Corporate Governance

• Concept
• Scope and significance of corporate governance
• Theories of corporate governance – Agency theory,
transaction cost economies, stewardship theory
• Governance of corporate entities
• Challenges for good corporate governance
• Importance of governance on business, society and
economy
 Concept
• Term Corporate Governance refers to process by
which company is controlled, or governed.
• Just as nations have governments that respond to
needs to citizens and that establish policy, so do
corporation have systems and internal governance
that determine overall strategic direction and
balance , sometimes strategic interest

An operational perspective
• Corporate governance is “the system by which
companies are directed and controlled”
 Concept
An operational perspective
• Board of Directors are responsible for the
governance of their companies
•Shareholders appoint directors and the auditors
•The board`s key role is to ensure that corporate
management is continuously and effectively striving
for above average
performance, taking into account of risk
• Corporate governance is about the procedures and
process according to which an organisastion is
directed and controlled
 Concept
An relationship perspective
• Corporate governance specifics the distribution of
rights and responsibilities among the different
participants in the organisations- such as board,
managers, shareholders and other stakeholders- and
lays down the rules and procedures for decision
making
• Corporate governance has relationship among the
shareholders, directors and management of the
company, as defined by the corporate charter by-
laws, formal policy and rule of law
 Concept
An relationship perspective
• Corporate governance involves the relationship
among the various participants, including CEO,
management, shareholders, employees, in
determining the direction and performance of
corporations
A Stakeholder perspective
• Corporate governance is the activities of the board
and its relationship with the shareholders or
members and with those managing enterprise, as
well as with external auditors, regulators, and other
legitimate stakeholders
 Concept
A Stakeholder perspective
• Corporate governance is the process by which
corporations are made responsive to the rights and
wishes of the stakeholders
A financial economics perspectives
• Corporate governance deals with way suppliers of
finance assure themselves of getting return to their
investment
• Principal concern was with ownership concentration
in corporate governance systems around the world
and legal protection available to investors
 Concept
A Societal perspective
• Sir Adrain Cadbury addressing Global Corporate
Governance forum of World Bank in 2000 said:
Corporate Governance is concerned with holding
the balance between economic and social goals and
between individual and communal goals
• Corporate Governance is there to encourage the
efficient use of resource and equally to require
accountability for the stewardship of those
resources
 Concept
A Societal perspective
• Aim is to align as nearly as possible the interest of
individual, corporation and society
• It includes all of stakeholders involved with the
company including contractual stakeholders such as
shareholders, managers, employees, bankers,
customers but also other stakeholders outside the
company whose interest could be affected by
corporate behaviour, including local, national and
international societal interest
Scope of Corporate Governance
Stock markets
for listed companies
Market
Finance market intermediaries
equity and debt
Shareholders

Board of
directors
Societal influences
and other
External
stakeholders
auditors
Government Management
and other
corporate
regulators Contractual stakeholders:
employees, suppliers,
Media customers etc.
 Scope of Corporate Governance
• Corporate governance thinking and practice are the
shareholders, the board of directors and the
management
• External auditors play a crucial role in corporate
governance
• In 19th century concept of corporation, the
shareholders appointed some of their own members
to act as auditors, to the check on the reports
presented to them by their directors
• Subsequently they were replaced by professional
auditors, as the accounting profession developed in
the later years of century
 Scope of Corporate Governance
• For public, listed companies, the stock markets and
their listing rules are, clearly, vitally significant to
corporate governance
• Rules on which shares are listed in stock market and in
particular the requirements laid down for listing are
fundamental to the effective governance of listed
companies
• Another perspective focuses on the interrelations
between the company and it shareholders
• In public companies market intermediaries play an
increasing important role in modern corporate
governance
 Scope of Corporate Governance
• Individual shareholders do have significant interest in
some markets, institutional investors – pension fund,
investment funds, investment houses , play a significant
role
• Brokers, merchant bankers, and other institutions can
hold a shares on behalf of others
•Government provide underpinning for corporate
governance- formulates and enforces legislation,
constrains activities of corporate enterprises under its
jurisdictions
• Relevant government department do have access to
corporate documents and also registration and filing of
corporate entities is also function of government
 Scope of Corporate Governance
• Corporate regulators play an ever increasing role in
corporate governance (e.g. Securities Exchange Board
of Nepal, Insurance Board etc.)
• Many company jurisdictions now have a separate
regulatory authority that monitors stock market
activities, determines and requires compliance with
corporate governance codes, has power to ensure
compliance
• Some commentators and researchers widen the focus of
corporate governance to include contractual
stakeholders includes employees, suppliers, and those in
the upstream and downstream
 Scope of Corporate Governance
• In recent years, the media has shone a spotlight on
corporate activities, and the investigate media now play
an active, useful role in the corporate governance
process
•Also growing importance of societal influences and
other stakeholders in corporate governance need
emphasis
•In earlier days companies are left alone to carry out their

