whole BOD is
responsible
● Reviews systems of internal The Audit Committee
controls / risk management
● Setting the work guidelines for (Composed of NEDs to
internal audit and reviewing their Review/Monitor company’s
performance
● Recommendations to the BOD for accounting practices)
appointment/removal of External
Auditors
● A bridge between auditors and
BOD External Auditors

● Benefits: Auditors do not have to

BOD
Audit Committee
report frauds / errors to
Executive Directors Internal Auditors
● Auditors feel comfortable
reporting weaknesses to Audit
Committee
● Monitoring the process of Nomination Committee
appointment of directors
To ensure that the composition of
● Ensures that: the board of directors is balance.
○ Various skills needed are
present in the board
○ Appropriate mix of EDs and
NEDs
● Via company publications such as
Annual Reports and Financial
Public Oversight
Statements
● How are committees formed and As public is an important
run in a company stakeholder, they have the “right
● Posting on the website is a good to know” how the company is
being governed
practice
● Submission of periodic reports to
regulatory bodies (Companies
House or State Bank)
Corporate Social ● Organisations try to maximize positive impact
on the stakeholders and minimize negative

Responsibility ●
impacts
Close link with Sustainable Development

(CSR)
Sustainable
Development

The idea that the companies should be

sensitive to the needs of all the
Financial Environmental
stakeholders and not just the Responsibility Responsibility
Social Responsibility

shareholders
End of Chapter