Corporate

Governance and
Sustainability
BCM 4101
Corporate Governance and
Sustainability
Loise Oburu
Purpose of the course

• The unit is designed to address the

governance and leadership needs of
business and social enterprises leaders.
This unit employs integrative and
Interdisciplinary approaches.
Expected Learning Outcome
1. Critically evaluate and apply governance and corporate leadership
in various organization types.
2. Apply Business fundamentals to the analysis, design and operation
of a model to develop the framework of a governance.
3. Develop a charter for an organization, drawing on a range of
sources and stakeholder perspectives, justifying its applicability to
that particular organization.
4. Develop an approach to corporate social responsibility and
building a sustainable organization making recommendations for
improvement to a range of stakeholders.
5. Communicate proficiently in professional practice to a variety of
audiences, function as an effective member or leader of a diverse
team.
6. Critically discuss key concepts in the area of Corporate Governance
and Corporate social responsibility.
7. Critically discuss state of the art research papers in the field of
corporate governance.
Course Outline

1. Corporate Governance
• Defining a good governance system and
practices
• Principles of efficient governance system
• Advantages and Disadvantages of business
forms
• Forms of Business and conflict of Interest.
Course Outline

2. Governance and Management

• The scope of corporate governance
• The significance of constitutions for
corporate entities
• The difference between governance and
management
• Alternative Board structures
Course Outline
3. Theories and philosophies of corporate
Governance
• Agency Theory
• Stewardship theory
• Resource dependency Theory
• Psychological and organizational perspective
• The societal perspectives: stakeholder
philosophies
• Enlightened Shareholder theory
• Differing boundaries and levels: systems
theory
Course Outline
4. Functions of the Board
• Role of the board
• Balancing the board’s performance and
conformance roles
• Board Committees: Functions and
authority
• Delegating board functions to
management
• Corporate transparency
Course Outline
5. Corporate social Responsibility and
sustainability
• The concept of corporate Social
Responsibility
• Changing Expectations in the governance of
organizations
• CSR strategies and policies
• The CSR competency framework
• Balancing Corporate responsibilities
• Sustainability and the triple bottom line
Course Outline
6. Board Membership: Directors’ appointment,
Roles and Remuneration
• The desired attributes and appointment of
directors
• Core competencies of a director
• Roles of a director
• Directors duties, rights and power
• Directors disclosures, service contracts and
agreements
• Directors Remuneration
Course Outline
7. Board Leadership
• How people, power and politics affect
practice
• The chairman’s leadership role
• Sources of Governance power
• Board styles and culture of the board
• The ethical dimension: corporate values and
business ethics
• Corporate codes of ethics and their
enforcement
• Mode of Delivery
Lectures, Presentations, Case studies
• Course Assessment
Type Weighting (%)
Examination 70
Continuous Assessment 30
Total 100
Books and Journals
3. Anderson, Ray. Mid-Course Correction: Toward a sustainable Enterprise: The Interface Model.
Chelsea Green Publishing Company, 1998.

Other Reading material

4.Makower, Joel. Beyond the Bottom Line: Putting Social Responsibility to Work for your
Business and the World. Simon and Schuster, 1994.

5. McDonough, William. Cradle to Cradle: Remaking the Way We Make Things. North Point
Press, 2002. Other
6. Carroll, Archie B./Shabana, Kareent M. (2010): The business case for corporate social
responsibility: a review of concepts, research and practice. In: International Journal of
Management Reviews, 12(1): 85-105.
7. Delmas, Magali A./Burbano, Vanessa C. (2011): The drivers of greenwashing. In: California
Management Review, 54(1): 64-87.
8. Devinney, Timothy M. (2009): Is the socially responsible corporation a myth? The good, the
bad, and the ugly of corporate social responsibility. In: Academy of Management Perspectives,
23(2): 44-56.
9. Walker, Kent/Wan, Fang (2012): The harm of symbolic actions and green-washing:corporate
actions and communications on environmental performance and their financial implications. In:
Journal of Business Ethics, 109 (2): 227-242.
Thank You
Background of Corporate
Governance in Kenya
• In November 1998, a workshop on the Role of
Non-Executive Directors was held at the Kenya
College of Communications Technology, Mbagathi,
Nairobi.
• Nairobi Stock Exchange (NSE), Capital Markets
Authority (CMA), Institute of Certified Public
Accountants (ICPAK) and the Kenya Chapter of the
Association of Chartered Certified Accountants
were present.
• Dominion Consultants Limited organizers
• 2nd meeting March, 1999 at the Whitesands Hotel,
Mombasa
 Reasons for Corporate Governance
in Kenya
• The quality of governance at all levels was increasingly
being seen as the most important factor for the success of
both the politico-economy and its institutions.

• Corporate governance was increasingly taking centre

stage, with the privatisation and corporatization of the
economies globally.

• There was greater expectation from society that

corporate organisations, especially private ones, should
take a more leading role in the debate and
implementation of economic revival strategies.
Reasons for Corporate
Governance in Kenya
• In the face of major scandals leading to the collapse of big
corporations, especially state owned ones, with disastrous
social and economic consequences, it was inevitable that
the wider society, led by the mass media, would start
questioning how these organisations were run.

• Shareholders, especially in publicly listed companies were

becoming increasingly vocal demanding better
transparency and disclosure of information from their
directors.