activities to make profit and now many people expect

companies to adopt a socially responsible attitude to
their activities
Significance of Corporate Governance
• Corporate governance systems and practices will
corporate entities fight effectively against corruption
and abuses of power that are rampant in Nepalese
societies
•Corporate governance help them establish a system of
managerial competence and accountability
• Good corporate governance is important for following
reasons:
• Investors and shareholders of a corporate company
need protection for their company due to lack of
adequate standards of financial reporting and
accountability
Significance of Corporate Governance
•Good corporate governance enables the corporate
firms to attract capital and perform effectively
•Strong corporate governance in indispensable for a
vibrant stock market
•Better corporate governance practices and procedures can
bring about an improved management of the firm
•Good corporate governance also would bring about
improvement in management structure and systems
• Issue of integrity: Boards and management of
companies carrying out their duties in an ethical way
• Bonus culture: Better corporate governance in
financial institutions and their remuneration policies
have prevented financial crisis
Significance of Corporate Governance
•Regulatory framework: Better regulations ensures
businesses recognize the importance of corporate
governance as integral part of management, not box
ticking exercises
•Director`s training: prevention is better than a cure,
so including knowledge of the principles and practice
of corporate governance in mainstream director`s
training is essential
• Good corporate governance reduces emerging market
vulnerability to financial crisis, reinforces property
rights, reduces transactions costs and the cost of
capital, and leads to capital market development.
• Weak corporate governance framework, on the other
hand, reduce investor confidence, and can discourage
outside investment
 Theories of Corporate Governance
Agency Theory
• Agency problem: Whenever the owner of wealth (the
principal) contracts with someone else (the agent) to
manage his or her affairs, the agency dilemma occurs.
How to ensure that the agent acts solely in the interest
of the principal is the challenge.
• Agency theory or principal-agent theory looks a
corporate governance practices and behaviour through
the lens of the agency dilemma
• The theory perceives the governance relationship as a
contract between shareholder (the principal) and director
(the agent). Directors seek to maximize their own personal
benefit, to take actions that advantageous to themselves,
but detrimental to the shareholders
 Theories of Corporate Governance
Agency Theory
Principal (Shareholder/s)

contracts with who takes advantage of

Agent (Director/s)

• Evidences show that above mentioned behaviour is not hard

to find
• There are several cases when directors treat listed
companies as through it were their own property, exploiting
their position , receiving unwanted benefits
 Theories of Corporate Governance
Agency Theory
•Directors may also take a different view from their
shareholders on corporate risk, after all, it not their money
they are risking. Successful management involves taking
controlled
•Researchers have explored links between corporate
governance processes and corporate performance . For e.g.
study might test whether there is correlation between board
structure and long term corporate performance
• Agency theory focuses at the level of shareholders and
boards as entities. Board-level processes, political activities
and interpersonal relations between the directors are outside
their scope
 Theories of Corporate Governance
Criticism of agency theory
• Some critics of agency theory say that it has narrow
theoretical scope and they argue that to study details
of corporate govern acne on terms of contracts
between principals and agents, this theory is naïve
• Critics of agency argue that it has erected on single
questionable abstraction that governance involved a
contract between the two parties, and is based on a
dubious mortality that people maximize their
personal utility
 Theories of Corporate Governance
Transaction cost economies
• Closely related to agency theory, transaction cost
economies was derived from original work in 1937
by Coarse
• He recognized that a firm could save costs by
undertaking activities within the organisation rather

