CORPORATE GOVERNANCE

AND

BUSINESS ETHICS
Definition
Business ethics are the moral principles that act as guidelines for the
way a business conducts itself and its transactions.In many ways, the
same guidelines that individuals use to conduct themselves in an
acceptable way in personal and professional settings apply to
businesses as well.

Ethics are the rules or codes of behaviour that individuals and

organisations apply in their decision-making and actions. Personal
ethics and business ethics underlie the regulations and codification
in corporate governance. The owners and leaders of companies
should establish the standards of ethical behaviour that they expect
all their employees to follow, and this behaviour (and the attitudes
associated with it) should be consistent with the way in which the
company is governed.
Personal Ethics
Personal ethics are closely associated with morality and a view of what is
right and what is wrong. Unethical behaviour by an individual is regarded
as unacceptable. To some extent, the law can establish rules about what is
‘wrong’. A breach of the criminal law is illegal. Other aspects of law, such as
contract law and employment law, can also establish standards of
behaviour that are required, and legal action can be taken against anyone
in breach of the law.
However, standards of behaviour are determined by social attitudes of
morality and good conduct, much more than by legal rules, even though
the attitudes of individuals often differ about whether a particular action is
‘wrong’ and unethical. Ethical personal behaviour helps to build trust. In
the context of corporate governance, ethical personal behaviour is
commonly associated with integrity (honesty) and transparency.
Unethical personal behaviour may be associated with selfishness, seeking
personal satisfaction and the fulfilment of personal objectives. Company
leaders are sometimes accused of this.
Personal Ethics example
Lord Browne resigned from his position as CEO of oil giant BP in
May 2007 due to media stories regarding his private life.

His resignation was to save BP from embarrassment after a
newspaper had won a court battle to print details of his private life.
Lord Browne apologised for statements made in court regarding a
four year relationship with Jeff Chevalier that he described as being
‘untruthful’ (he had actually lied, this relationship had existed).

Due to this ‘untruthfulness’ Lord Browne gave up a formidable
distinguished 41 year career with BP, and did the honourable thing
by resigning as the damage to his reputation would have impacted
adversely on BP.
Corporate Ethics
Corporate ethics are standards of business behaviour by
companies. The way in which employees act can be influenced
strongly by the way in which the employer expects them to act,
and each company has its own ethical (or unethical) standards.
This can affect the company’s dealings with its employees,
customers, suppliers and agents, as well as the government,
local communities and society as a whole.
There is a connection between corporate ethics (or business
ethics) and the different approaches to corporate governance. If
a company has a shareholder approach to corporate governance,
it puts the interests of shareholders ahead of the interests of
anyone else. If it adopts a stakeholder approach to governance,
it will act in a way that takes into consideration the needs and
concerns of other stakeholders. The concerns of an ethical
company that adopts a stakeholder approach are described
briefly in the following section on corporate codes of ethics.
Professional Ethics
The professions, such as medicine, law and accountancy, are governed by
professional bodies that require all members to comply with standards of
professional ethics. Members of the accountancy profession, for example, are
required to act with integrity, to be independent in their opinion and judgement,
to be objective (avoid bias), and to comply with all relevant laws and regulations. In
addition, they are required in most circumstances to maintain client confidentiality.
These broad principles apply to all accountants, including employees of companies
as well as accountants acting as company auditors. In the UK, ethical standards have
been issued by the Institute of Chartered Accountants in England and Wales.
In the context of corporate governance, it is essential that auditors should retain their
independence, objectivity and integrity, because shareholders rely on the opinion
they provide about the company’s annual financial statements. Unfortunately, a
number of corporate scandals in the past, notably the collapse of Enron (see Case
example 1.2), have raised questions about the integrity of the information in financial
statements and the independence and judgement of the company’s auditors.
Assume Company A works with a contact at Company B, an individual through
which they negotiate all the prices for supplies they buy from Company B. Company
A naturally wants to get the best prices on the supplies. When the individual from
Company B comes to their home office to negotiate a new contract, they put him up
in a top-tier hotel, in the very best suite, and make sure that all his wants and needs
are met while he’s there.
Nature of Ethical Issues
The range of ethical issues that potentially face the manager is enormous. Below are some of
the more important ones.

