CORPORATE

GOVERNANCE

What is a corporation
A business entity that is separate from its
owners called stockholders, who share in profits
and losses generated from the business
operations, with separate liabilities from those
of the owners and taxed separately; shares
may be privately, closely or publicly held
Typically, shareholders do not actively manage
the entity, but appoint aboard of directorsto
control the corporation in afiduciarycapacity
As a legal entity, it has the same rights and
responsibilities as natural persons do; it can be
convicted of criminal offenses such
asfraudandmanslaughter
Corporations can be dissolved either by

Characteristics of a corporation
Legal existence
The entity can buy,sell, own, enter into a
contract, and sue otherpersonsand firms, and
be sued by them. It can do good and be
rewarded, and can commitoffenseand be
punished
Limited liability
The entity and its owners arelimitedin
theirliability up to theresourcesof the firm,
unless the owners give personal guarantees
Continuity of existence
The entity can live beyond the life span of its
owners since ownershipcan be transferred

What is governance
It is the way rules, norms and actions are
produced, sustained, regulated and held
accountable among the players in a collective
problem, wherein the degree of formality
depends on the internal rules of the
organization
The need for governance exists anytime a
group of people come together to accomplish
an end based on 3 underlying dimensions:
authority, decision-making and accountability
Governance determines who has power, who
makes decisions, how other players make their
voices heard and how accountability is rendered
To efficiently make the necessary decisions, an

What is corporate governance?

The structures, mechanisms, processes and
relations by which corporations are controlled
and directed, focusing on the internal and
external stakeholders with the intention of
monitoring the actions of management and
directors, thereby mitigating agency risks
which may stem from the misdeeds of
corporate officers
The framework used to balance shareholders
interests with those of other key stakeholders
(employees, customers, suppliers, creditors,
communities and government)

Importance of corporate governance

It is an economic discipline that focuses on
the strategic management of corporations
with the aim of improving financial
performance in a socially responsible
manner
It eliminates internal corporate corruption
by creating a climate of transparency
where shareholders are fully informed of
business decisions and long-term business
plans
It helps restore consumer confidence in
financial investments by observing
integrity and responsible business

Importance .
It is a managerial tool for extremely large or
publicly held companies
It protects the financial interests of
stakeholders by providing guidelines or
policies that management and employees
must follow
It sets a minimum standard of acceptable
behavior for employees in the business - honesty, integrity, accountability
transparency, fairness and proper
relationships with other companies in the
business environment
It creates a competitive advantage for
organizations by providing specific

Evolution of corporate governance

Interest in corporate governance practices
of modern corporations particularly
accountability, increased following the
massive bankruptcies of large
corporations in 20012002 involving
accounting fraud
Because of high-profile scandals involving
abuse of corporate power and alleged
criminal activities by corporate officers, an
integral part of an effective corporate
governance regime includes provisions for
civil or criminal prosecution of individuals

Evolution.
In the wake of high profile corporate scandals, the
US federal government passed in 2002 the
Sarbanes-Oxley Act , which sought to restore public
confidence following the collapse of several major
companies (ENRON, WorldCom, HIH, Parmalat, Bern
Stearns, AIG, Arthur Andersen, Washington Mutual)
Other triggers for continued interest in the
corporate governance of organizations included the
financial crisis of 2008-2009 and the level of CEO
pay

Codes and Guidelines

Sarbanes-Oxley Act
OECD Principles
International Standards of Accounting
and Report (ISAR)
Stock exchange listing standards
International Corporate Governance
Network
World Business Council for Sustainable
Development

Sarbanes-Oxley Act
An act passed in 2002 by the US federal
government, establishing a series of
requirements that affect corporate
governance in the US:
Auditors are responsible for reviewing the
financial statements of corporations and
issuing an opinion as to their reliability and
accuracy
The Chief Executive Officer (CEO) and Chief
Financial Officer (CFO) attest to the financial
statements. Prior to the law, CEO's had
claimed in court they hadn't reviewed the