than externally or firms would get goods and

services at a lower price than in marketplace. But
times comes at point at which external market place
becomes cheaper
 Theories of Corporate Governance
Transaction cost economies
•This focuses on the cost of enforcement or check-and-
balance mechanisms, such as internal and external
auditor controls, information disclosure, independent
outside directors, the separation of board chairmanship
from CEO, risk analysis, and audit, nomination and
remuneration committees
•Both this theory and agency theory, directors and top
management act in their own best interests, not
necessarily in those of the shareholders; but transaction
cost analysis focuses on the governance structure and
mechanism, where as agency theory see firm as set of
contracts
•Fundamental discipline to this theory is financial economics
 Theories of Corporate Governance
Stewardship Theory
• In 19th century incorporation of joint-stock company with
limited liability for its shareholders was simple and
successful development . In this each company is
incorporated as separate entity
• Shareholding members of the company nominate and
appoint the directors, who then act as stewards for their
interests
• Directors report to them on the results of stewardship,
subject to report from independent auditors
• Ownership is basis of power over the corporation and
directors have fiduciary duty to act as stewards of the
shareholder1s interest
 Theories of Corporate Governance
Stewardship Theory
Shareholders

To protect their interest who accept a fiduciary duty to

nominate and elect be steward of those interests

Directors

• Belief of this theory is that directors do not

inevitably act in a way that maximizes their own
personal interests; they can do and act responsively
with independence and integrity
 Theories of Corporate Governance
Stewardship Theory
• Directors need to identify the interests of customers,
employees, suppliers and other legitimate stakeholders,
but under the law their first responsibility is to the
shareholders
• Conflict of interests between stakeholder groups and the
company should be met by competitive pressures in the
free markets, backed by legislation and legal controls to
protect customers (monopoly and competition law),
employees (employment law, health & safety law) ,
consumers (product safety law), suppliers (contract law)
and society (environmental law, taxation law)
•Underpinning disciplines in stewardship theory are legal
and organizational studies
 Theories of Corporate Governance
Criticism of Stewardship Theory
• In modern circumstances the concept of a set of
shareholders owning s single company and appointing
board of directors is naïve except for smaller companies
•In listed companies, shareholders become remote from the
company and do not nominate the directors
• Since this theory is rooted in law, it emphasizes what
should be done, or even exhorts. It is not predictive and
unable to show a casual relationship between specific
behaviours and corporate performance
• Share ownership is less widespread, with many
companies still influenced by dominant shareholders and
family interests
 Theories of Corporate Governance
Criticism of Stewardship Theory
• After major corporate collapses in the late 20th and 21st
centuries, many commentators filet that the trust directors
under the stewardship model has been undermined, and
this erosion of trust had adversely affected the well-being
of investors, employees and communities
• Giving more power to investors, skeptics suggests, would
increase investor cost and reduce returns
• Involvement by investors in governance of companies
changes relationships and no longer being at arm`s length
might limit freedom to deal in the shares
 Governing Corporate Entities
Listed companies
• Some treat the owners of listed companies as though
they were homogeneous, but in real terms actual pattern
of ownership can have a major influence on corporate
governance
•There are complex chain of intermediaries acting as
agents -for example ultimate owner of share could be an
individual who invests in a private pension fund
• Public companies, listed on the stock market, face
significantly more demanding governance standards
than those of private companies, through legislation and
regulations, corporate governance codes
 Governing Corporate Entities
Listed companies
• Companies planning stock market listing need to
consider include:
• Meet the requirements of the relevant corporate
governance codes and listing rules
• Ensure the chairman of the board as confident and
competent in the role
• Seek advice from auditors and lawyers, particularly
from the compliance and governance specialists
• Consider board structure, ensuring a sufficient
number and quality of independent outside directors
 Governing Corporate Entities
Listed companies
• Existing directors have the appropriate knowledge,
time, and enthusiasm to serve on the board of quoted
company
• Create the required board committee, including
board committee, remunerations committee
• Agree board level remuneration and review policies
• Consider board succession, director training and
development
• Develop required reporting routine and shareholders
interaction processes well ahead of time
• Develop board reporting system to ensure they are
comprehensive, timely and accurate governance
Governing Corporate Entities
Listed companies
• Rights that shareholders acquire with their shares are
determines by Company Act and company's articles of
association
• Shareholders do not have right to attend internal
meetings of the company, to access management
accounts and other corporate information, or get
involved in management .
• In Annual General Meeting (AGM) ordinary
resolutions
require a simple majority with over 50% of the
members to make decision and normally includes -
approval of accounts presented, approval of auditor
appointment, payment of dividend proposed, approval
 Governing Corporate Entities
Private companies
•Private companies far exceeds those than the listed
companies
Governance of family owned companies
•Large portion of private companies are owned and
controlled by their founders or families
•Governance of family controlled private companies
raises some interesting issues
•Initially shareholders will be entrepreneur starting
the business, family members involved in the firms,
or the partners in the existing partnership
•Management and governance is intertwined in the early
stages and distinction between the two are seldom
indentified
 Governing Corporate Entities
Private companies
• Formal board meetings and meeting of shareholders
are likely to ne minimal
• At this important thing that director or dominant
shareholders need to understand that company is
separate entity and its assets are not their own
• Next stage after the company thrives, existing
director lack the additional skills and invites outside
director with these skills, knowledge or network
contacts to join the board
•Successful family company has to face challenge of
passing the governance and management to the second
generation - one solution is for the founder/father figure
to assume that role of chairman family member of
second generation becomes chief executive
 Governing Corporate Entities
Private companies
• From start up to the passing of the governance
power to the next generation, it is vital that
corporate governance framework is appropriate to
the stage of development
Subsidiary and associated companies
• Holding companies determines that governance
polices and practices of the companies in the group
• Subsidiary company self governance: first approach,
delegating decision making power to the groups
subsidiary company boards, requires each subsidiary
in the group to act as autonomous company
 Governing Corporate Entities
Group wide governance: group holding company imposes
management control systems and organizational structures on the
entire group operations, which transcend the operations of the
individual subsidiary companies
Holding Company