Keeping to Laws and Regulations

Often managers must decide whether or not to break laws or ignore regulations pertaining to
their and their companies' activities.

Telling the Truth

Managers must also often decide when to tell the truth or at least how much information to
provide.

Showing Respect for People

The business manager can face dilemmas with regard to standards of ethical behaviour
relating to how people, and specifically staff and employees, are treated.

Doing No Harm
For many, this first rule of medical ethics is considered to be the most important ethical
consideration for any business manager. There is no doubt that managers face dilemmas
with regard to this principle. In this case, harm could mean harm to particular people or
perhaps the wider environment and society.
Encouraging Ethical Behaviour
Johnson and Scholes suggest that the ethical issues which concern both
businesses and public-sector organisations operate at three different levels:

The macro level, which concerns their role at the national and international
level of the organisation of society;

The corporate level, which focuses on the ethical issues concerning individual
corporate entities, both in the private and the public sectors, when selecting
and implementing strategies;

The individual level, which concerns the behaviour of individuals within

organisations.

There are a number of steps that a company can take to encourage ethical
behaviour on the art of its staff. Some of the main ones are as follows.

Ensure top management commitment to ethical issues in the organisation.

Establish clear corporate guidelines and policies with regard to ethical issues
Cont...
Communicate ethical guidelines and policies to all staff, preferably
through a written code of ethics.

Encourage staff to be open about ethical problems and dilemmas they

face. Establish "ethics hotlines" which allow employees to bypass normal
chains of command.

Conduct ethics audits on a regular basis to identify any serious breaches of

ethical policies.

Conduct ethics training on a regular basis.

Devise systems of motivation and remuneration/reward which encourage

conformance to ethical practices and standards of a corporate code of
ethics
 Cont...
A large number of large companies have developed, adopted and disclosed a formal
code of ethics that employees are required to apply. In the USA, one of the
requirements for a listing on the New York Stock Exchange (NYSE) is that the
company must adopt and disclose a code of business conduct and ethics for its
directors and employees. Key features of a corporate code of ethics are that:

It is a formal document;

It is adopted by the board of directors;
It is disclosed to employees and to the public, including other stakeholders who
have direct dealings with the company;
It is made clear to employees that they should comply with the code
Its application in practice should be monitored, and breaches of ethical conduct
should be dealt with according to established rules and procedures.

The effectiveness of a code of ethics depends on the leadership of the company – its
directors and senior managers. These individuals must be seen to comply with the
ethical code, other- wise employees will see no purpose in complying with the code
themselves. The culture of a company drives its ethical behaviour, and a code of
ethics provides useful guidance.
CORPORATE
GOVERNANCE
Key Strategic Players in CG
Identify the strategic players in the corporate
governance system and explain the relationship that
exists among these strategic players.
Definition...
Corporate governance refers to the way in which
companies are governed and to what purpose. It is
concerned with practices and procedures for trying to
ensure that a company is run in such a way that it
achieves its mission and goals.
 Definition...
This could be to maximise the wealth of its owners (the shareholders), subject
to various guidelines and constraints and with regard to other groups or
individuals with an interest in what the company does. Guidelines and
constraints include behaving in an ethical way and in compliance with laws and
regulations.

From a shareholder’s perspective, corporate governance can be defined as a

process for monitoring and control to ensure that management runs the
company in the interests of the shareholders. Other groups with an interest in
how the company acts include employees, customers, sup-pliers, the
communities in which the company operates and the general public.
Individuals, organisations or groups with an interest in how a company operates
are called stakeholders. It can be argued that companies should be governed in
the interests of all its major stakeholders, not just its owners. This argument is
particularly relevant to large companies whose activities have a big impact on
the economy and society.
 Cont...
“Corporate governance refers to the structures and processes for the direction and
control of companies. Corporate governance concerns the relationships among
the management, board of directors, controlling shareholders, minority
shareholders, and other stakeholders. Good corporate governance contributes to
sustainable economic development by enhancing the performance of companies
and increasing their access to outside capital.”12
This definition focuses on three key elements:

Direction refers to all the decisions that relate to setting the overall strategic
direction of the company such as: (i) long-term strategic decisions; (ii) large-scale
investment decisions; (iii) mergers and acquisitions; and (iv) succession planning
and appointment of key senior managers, such as the CEO of the company.
Control refers to all the actions necessary to oversee the management’s
performance and follow up on the implementation of the strategic decisions set
above.
Relationship among the main governing bodies of the firm refers to the
interactions among the shareholders, the directors of the board, and the
managers. An important element of any good corporate governance structure is
the clear definition of the role, duties, rights, and expectations of each of these
governing bodies.
Maxwell Corporation
Maxwell Corporation consisted mainly of Maxwell Communication
Corporation and Mirror Group Newspapers. As its chairman and CEO, Robert
Maxwell had a position of dominant power on the board of directors. He was
also a domineering personality, who bullied the people working with him; he
was able to run his companies in whatever way he liked. He apparently made
no clear distinction between his privately-owned companies and the public
Maxwell Corporation. In the early 1990s, his companies got into serious
financial difficulties. Maxwell drowned falling off his yacht in 1991; after his
death it emerged that his companies had accumulated debts of £4 billion, and
an unauthorised ‘hole’ of more than £400 million existed in the pension fund
of Mirror Group Newspapers.
Maxwell’s ability to accumulate unsustainable debts and to raid the pension
fund was attributed to a combination of his domineering personality and
position of power, a weak board of directors and questionable accounting
practices. the Maxwell ‘empire’ collapsed.
Arthur levitt
Commenting on the numerous corporate scandals in the USA in 2001 and 2002, Arthur
Levitt, a former chairman of the Securities and Exchange Commission (SEC), said in a
speech:


‘If a country does not have a reputation for strong corporate governance practice, capital
will flow elsewhere. If investors are not confident with the level of disclosure, capital
will flow elsewhere. If a country opts for lax accounting and reporting standards, capital
will flow elsewhere. All enterprises in that country, regardless of how steadfast a
particular company’s practices, may suffer the consequences. Markets exist by the grace
of investors. And it is today’s more empowered investors who will determine which
companies and which markets stand the test of time.’

The challenge of good corporate governance is to find a way in which the interests of
shareholders, directors and other interest groups can all be sufficiently satisfied.

Group presentations
Identify at least five principles of good corporate governance and
the recommended practices to support each principle as
highlighted in the King IV Report.

The ZimCode aims to minimise corporate collapses and instil

discipline within the business sector by establishing minimum
standards for corporate leadership. It raises the bar on
corporate governance above legal stipulations on the concept.

Identify and analyse the ZIMCODE principles and

recommendations relating to ownership and control of
companies in Zimbabwe.
OECD principles of corporate governance
Issued by the OECD in 1999, and revised in 2004. These set out broad principles of good corporate governance
that should apply worldwide, in developed and developing economies alike.

The OECD Principles are intended to serve as a reference point for countries to use when evaluating their
legal, institutional and regulatory provisions for corporate governance. They also offer guidance and
suggestions for stock exchanges, investors, companies and other bodies involved in developing good corporate
governance practices.

The principles deal with six aspects of governance, as follows.

Ensuring the basics for an effective corporate governance framework.

The rights of shareholders and key ownership functions.
The equitable treatment of shareholders.
The role of stakeholders in corporate governance.
Disclosure and transparency.
The responsibilities of the board.

The corporate governance framework has three main elements:

It is a set ofrelationshipsbetweentheboardofdirectorsofacompany,itsshareholders,management and other

stakeholders.

It is a structure through which the objectives of the company are set and the means of achieving those
objectives and monitoring performance is decided.

It should provide appropriate incentives for the board and management to pursue objectives that are in the
International Corporate Governance Network (ICGN)
What is it?

ICGN, founded in 1995 at the instigation of major institutional investors, represents investors, companies, financial
intermediaries, academics and other parties interested in the development of global corporate governance practices.