Sarbanes-Oxley Act.
Board audit committees have members who
are independent, and should disclose
whether or not at least one is a financial
expert, or reasons why no such expert is on
the audit committee
External audit firms cannot provide certain
types of consulting services and must rotate
their lead partner every 5 years. Further, an
audit firm cannot audit a company if those
in specified senior management roles
worked for the auditor in the past year. Prior
to the law, there was real or perceived
conflict of interest between providing an
independent opinion on the accuracy and

Organization for Economic

Cooperation and Development
(OECD) Principles

OECD is aninternational economic organization

of 34 countries founded in 1961 to stimulate
economic progress and world trade. Most OECD
members arehigh-income economieswith very
high Human Development Index (HDI) and are
regarded asdeveloped countries
OECD Principles of Corporate Governance
published in 1999 and revised in 2004 are
intended to assist governments efforts to
evaluate and improve the legal, institutional
and regulatory framework for corporate
governance, and to provide guidance and
suggestions for stock exchanges, investors and

OECD Principles
Rights and equitable treatment of
shareholders:Organizations should respect the
rights of shareholders and help them to exercise
those rights by openly and effectively
communicating information, and encouraging them
to participate in general meetings
Interests of other stakeholders:Organizations
should recognize that they have legal, contractual,
social, and market-driven obligations to nonshareholder stakeholders (employees, investors,
creditors, suppliers, local communities, customers,
policy makers)
Role and responsibilities of the board:The board
needs sufficient relevant skills and understanding to
review and challenge management performance. It

OECD Principles
Integrity and ethical behavior:Integrity should be
a fundamental requirement in choosing corporate
officers and board members. Organizations should
develop a code of conduct for their directors and
executives that promotes ethical and responsible
decision-making
Disclosure and transparency:Organizations
should clarify and make publicly known the roles
and responsibilities of board and management to
provide stakeholders with a level of accountability.
They should also implement procedures to
independently verify and safeguard the integrity
of the company's financial reporting. Disclosure of
material matters concerning the organization

International Standards of Accounting

and Reporting (ISAR)
Spearheaded by theUN Intergovernmental Working
Group, ISAR produced a Guidance on Good
Practices in Corporate Governance Disclosure
across the following categories:
Auditing
Board and management structure and process
Corporate responsibility and compliance in
established laws
Financial transparency and information disclosure
Ownership structure and exercise of control rights

Stock exchange listing standards

Companies listed on theNYSE and other stock

exchanges are required to meet certain governance
standards such:
Independent directors. There should be a majority
of independent directors who can exercise judgment
in carrying out their responsibilities, and are not part
of management and have no material financial
relationship with the company
Board meetings that exclude management. To
empower non-management directors to serve as a
more effective check on management performance
and corporate decisions
Boards organize their members into committees
with specific responsibilities. Companies must
have a corporate governance committee composed
entirely of independent directors who are responsible

Other guidelines
International Corporate Governance
Network (ICGN) was set up by investors from the
worlds 10 largest pension funds, aimed at
promoting global corporate governance
standards. The network manages US$18 trillion
with members located in 50 countries. ICGN has
developed a suite of global guidelines ranging
from shareholder rights to business ethics
World Business Council for Sustainable
Development (WBCSD) is a CEO-led, global
association created in 1995 by 200 international
companies dealing exclusively with business and
sustainable development. The Council provides a
platform for companies to explore sustainable

Framework of corporate governance

Consists of structures, elements, mechanisms and
principles to support effective leadership, responsible
and ethical decision-making, management and
accountability, and performance management
Board of Directors (provides leadership &
direction, and responsible for oversight and
guidance to meet the organizations obligations of
accountability, fairness and transparency to all
stakeholders)
Executive Management (responsible for driving
governance and risk practices throughout the
organization)
Business units and Supporting Functions
(where the risk activities occur and ownership lies)

Elements of corporate governance

Independence and Separation of Duties
Implementation of policies and procedures are
designed to eliminate bias and conflicts of
interest, which may hinder the ability of the BOD
to make independent decisions. The strategic
planner and operator must also maintain a
separation of duties so the planner can focus on
long-term planning, while the operator maintains
control of day-to-day business activities
Reliability of Systems and Procedures
Systems and procedures should be both reliable
and easily manageable, allowing the company to
remain operational during business interruptions.
Extensive documentation of all systems and

