LECTURE 6 :CORPORATE GOVERNANCE

Areas To Cover:
Definition Of Corporate Governance
Characteristics of good corporate governance
Importance of corporate governance
Why Considerable Attention Is Being Given To
Corporate Governance In Organizations Today.
Theories of corporate governance
Corporate governance practices
Comply or explain mechanism of corporate
governance
Board Corporate Governance Models

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 – Growing number of scams everyday calls for
corporate governance
– Globalization-Today most big companies are
selling their goods in the global market. They
have to attract foreign investors and foreign
customers. They also have to follow foreign
rules and regulations .All these require
corporate governance.
– Regulatory framework-This has made corporate
governance compulsory for certain companies.
- Takeovers and mergers-Corporate governance is
required to protect the interest of all the
parties during takeovers and mergers

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Characteristics/principals of good corporate
governance

1.Transparency-being candid, accurate

2.Accountability and disclosure

Individuals or groups need to be accountable for their
decisions and actions.
Disclosure -access to clear, factual information.

3.Discipline, Integrity and ethical behavior-

adhere to behavior that is universally recognized
and accepted to be correct and proper. 6
4.Independence
Minimize or avoid potential conflicts of interest that
may exist, such as dominance by a strong chief
executive or large share owner.
5. Responsibility
Responsibility pertains to behavior that allows
for corrective action and for penalizing
mismanagement. While the board is accountable to
the company, it must act responsively to and with
responsibility towards all stakeholders of the
company.
6. Fairness-The rights of various groups have to
be acknowledged and respected.

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7.Social responsibility and compliance
A well-managed company is non-discriminatory, non-
exploitative, and responsible with regard to
social,environmental and human rights issues.
8. Competence
The board needs sufficient relevant skills and
understanding to review and challenge management
performance.

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Other principles of good corporate governance
-Interests of other stakeholders should be taken care of,
-Role and responsibilities of the board should be well
defined,
-Appointments to the BOD should be based on merit,
-Disclosure and transparency
-Corporate Performance,
-Viability & Financial Sustainability,
-Corporate compliance,
- Good Corporate Communication,
- -Proper Accountability to Members,
- Good Strategy and Values,
- Better Structure and organization
 

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  Importance of corporate governance
-It creates a safe environment in front of the small
investors.
-It promotes the investment habits of people by
securing better return on investment .
- It make the management responsible and
productive.
- It ensures proper allocation of resources.
-It focuses on the stakeholders betterment.
- Economic development of the society through
investment etc..

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 Theories of Corporate Governance  
The Agency Theory
i)

In a company,the agent is the director while principal is the

shareholder/owner of the business.
The principal–agent problem or agency dilemma occurs
when one person or entity (the "agent") is able to make
decisions that impact, or on behalf of, another person or
entity( the "principal“)

The dilemma exists because sometimes the agent(directors

of a company) is motivated to act in his own best interests
rather than those of the principal(shareholder).
The basis for the agency theory is the separation of
ownership and control.
  
 

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Solutions to agency problem
The incentive solution -Stock options, basic
salaries, perquisites(company cars, club membership,
bonuses, are some of the examples of executive
compensations.
Monitoring involves use of code of ethics, internal
and external audit, internal controls etc.

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ii) Stakeholder Theory
• This theory centres on the issues concerning the
stakeholders in an institution.
• It stipulates that a corporate entity invariably seeks
to provide a balance between the interests of its
diverse stakeholders in order to ensure that each
interest constituency receives some degree of
satisfaction.

• iii)The Stewardship Theory: 

• Here managers are considered good stewards who
will act in the best interest of the owners .

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iv) Resource Dependency Theory
• The basic proposition of resource dependence theory is the
need for environmental linkages  between the firm and
outside resources.
• According to the resource dependency rule, the directors
 bring resources such as information, skills, key constituents
(suppliers, buyers, public policy decision makers, social
groups) and legitimacy that will reduce uncertainty .

v)Social Contract Theory

• Social contract theory, sees society as a series of social
contracts between members of society and society itself.
There is a school of thought which sees social responsibility
as a contractual obligation the firm owes to society.  
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vi) Political Theory
• Political theory brings the approach of
developing voting support from
shareholders, rather by  purchasing voting
power.
• Hence having a political influence in
corporate governance may direct corporate
governance within the organization.

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Corporate governance best practices that can be
practiced by directors include:
-Building a strong, qualified board of directors,
 -Evaluating performance
- Defining roles and responsibilities
- Emphasizing integrity and ethical dealing
-Evaluating performance and making principled
compensation decisions
- Engaging in effective risk management.