Objectives of the ICGN principles

The ICGN principles highlight corporate governance elements that ICGN-investing members take into account when
making asset allocations and investment decisions.

The ICGN principles mainly focus on the governance of corporations whose securities are traded in the market – but in
many instances the principles may also be applicable to private or closely-held companies committed to good
governance.

The ICGN principles do, however, encourage jurisdictions to address certain broader corporate and regulatory policies
in areas which are beyond the authority of a corporation.

The ICGN principles are drafted to be compatible with other recognized codes of corporate governance, although in
some circumstances, the ICGN principles may be more rigorous.

The ICGN believes that improved governance should be the objective of all participants in the corporate governance
process, including investors, boards of directors, corporate officers and other stakeholders as well as legislative bodies
and regulators. Therefore, the ICGN intends to address these principles to all participants in the governance process.
Content of the ICGN principles:

corporate objective – shareholder returns

disclosure and transparency

audit

shareholders’ ownership, responsibilities, voting rights and remedies

corporate boards

corporate remuneration policies

corporate citizenship, stakeholder relations and the ethical conduct of business

corporate governance implementation.

Limitations

All codes are voluntary and are not legally enforceable unless enshrined in statute by individual
countries.

Local differences in company ownership models may mean parts of the codes are not applicable.
Sarbanes-Oxley Act (SOX)2002

A different approach to the regulation of corporate governance was taken in the USA, following a
number of financial scandals and corporate collapses in 2001–2002 involving major corporations such as
Enron, World Comand Tyco.

Previously, corporate governance issues had not been considered a matter of any significance. As a
result of Enron and the other corporate scandals, there was an immediate recognition of a need to
protect investors, mainly by improving the accuracy and reliability of financial reporting and other
disclosures by companies.

The USA took a regulatory approach to dealing with the problems that were recognised at the time, and
a number of corporate governance measures were included in the Sarbanes-Oxley Act 2002 (sometimes
referred to as SOX). The law applied to all public companies in the USA and also to all non-US
companies that had shares or debt securities registered with the SEC. CEOs and CFOs were made
personally liable for the accuracy of the financial statements of their company, and new rules on
financial reporting were introduced. Several other corporate governance measures were included in the
Act, such as a requirement for legal protection for whistleblowers.

With the enactment of SOX, the USA was considered to have adopted a rules-based approach to
corporate governance, different from the ‘principles-based’ approach in most other countries
(described in Chapter 3). However, SOX is not a comprehensive law on corporate governance, and many
aspects of corporate governance are not covered by the Act.

For example, SOX does not contain any rules about the composition of the board of directors,
remuneration of senior executives or dialogue between companies and their shareholders.
The Cadbury Commission, which produced the first
corporate governance code in the UK in 1992, provided the
following definition:

‘Corporate governance is the system by which companies are

directed and controlled. Boards of directors are responsible
for the governance of their companies. The shareholders’ role
in governance is to appoint the directors and the auditors
and to satisfy themselves that an appropriate governance
structure is in place. The responsibilities of the board
include setting the company’s strategic aims, providing the
leadership to put them into effect, supervising the
management of the business and reporting to shareholders
on their stewardship. The board’s actions are subject to laws,
regulations and the shareholders in general meeting.’
The UK Corporate Governance Code

‘The purpose of corporate governance is to facilitate effective, entrepreneurial

and prudent management that can deliver the long-term success of the
company…. Corporate governance is about what the board of a company does
and how it sets the values of the company, and it is to be distinguished from the
day-to-day operational management of the company by full- time executives.’

For large companies, the main issue with corporate governance is the
relationship between the board of directors and the shareholders, and the way
in which the board exercises its powers. The relationship between the
shareholders and the board can be described as a ‘principal-agent’ relationship.
In some companies, other stakeholders may have significant influence.

Principles of corporate governance are based on the view that a company should
be governed in the interests of the shareholders, and possibly also in the
interests of other stakeholder
groups.Theboardoughttouseitspowersinanappropriateandresponsibleway,andsh
ouldbe accountable in some ways to the shareholders (and other stakeholders,
perhaps).
Why Is Corporate Governance Important?