Elements .
Key Performance Indicators
Key performance indicators (KPIs) involve the
determination and measurement of the major
factors that drive business growth. Key indicators
may include financial measurements and
operational goals. It is important to identify
appropriate KPIs to measure and manage
company performance
Transparency
Transparency in all aspects of corporate
governance provides greater protections for
investors and reduces the opportunity for
mismanagement and unethical practices which
may damage the company. The areas include

Elements .
Direction
Gives overall direction for the business,
management and employees by making
strategic decisions and discussing current and
future concerns of the company. Company
mission and vision statements stem from the
governance role of business, providing a sense
of purpose and illustrate primary motives for
the company's business activities
Oversight
Provides leadership oversight by monitoring and
evaluating the decisions and actions of CEOs
and other executive officers to ensure that

Mechanism and controls

Corporate governance mechanisms and
controls are designed to reduce inefficiencies
that arise frommoral hazardsand adverse
selection of monitoring systems. An ideal
monitoring and control system should regulate
both motivation and ability, while
providingincentive alignmenttowards
corporate goals and objectives. Care should be
taken that incentives are not so strong that
some individuals are tempted to cross lines of
ethical behavior
Internal monitoring controls
External monitoring controls

Internal Monitoring Controls

Controls which aim to monitor activities and
then take corrective action to accomplish
goals
Monitoring by the board of directors
Internal control procedures and internal
auditors
Balance of power
Remuneration
Monitoring by large shareholdersand/or by
banks and other large creditors

External Monitoring Controls

Controls that encompass the influence that
external stakeholders exercise over the
organization
Competition
Debt covenants
Demand for and assessment of performance
information (especiallyfinancial statements)
Government regulations
Managerial labor market
Media pressure
Takeovers

Financial reporting
The BOD is responsible for the
corporation's internal and external financial
reportingfunctions. The CEO and CFO are
crucial participants, and Boards usually
have a high degree of reliance on them for
the integrity and supply of accounting
information .
Boards oversee the internal accounting
systems, and are dependent on the
corporations accountants and internal
auditors

Independent Auditor
Current accounting rules underInternational
Accounting Standardsand U.S.GAAPallow managers
to determine the methods of measurement and criteria
for recognition of various financial reporting elements
to improve performance
Financial reporting fraud, including non-disclosure and
deliberate falsification of values, contributes to
information risk. To reduce this risk and to enhance the
perceived integrity of financial reports, corporate
financial reports must be audited by an independent
external auditorwho issues a report that accompanies
the financial statements

Objectives of corporate governance

Transparency and Full Disclosure. Ensures
a higher degree of transparency through full
disclosure of company transactions, including
compliance with regulations and disclosing any
material information to the shareholders.
Transparency involves disclosure of all forms of
conflict of interest
Accountability. Encourages accountability of
management to Board and the accountability of
the directors to the shareholders. CEO
compensation package has to be approved by
the BOD to ensure that it is fair and in the best
interests of the shareholders. Any discrepancies
in the company accounts or strategic decisions

Objectives.
Equitable Treatment of Shareholders.
Ensures equitable treatment of all
shareholders, avoiding preferential treatment
of shareholders with substantial investments
in the company
Self Evaluation. Allows the company to
evaluate its business conduct before being
scrutinized by regulatory bodies. Firms with a
strong corporate governance system are
better able to limit their exposure to
regulatory risks and fines
Increasing Shareholders' Wealth. Protects
the long-term interests of shareholders by

Principles of corporate
governance
Conducting business with integrity and
fairness
Transparency in all transactions
Making necessary disclosures and decisions
Complying with laws
Accountability and responsibility to
shareholders and stakeholders
Commitment to conduct business in an
ethical manner

Benefits of corporate governance

Helps companies operate more efficiently
Mitigates risk and safeguards against
mismanagement
Promotes accountability and transparency
to investors
Provides the mechanisms to respond to
stakeholder concerns
improve access to capital that encourages
new investments
contributes to national development by
boosting economic growth and providing
employment opportunities