DEFINITION

CORPORATE GOVERNANCE

Is a system by which organizations are directed and controlled.

-Cadbury Report

Is a set of relationships between a company’s directors, its

shareholders, and other stakeholders. It provides the structure
through which the objectives of the company are set, and the
means of achieving those objectives and monitoring performance
are determined.
-OECD
MANAGEMENT VS GOVERNANCE
Management Governance
Concerned with running the Concerned with leading the
day to day business company, and monitoring
operations of a company. and controlling the decisions
of management to ensure
that the business meets its
objectives.
Concerned with making Concerned with monitoring
business decisions. and controlling decisions, as
well as providing leadership
and direction.
• Using the USJR structure, identify who you
think are members of management and of
governance.
The separation of ownership and control creates
problems for good corporate governance,
because the directors of a company might be
able to run the company in a way that is not in
the best interests of the shareholders, but the
shareholder might not be able to prevent the
directors from doing this, because the directors
have most of the powers to control what the
company does.
• What do you propose in order to solve this
problem?
• Will the presence of a majority shareholder
change this problem? How?

• It has been said the governance is more of a

concern for publicly listed corporations,
rather than small family owned ones. Why do
you think this is the case?
CORPORATE GOVERNANCE ISSUES
The role and responsibilities of
the board of directors
The BODs should:
1. Understand its responsibilities
2. Fulfil its responsibilities
3. Provide suitable leadership to the
company.
Governance should, therefore, clearly establish
the responsibilities of the BOD and ensure
these are carried out properly.
The composition and balance of
the board of directors
The board should not be dominated
by a powerful chief executive and/or
chairman.

The board should have a suitable balance, and

consist of individuals with a range of
backgrounds and experience
Financial reporting, narrative
reporting and auditing
The board should be:
1. properly accountable to its
shareholders, and
2. should be open and transparent
with investors generally
High standards of financial reporting (and
narrative reporting) and external auditing must
be upheld
Directors’ remuneration
To encourage their commitment to
achieving the objectives of their
company, they should be given
suitable incentives.

Linking remuneration to performance

is considered essential for successful
corporate governance
Risk management and internal
control
The directors should ensure that
1. their company operates within
acceptable levels of risk, and
2. that through a system of internal
control, the resources of the
company are properly used and
its assets are protected
Shareholders’ rights

Encourage the involvement of

shareholders through:
1. more dialogue with the directors
2. greater use of shareholder powers
THE CORPORATE GOVERNANCE
TRIANGLE
CORPORATE GOVERNANCE TRIANGLE
Chief Executive Officer

Managing Director
• In a publicly listed entity where there are many
different shareholders, the presence of a
knowledge gap exists between the owners and
management. How do you understand
“knowledge gap” in this context?

• What do you think can be done to address this

knowledge gap?
AGENCY THEORY IN CORPORATE
GOVERNANCE
HOW DOES AGENCY THEORY
AFFECT CORPORATE GOVERNANCE?
HOW TO SOLVE THE ISSUES THAT
ARISE OUT OF THE AGENCY THEORY?
Agency costs
CHAIRMAN OF THE BOARD VS
CHIEF EXECUTIVE OFFICER
BOARD COMMITTEES
 Board committees
• A board committee is a committee set up by
the board, and consisting of selected
directors, which is given responsibility for
monitoring a particular aspect of the
company’s affairs for which the board has
reserved the power of decision-making
 Can board NO.
committees They only report
back to the board
make and make
decisions? recommendations.
• The number of and the type of board
committee created will depend on the
company. The common committees are:
– Remuneration committee
– Audit committee
– Nominations committee
– Risk management committee