A company should have a purpose, goals and objectives. Some of these,

such as the reasons for its existence, may be set out in its written
constitution. Others may be implied or assumed, rather than clearly
documented objectives. A company should be governed in a way that
moves it towards the achievement of its goals.

However, although a company exists as a legal person, in reality it is the

organised, collective effort of many different individuals. It is
controlled by a board of directors in the interests of its owners the
shareholders.

The interests of the board and the shareholders ought to coincide, but
in practice they may be in conflict with each other. The challenge of
good corporate governance is to find a way in which the interests of
shareholders, directors and other interest groups can all be sufficiently
satisfied.
Poor Corporate Governance
Aspects of poor corporate governance include:
A board of directors that fails to perform its duties properly, perhaps
because it is dominated by one or more individuals, or because it fails
to carry out the tasks that it is supposed to;
misleading financial reporting to shareholders and other investors,
and perhaps inadequate auditing of the financial statements;
A poor relationship between the board and the main shareholders;
In effectives ystemsof risk management, and exposure to errorsand
frauddue to inadequate internal control systems;
inappropriateremunerationandrewardsystemsfordirectorsandseniorex
ecutivesunethicalbusinesspractices
A key issue in corporate governance is the relationship between the
board of directors, the shareholders and other importantstakeholders.
List five examples of good and bad corporate governance practice in
your organisation.
Rules and principles based approaches to
corporate governance
A rules-based approach instils the code into law with appropriate penalties for transgression.

A principles-based approach requires the company to adhere to the spirit rather than the letter of the code. The
company must either comply with the code or explain why it has not through reports to the appropriate body
and its shareholders.

The UK model is principles based and although it requires the company to adhere to the spirit of the code, and
therefore best adopt best practice, it is governed by the Stock Exchange Listing Rules.

 The listing rules provide statutory authority (via the Financial Service and Markets Act 2000) and require
public listed companies to state how they have complied or explain why they have not under the “comply or
explain” clause noted above. This provides a basis for comparing Corporate Statements.

There is no such requirement for disclosure of compliance in private company accounts.

Principles of good corporate governance
Several concepts apply to sound corporate governance in all
countries where international investors invest their money. Many
of these are ethical in nature and the original King Code described
them as the ‘overarching corporate governance principles’:
fairness
accountability
responsibility
Transparency
Principle

Fairness Companies should act In an ethical manner. ethical conduct

underpins good corporate governance.

Accountability and responsibility
Transparency
Management should be accountable to the board of directors for
the way in which they have exercised their responsibilities.
Similarly, the board of directors should be accountable to the
shareholders (and other stakeholders).
Companies should be open about what they are doing, in matters
that are of interest or concern to shareholders and other
stakeholders. Reporting is an important element of governance.
Shareholders (and other stakeholders) have a right to be told.
Good corporate governance should promote the best long-term interests of the company. It
requires an effective board of directors, with an appropriate balance of skills and
experience, and well-motivated individuals as directors. The composition of the board, its
functions and responsibilities, and its effectiveness, are therefore core issues in corporate
governance.

At the heart of the debate about corporate governance lie the conflicts of interest, or
potential conflicts of interest, between shareholders, the board of directors as a whole and
individual board members, and possibly also a number of other stakeholder groups.

The directors may be tempted to take risks and make decisions aimed at boosting short-
term performance. Many shareholders are more concerned about the longer term, the
continuing survival of their company and the value of their investment. If a company gets
into financial difficulties, professional managers can move on to another company to start
again, whereas shareholders suffer a financial loss.

Issues in corporate governance where a conflict of interests might be apparent are:

 Financial reporting and auditing. The directors should be honest and transparent in
reporting on the company’s performance to shareholders, and the external auditors should
give an independent opinion of the financial statements.
 Remuneration of directors and senior executives. Remuneration policy should be fair and
consistent with good governance practice.
 Company–stakeholder relations.
 Risk-taking and the management of risk. There should be effective systems for the
management of business risk.
 Effective communication between the directors and shareholders. Issues in governance are
what information should be reported to stakeholders, and the transparency of reporting.
Comply or explain
A principles-based code requires the company to state
that it has complied with the requirements of the code
or to explain why it could not do so in its annual report.
This will leave shareholders to draw their own
conclusions regarding the governance of the company.