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The following factors influence corporate governance
practices in companies:
Board Size
CEO duality
Independent board members
Gender diversity in the Board
Number of board of meetings

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• 1 .Board Size
• Board size is defined as the number of both Non-Executive
Directors and Executive Directors of the Board of an
organization or an institution. To be able to incorporate key
skills and perspective the board size should be large enough. It
should also be small enough to allow smooth functioning of
meetings and also allow for active involvement of the board
members.

• 2. CEO Duality
• CEO duality refers to a situation in an organization where the
positions of chairman and that of a CEO are held by the same
person.
• Combining the roles of the CEO of an organization and that of
the board chairperson may bring about dominance, which may
eventually lead to ineffective monitoring of both the board and
the management.
• Those who advocate for stewardship theory argue that by
combining the two roles, there will be strength in the
leadership that will in turn empower the leader to quickly take
action especially on important decisions.
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• 3. Gender Diversity of the Board
• The board diversity concept states that boards of
organizations should reflect the structure of society
and properly represent the gender, professional
backgrounds and ethnicity of those within it. For the
essence of diverse viewpoints, boards of directors
in a firm need to have the right composition.

• 4. Independent Board Members

• Directors should be able to put in practice objective
and independent judgment on different issues within
the company.
• This independence gives investors additional
confidence that the board’s deliberations will be free
of obvious bias.
• Best corporate governance guidelines in many
countries advocate for the inclusion of so called
independent directors.

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• Every company should be headed by an effective
,independent and balanced board of directors to
offer strategic guidance ,lead and control the
company and be accountable to shareholders.
• An independent and balanced board of directors
is important because:
- It offers better oversight since conflict of interest
would be minimized.
- It is also able to protect the interests of the minority
shareholders, guard the activities of the board as a
whole and
- It ensures corporate assets are used only for the
company.

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Directors should be people of high integrity, efficient,
effective and with leadership skills. They should be
visionary leaders.
The qualities of visionary directors include foresight,
creativity, openness, imagination, persistence,
conviction, integrity, action oriented and inspiring.

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• A board's activities are determined by the powers,
duties, and responsibilities delegated to it or
conferred on it by an authority outside itself.
• These matters are typically detailed in the
organization's bylaws.
• The bylaws commonly also specify the number of
members of the board, how they are to be chosen,
and when they are to meet.
• A board can also have a charter.
• A charter is a formal document or an instrument that
defines or mandates an organization’s function(s) and
lays down rules for its conduct or governance.

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The Directors are responsible for preparing the
Annual Report and the financial statements in
accordance with applicable laws
An annual report is a comprehensive report on a
company's activities throughout the preceding year.
Annual reports are intended to give shareholders and
other interested people information about the
company's activities and financial performance.

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Annual reports should include report on corporate governance.
The items to be included in the report on corporate governance
in the annual report of companies include:
• -Accountability and audit-Account to the stakeholders for the
organization's performance;
• - Board membership
• -Remuneration policy
• -Shareholders’ rights and responsibilities
• -Board approvals
• -Risk management and internal controls
• - Board performance
• -Access to information
• -Process of selection and appointment of board members
• -Re-appointment of board members
• -Induction and training of directors
• -Delegation by the board
• -Key information on directors
• -Directors’ independence
• -Board’s conduct of its affairs etc…
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• A person may choose to become a shadow director.
• A shadow director is someone who is not a named
director but who directs or controls the company.
• It is important to identify any such person as the
liquidator can take the same action against this
person as can be taken against the named directors.
• A shadow director owes the same duties to their
company as a formally appointed director

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 The “Comply or Explain” mechanism of corporate
governance
• Its also Known as the Cadbury Code. It introduced a new
regulatory concept known as “comply or explain,” under which
companies have the option either to follow the best practices or
to explain to their shareholders why they considered that they
were not appropriate in the company’s particular
circumstances.
 
• Board meetings
Formal meeting of the board of directors of an organization, are
held usually at definite intervals to consider policy issues and
major problems.