Division A Division B
Subsidiary Subsidiary
Company 1 Company 3
Subsidiary
Subsidiary Company 4
Company 2
Subsidiary
Company 5
 Governing Corporate Entities
Employee owned companies
•Some public listed companies offer share to their
employees, either as part of their remuneration, or for
purchase on favourable terms to motivate employees and
commitment for long term interest in the company
•Employee owned businesses take many forms but all
emphasize the importance of employee commitment and
participation in decision making
Joint Ventures
•Governing joint ventures companies can present special
challenges
•Disagreements can arise between the partners that were not
envisaged in the initial joint venture agreement
 Governing Corporate Entities
Joint Ventures
•Directors face conflict of interest between their
responsibilities to the joint venture company and to
partner company that employs them.
•Joint venture companies may be incorporated in foreign
jurisdictions with diverse and different company laws
and regulatory regimes, and have overseas partners with
different cultural expectations
•Composition of the board of joint venture companies needs
to be considered carefully and written into the joint venture
agreement, including how many representative directors
there will be from each side
 Governing Corporate Entities
Mutual, social enterprises, and non profit entities
•Charities, education authorities, cooperatives, trade
unions, trusts, and not-to-profit entities and they are
working for public good, community objectives, roots
in the laws of trusts
•Foundation of governance in such organization is the
constitution and this determines the name and purpose, the
way those associated with it elect the governing body, the
rights and meetings of those members
Governance of partnerships and limited liability
partnerships
• A partnership is not a company and most in jurisdictions
operates under specific partnership law
 Governing Corporate Entities
• Partners are free to decide how they want to govern
their partnership. In a small partnership with relatively
few partners, the normal form of governance is through
meeting of all partners
• In larger practices, with many partners and particularly
if they are geographically spread, the partnership may
decide to appoint a managing partners and a governing
body
Hedge funds, private equity and sovereign funds
•Large sums of money are provided to hedge fund managers
by sophisticated rich individuals who have been attracted by
the funds prospectus, the fund mangers and their track
records
 Governing Corporate Entities
Hedge funds, private equity and sovereign funds
• Hedge funds take a short term view of their investments,
rather than assuming the role of stewards working with
management long term
•Compared with heavy regulations of listed companies, the
hedge funds industry is relatively unregulated
Private equity firms
• They can invest massively in the acquisition of limited
liability companies
•Private equity funds generate returns on their investments by
the sale of acquired businesses to other interests, or by
floating the acquired company through an initial public
offering
 Governing Corporate Entities
Private equity firms
•It is secretive sector and firms do not publish
information on their history and nor do they disclose the
portfolio of companies in the fund
• A few private equity firms have been floated as public
companies and are listed on stock markets
Sovereign –Wealth funds
•Surging Asian exports and high oil prices in the Middle East
generated massive surpluses
•Criticism of corporate governance of sovereign funds
include companies that they lack transparency and are
secretive, neither stating their objectives nor disclosing their
portfolios, that they lack accountability
Governing Corporate Entities
•Strategic intent of sovereign nations include the
worries that they may not be driven solely by a f
financial motive and that financial markets could
be manipulated, cause of with their enormous
wealth of fund could affect financial markets
•Other see a potential abuse of power if sovereign
wealth funds use their investments to exercise