UK Corporate Governance Code (2016) states – "The

“comply or explain” approach is the trademark of
corporate governance in the UK. It has been in
operation since the Code’s beginnings and is the
foundation of its flexibility. It is strongly supported by
both companies and shareholders and has been widely
admired and imitated internationally."
Cont…
The Code has five sections.
Leadership.
This contains principles and provisions relating to the responsibilities
of the board as a whole, its chairman and its NEDs.
Effectiveness
This section is concerned with the effectiveness of the board of
directors. It deals with issues such as the composition of the board of
directors, the appointment and re- election of directors, induction
and training for directors, and annual performance reviews for the
board, its committees and individual directors.
Accountability
This section deals with the accountability of the board of directors,
and also its responsibility for risk and risk management, including
internal control risk (see also
Remuneration
The fourth section of the Code contains principles and provisions
relating to the remuneration of directors and senior executives.
Relations with shareholders
The final section of the Code sets out the responsibilities of the board
for establishing a dialogue with shareholders, and using the AGM to
Principles and provisions
The UK Corporate Governance Code (and the corporate governance
codes in many other countries) consists of a number of:
Principles; and
Supporting provisions, with one or more provisions for each principle.
In the UK Code, most of the principles are ‘main’ principles, but for
some main principles there are also supporting principles. Provisions
indicate how a principle should usually be applied in practice.

‘Comply or explain’

‘Apply or explain’

What is the difference between ‘comply or explain’ and ‘apply or explain’?

Stakeholders
A stakeholder in a company is someone who has an interest or ‘stake’ in
it, and is affected by what the company does. A stakeholder, in turn, has
an influence on what companies do.

 Each stakeholder or stakeholder group may expect the company to

behave or act in a particular way with regard to the stakeholders’
interests. A stakeholder can also expect to have some say in some of the
decisions a company makes and some of the actions it takes. The balance
of power between different stakeholder groups, and the way in which
that power is exercised, are key issues in corporate governance.

A public company has a number of different stakeholder groups, which

can be divided into different categories.

Internal stake- holders (stakeholders inside the organisation: executive

directors, management and other employees);

Connected stakeholders (who have close connections with the company

without being inside it, such as shareholders, lenders, customers,
suppliers and non-executive directors);

External stakeholders, such as government, the general public and

pressure groups.
Freeman defines stakeholders as 'any person or group
that can affect or be affected by the policies or
activities of an organisation'.
Stakeholder Classification and relations
Stakeholder Analysis.
Stakeholder mapping: The Mendelow model

Interest
Low High
Power Low Minimal Effort Keep informed
High Keep Satisfied Key Players

Power - Interest Grid

Stakeholder Operational role Corporate Main interests

governance in company

Role

Directors Responsible for the Control • Pay

actions of the company in

corporation. best interest of • performance-

Linked
stakeholders.
Bonuses
Company Ensure compliance Advise board
• Share
Secretary with company on corporate
Options
legislation and governance

regulations and matters. • Status

keep board • Reputation

members informed

of their legal • power.

responsibilities.
What are the main differences between the shareholder and pluralist
approaches to corporate governance?
Theoretical frameworks

The two different frameworks are:

Agency theory.

Stakeholder theory.

Agency theory can be used to justify a ‘shareholder

approach’ to corporate governance.
Stakeholder theorycan be used to justify a ‘stakeholder’
approach.
Key concepts of agency theory
•An agent is employed by a principal to carry out a task on their behalf.
•Agency refers to the relationship between a principal and their agent.
•Agency costs are incurred by principals in monitoring agency behaviour because
of a lack of trust in the good faith of agents.
•By accepting to undertake a task on their behalf, an agent becomes accountable
to the principal by whom they are employed. The agent is accountable to that
principal.
•Directors (agents) have a fiduciary responsibility to the shareholders (principal)
of their organisation (usually described through company law as 'operating in
the best interests of the shareholders').
Cont...
Stakeholders are any person or group that can affect or be
affectedby the policies or activities of an organisation.