Presided over by a chairperson (chairman or chairwoman) of the

organization or his or her appointee, it must meet the quorum
requirements and its deliberations must be recorded in the
minutes. Under the doctrine of collective responsibility, all
directors (even if absent) are bound by its resolutions.
• A quorum, unless otherwise defined by the board represents at
least half of the board members.
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• Minutes must be filed and kept in case there is any
government investigation of the board at a later date.
• Minutes also may need to be presented to the public
should there be a request for such from the public.
• The first topic of most board meetings is reading of
the minutes. The secretary will briefly summarize the
minutes of the previous meeting.
• Next is resolution of old business. Anything that was
unresolved in the previous meeting will perhaps be
resolved at the current meeting or be postponed for a
future meeting.

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Board Governance Models
1.Traditional(Structural) Model
The Traditional Model is the oldest model for
corporate governance.
The structure of the Board itself, and the way in
which it makes decisions, holds meetings, and the
parameters by which it must abide are put into an
approved structure and format.
The Traditional Model gives legal responsibility to the
collective board and the board speaks as one voice on
all matters. .

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Another fundamental concept in this model is that the
Board only speaks as a Board, and members of the Board
speak on behalf of the Board but do not have an individual
voice in the outside world.
The Board Chair is usually structured to be the official
“voice” of the Board, but again can only speak in a way
authorized by the Board as a whole.
The structural model will usually define the delegation of
responsibilities from the Board to:
(a) The CEO and Management, and/or
(b) Board Committees (including Executive Committee)

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2.Advisory Board Governance Model
A CEO who founds an organization will soon find
that he needs help in running the organization.
An advisory board serves as the primary resource for
the CEO to turn for help and advice.
Members of an advisory board are trusted advisors
who offer professional skills and talents at no cost to
the organization.
Advisory boards may also be formed in addition to an
organization’s board to help and advise the board, as a
whole

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3.Patron Governance Model
The Patron Model is similar to the Advisory Board Model.
The main difference between the two models is that the
primary purpose of the board members under the Patron
Model is to perform duties related to fundraising.
Patron Model boards are typically comprised of board
members who have personal wealth or influence within
the field.
The primary role of board members under the Patron
Model is to contribute their own funds to the organization
and to use their network to gain outside contributions for
the organization

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4.Cooperative Governance Model
A board that operates without a CEO uses a
Cooperative Model.
The board makes consensual decisions as a group of
peers, making it the most democratic governance
model.
There is no hierarchy and no one individual has
power over another. The board exists only because
the law requires its formation.

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5.Management Team Model
This model is similar to how an organization
administers its duties.
Rather than hiring paid employees to be responsible
for human resources, fund-raising, finance, planning,
and programs, the board forms committees to
perform those duties.

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6.Carver’s Policy Board Model
John Carver, author of “Boards that Make a
Difference,” developed the Model.
The board gives a high level of trust and
confidence over to the CEO.
The board has regular meetings with the
CEO to get updates on the organization’s
activities.

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The Carver model has 2 fundamental concerns:
(a) Boards focus on defining the “ends” of the
organization – i.e. what the organization strives to
achieve
 (b) Creating the policies by which the Board and
Management must abide in its pursuit of the ends.
The Board’s main role in this model is to create
policy to guide management in its operational work,
and to guide the Board in its governance work

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In the operational environment, the Board’s policies
define what the CEO is not allowed to do, the limits
to his/her decision-making, and the guide-posts
within which he/she must operate.
As long as the CEO doesn’t break these limitations,
he/she has significant freedom to decide how, when,
where to do things – the means of getting to the ends.
 Policies also describe the parameters within which
the Board must operate: minimum number of
meetings per year, minimum number of members,
requirement for annual meeting with members, etc.

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7.Cortex Board Governance Model
The Cortex Model is a model that focuses on the
value that the organization brings to the community.
The board defines the standards, expectations, and
performance outcomes according to the aspiration of
the organization.
Clarifying and setting outcomes to achieve success
become the primary duties of the board under this
model

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8.Consensus Board Governance Model
The Consensus, or Process Model, is a form of the
Cooperative Model
It gives all board members an equal vote, equal
responsibility, and equal liability.
The Consensus Model is appropriate for corporations
without major shareholders.

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 9.Competency Board Governance Model
Its a model that focuses on communication, trust,
and relationships to improve overall board
performance.
The organization’s bylaws do the work of outlining
practices and strategies.
A corporate board that is interested in developing the
knowledge and skills of the board members will
benefit from the Competency Model,

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QUIZ
1.In the context of corporate governance models,
explain the difference between ‘carver board
governance model’ and “Cortex Board Governance
Model”
2.Organizations in the non-profit sector are increasingly
adopting the advisory board model of governance.
Outline roles of an advisory board

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THANK YOU

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