strategic, possibly political, power around the
world
 Governing Corporate Entities
Corporate Members Constitution Governing
Entity Body
Limited liability Shareholders Memorandum Board of
company and articles of directors
association
Professional Qualified Charter and Council
organization members of the membership
profession rules
Local sports Club members Rules Committee
clubs
Trade unions Registered Constitution and General
members branch rule book Executive
Council
Oxford College Fellows of the Founding statute The Governing
college or Royal Charter Body
Challenges for good corporate governance
•High concentration of corporate ownership structure and
dominance of family business groups in corporate affairs are
major constraints in exercising good cornpone governance-
includes nepotism, favoritism and insider trading
•Nepal`s political instability and frequently changed
government and different political unrest brings different
challenges in governance issues
•Nepal`s government lack institutional capacity for
enforcement of laws and regulations
•Absence of political and leadership will
• Lack of training in corporate governance and resources
• In Nepal may organizations do not appreciate and realize
the significance of ethics in corporate governance
Challenges for good corporate governance
• From different media reports there is violations of tax,
scams and other frauds and these practices hurt the interests
of the stakeholders and society, and causes hardships to
suppliers and partners, and bring distress to stakeholders
• Process of governance must recognize the fact that we are
integrally related to the social, economic, and environmental
health of each other for the wellbeing and prosperity of all
Impact of governance in business, society
and economy
• Corporate governance is a necessary ingredient for the firm
performance as well as for the overall growth of the
economy of the country
• It is about ensuring that the business is running well
investors receive a fair return
• It plays a important role in enhancing the performance and
value of the firm
• Corporate governance is an umbrella term that includes
specific issues from interactions among senior
management, shareholders, board of directors and other
corporate stakeholders
• Good and proper corporate governance is considered
imperative for the establishment of a competitive market
Impact of governance in business, society
and economy
•Corporate governance practices stabilize and strengthen
good capital market and protect investors
•Good corporate governance help companies to improve their
performance and attract investment
•Good corporate governance can help to prevent corporate
scandals, frauds and potential civil and criminal liability of
companies
•Good corporate governance enhances image and reputation
of the company and makes it attractive to the investors,
suppliers, customers and other stakeholders of the company
•Good corporate governance produces direct economic
benefit to the company making it more profitable and
competitive
Impact of governance in business, society
and economy
• For investors one of the most important aspects while
making an investment decision is level of implementation
of principles of corporate governance – public disclosure of
information, protection of shareholder rights, equal
treatment of shareholders and profitability
• Good corporate governance should provide proper
incentives for the board and management to pursue interest
of the company and shareholders and should facilitate
effective monitoring
• Good corporate governance brings benefits to the society
and it helps in preventing corruption
• Good corporate governance also helps attract investors in
getting required funds needed from potential investors
Impact of governance in business, society
and economy
• Better corporate governance would also ensure that mergers
and acquisitions are undertaken for strategic business
reasons rather then for flimsy causes
• Good governance is of course important in every sphere of
society whether it be the corporate environment or general
society of the political environment