Agent objectives (such as a desire for high salary, large bonus

and status for a director) will differ from the principal's objectives
(wealth maximisation for shareholders)

The most important agency costs are the external audit fee,
attending meetings and reading both annual reports and analyst’s
reports.
For each of the following scenarios, decide which kind of
principal-agent conflict exists.
 Scenario Conflict

The CEO of a frozen food distributor decides that the company should buy the car manufacturing
company Ferrari, because he is a big fan of the car.

An employee discovers that one of the key financial controls in his area is not operating as it should,
and could potentially result in losses to the company. He has not said anything because he does not
want to get into trouble.

The financial director decides to gamble £1 million of company money, obtained from a bank loan, on a
football match result.

In agency theory, what are agency costs and what are the three main
elements of agency cost?
In agency theory, what are agency costs and what are the three main
elements of agency cost?
Stakeholder theory

The basis for stakeholder theory is that companies are so large and
their impact on society so pervasive that they should discharge
accountability to many more sectors of society than solely their
shareholders.

As defined in an earlier section, stakeholders are not only are

affected by the organisation but they also affect the organisation.

Stakeholder Analysis.

Power - Interest Grid

In agency theory, what are agency costs and what are the three main
elements of agency cost?
Explain the disadvantages of a rules-based approach to corporate governance, compared with a principles-based approach.
BOARD OF DIRECTORS
AND
DIRECTORS
In relation to corporate bodies:

a director is an officer of the company charged by the board of

directors with the conduct and management of its affairs

the directors of the company collectively are referred to as a board

of directors.

the shareholders appoint the chairman of the board and all other
directors (upon recommendations from the nominations
committee)

directors, individually and collectively, as a board of directors, have

a duty of corporate governance.
Non-executive directors (NEDs)
Threats to independence
Chairman and CEO
Directors' induction and CPD
Legal and regulatory framework governing the board of directors
Board committees
Arguments for and against Corporate Governance regimes

The main arguments in favour of having a strong corporate governance regime for listed
companies are as follows.
Goodgovernancewilleliminatetheriskofmisleadingorfalsefinancialreporting,andwill prevent
companies from being dominated by self-seeking CEOs or chairmen. By reducing the risks of
corporate scandals, and promoting fairness, accountability, responsibility and transparency
in companies, investors will be better protected. This should add generally to
confidenceinthecapitalmarkets,andhelptosustainshareprices.
In a well governed company, there is a keen awareness of sign if I cantrisks and the
importance of effective risk management. Risks need to be kept within acceptable levels;
otherwise companies may fail to respond adequately to adverse risk events and
developments, and profitability may be damaged as a result.
It has been argued that companies that comply with best practice in corporate governance
are also more likely to achieve commercial success. Good governance and good leadership
and management often go hand-in-hand. Badly governed companies may be very successful,
and well-governed companies may fail. However, the probability is greater that badly
governed companies will be less successful and more likely to fail than well-governed ones.
Well-governed companies will often develop a strong reputation and so will be less exposed
to reputation risk than companies that are not so well governed. Reputation risk can have an
adverse impact on investors and customers.
Good governance encourages investors to hold shares in companies for the longer term,
instead of treating shares as short-term investments to be sold for a quick profit. Companies
benefit from having shareholders who have an interest in their longer term prospects.
The main arguments against having a strong corporate governance regime for listed
companies focus on costs, benefits and value and are as follows:
It is argued that, for many companies and institutional investors, compliance with a
code of corporate governance is a box ticking exercise (seeChapter3). Companies adopt
the required procedures and systems without considering what the potential benefits
might be. The only requirement is to comply with the ‘rules’ and put a tick in a box
when this is done. Corporate governance requirements therefore create a time and
resource consuming bureaucracy, with compliance officers, and divert the attention of
the board of directors from more important matters.
Good corporate governance is likely to reduce the risk of scandals and unexpected
corporate failures. However, it could be argued that the current regulations or best
practice guidelines are far too extensive and burdensome.
When regulations and recommended practice become burdensome, there is an
inevitable cost, in terms of both time and money, in achieving compliance. It could be
argued that less regulation is better regulation. However there has not yet been an
authoritative assessment of the costs of corporate governance compliance with the
benefits of better corporate governance systems.
Companiesthatareobligedtocomplywithcorporategovernanceregulationsorbestpractice
are at a competitive disadvantage to rival companies from countries where
corporategovernanceregulationisweaker.Ascorporategovernanceregimeshaveextendedt
omorecountries, however, this argument is weaker than it used to be. There is no
evidence, for example, that UK companies have lost competitiveness because of the
Risk and corporate governance
The issue of corporate governance and how to manage risk has
become an important area of concern across the world.
Reviews, such as the UK Turnbull Committee, have identified risk
management as key to effective internal control.
•In turn, following good corporate governance procedures
(including having sound internal control systems) will decrease
the impact of many risks on an organisation.
•Risk analysis is best carried out in the context of the OECD
principles of good corporate governance.
•An overriding risk is that an organisation fails to meet the appropriate
corporate governance regulations.
Enterprise Risk Management (ERM)

Risk management has transformed from a ‘department focused’ approach to a

holistic, coordinated and integrated process which manages risk throughout the
organisation.

Drivers for this transformation include globalisation, the increased complexity of

doing business, regulatory compliance/corporate governance developments, and
greater accountability for the board and senior management to increase
shareholder value.

These drivers mean that an organisation and its board must have a thorough
understanding of the key risks affecting the organisation and what is being done
to manage them. ERM offers a framework to provide this understanding.

ERM is a COSO initiative and depicts the ERM model in the form of a cube.
COSO intended the cube to illustrate the links between objectives that are shown
on the top and the eight components shown on the front, which represent what is
needed to achieve the objectives. The third dimension represents the
organisation’s units, which portrays the model’s ability to focus on parts of the
organisation as well as the whole.
Risk management Strategies:
TARA/SARA

Strategies for managing risks can be explained as TARA

(or SARA): Transference (or
Sharing), Avoidance, Reduction or Acceptance.
King Report
ZIMCODE

Application of Code and Derivative Codes

Ownership and Control

Boards of Directors and Directors
The Governance of Risk
Information Management and Disclosures
Corporate Conflict Prevention and Resolution
Compliance and Enforcement
Governance of Stakeholder Relations
Role of Government in Corporate Governance
CORPORATE SOCIAL RESPONSIBITY
CSR is a concept with many definitions and practices. The way it is
understood and implemented differs greatly for each company and
country. Moreover, CSR is a very broad concept that addresses many
and various topics such as human rights, corporate governance,
health and safety, environmental effects, working conditions and
contribution to economic development. Whatever the definition is,
the purpose of CSR is to drive change towards sustainability.
Corporate social responsibility is the internationally regarded concept
for responsible corporate behavior
CSR refers to the moral and ethical obligations of a company with
regards to their employees, the environment, their
competitors, the economy and a number of other areas of life that
its business affects.
Corporate social responsibility (CSR)
Milton Friedman argues that, a corporation has no
responsibility outside of making profit for shareholders:

Only human beings have moral responsibility for their

actions.

It is the managers' duty to act solely in the interest of

shareholders:

– this is a point of law. Any other action is shareholder

betrayal.

Social issues are the province of the state and not

corporations.
CARROL’S 4 Responsibities of Corporates
Economic – For the business to survive on a long-term basis and
benefit the society, the first responsibility of the company is to
gain profits.
Legal – It is imperative for the company to obey and adhere to
the laws and regulations related to the nature of its business,
competition, employment, and health and safety among others.
Ethical – It is important for the company to act on the grounds of
ethics and morals in society and should also go beyond the
narrow requirements of the law and order.
Philanthropic – It is the responsibility of the company to give
back to society. This facet of responsibility holds an important
place even though it is discretionary in nature.