• Regulatory bodies, notably the CMA and the NSE, were

already hinting that they would require good corporate
governance practices amongst the publicly listed
companies.
 Economic Situation of
Kenya GDP Growth
1
0

1995 1996 1997 1998 1999 2000 2001(e) 2002(p)

-
2

-
4

-
6

-
8

-
10
What is Governance?
• Governance – the manner in which power is
exercised in the management of economic and
social resources for sustainable human
development.
• It is a vital ingredient in the maintenance of a
dynamic balance between the need for order and
equality in society, the efficient production and
delivery of goods and services, accountability in
the use of power, the protection of human rights
and freedoms, and the maintenance of an
organized corporate framework within which each
citizen can contribute fully towards finding
innovative solutions to common problems.
Corporate Governance
seeks to promote
• Efficient, effective and sustainable
corporations that contribute to the welfare of
society by creating wealth, employment and
solutions to emerging challenges.
• Responsive and accountable corporations
• Legitimate corporations that are managed
with integrity, probity and transparency
• Recognition and protection of stakeholder
rights
• An inclusive approach based on democratic
ideals, legitimate representation and
participation
 1. Introduction
What is corporate governance?
• Corporate governance is the system of principles,
policies, procedures, and clearly defined
responsibilities and accountabilities used by
stakeholders to overcome the conflicts of interest
inherent in the corporate form.
– Hence, the importance of understanding the different
forms of business.
• Corporate governance affects the operational risk
and, hence, sustainability of a corporation.
– The quality of a corporation’s corporate of
governance affects the risks and value of the
corporation.
– Effective, strong corporate governance is essential for
the efficient functioning of markets.
Corporate Governance

• Corporate Governance, therefore, refers to

the manner in which the power of a
corporation is exercised in the stewardship
of the corporation’s total portfolio of
assets and resources with the objective of
maintaining and increasing shareholder
value and satisfaction of other
stakeholders in the context of its corporate
mission.
Corporate Governance
• Fair, efficient and transparent administration
of corporations to meet well-defined
objectives.
• Systems and structures of operating and
controlling corporations with a view to
achieving long-term strategic goals that
satisfy the owners, suppliers, customers and
financiers while complying with legal and
regulatory requirements and meeting
environmental and society needs;
• An efficient process of value-creating and
value-adding;
How do we create an efficient
process of value-creating and
value-adding
• The Board has set strategic objectives and plans and
put in place proper management structures
[organization, systems and people] to achieve those
objectives and plans.
• The structures put in place function to maintain
corporate integrity, reputation and responsibility
towards all stakeholders.
• The Board acts as a catalyst, initiating, influencing,
evaluating and monitoring strategic decisions and
actions of management and holds management
accountable.
• Ensuring that the Board is not a mere formality which
takes a back seat, leaving management to make all
strategic decisions.
How do we create an
efficient process of value-
creating and value-adding
• The Board has established and put in place
mechanisms to ensure that the
corporation operates within the objects
established by shareholders, the mandate
given to it by society, utilizes the resources
entrusted to it efficiently and effectively in
pursuit of the stated mandate, and meets
the legitimate expectations of its various
stakeholders.
How do we create an
efficient process of value-
creating and value-adding
• There are established mechanisms, processes and
systems to constantly ensure that:
• Governance practices are effective and appropriate
• There is transparency and accountability to the various
stakeholders
• The corporation complies with legal and regulatory
requirements
• There is disclosure of all pertinent information to
stakeholders
• There is effective monitoring and management of risk,
innovation and change • The corporation remains
relevant, legitimate and competitive; and
• The corporation is viable, solvent and sustainable.
Conclusion
• corporate governance refers to the
establishment of an appropriate legal,
economic and institutional environment
that allows companies to thrive as
institutions for advancing long-term
shareholder value and maximum human-
centered development while remaining
conscious of their other responsibilities to
stakeholders, the environment and the
society in general.
Why good Corporate
Governance
• Attract investors – both local and foreign –
and assure them that their investments will
be secure and efficiently managed, and in a
transparent and accountable process.
• Create competitive and efficient companies
and business enterprises.
• Enhance the accountability and performance
of those entrusted to manage corporations.
• Promote efficient and effective use of limited
resources.
4 Pillars of good corporate
Governance
1. There must be an effective body responsible for
governance separate and independent of management to
promote:
• Accountability [leadership that must be ready to
account]
• Efficiency and effectiveness [hence leadership for
results]
• Probity and integrity [hence leadership that is honest,
faithful and diligent]
• Responsibility [hence leadership that is capable,
responsible, representative and conscious of its
obligations]
• Transparent and open leadership with accurate and
timely disclosure of information relating to all economic
and other activities of the corporation.
4 Pillars of good corporate
Governance
• There must be an all-inclusive approach to
governance that recognizes and protects the rights
of members and all stakeholders – internal and
external.
• The institution must be governed and managed in
accordance with the mandate granted to it by its
founders and society and take seriously its wider
responsibilities to enhance sustainable prosperity.
• The institutional governance framework should
provide an enabling environment within which its
human resource can contribute and bring to bear
their full creative powers towards finding
innovative solutions to shared problems.
5 basic Tenets of Corporate
Governance
• ♦ Accountability
• ♦ Efficiency and Effectiveness
• ♦ Integrity and Fairness
• ♦ Responsibility, and
• ♦ Transparency
21 PRINCIPLES OF CORPORATE
GOVERNANCE
 Principle 1
Authority and Duties of Members [or Shareholders]
• Members or shareholders [as owners] of the corporation shall
jointly and severally protect, preserve and actively exercise the
supreme authority of the corporation in general meetings. They
have a duty, jointly and severally, to exercise that supreme
authority of the corporation to:
• Ensure that only competent and reliable persons, who can add
value, are elected or appointed to the Board of Directors;
• Ensure that the Board is constantly held accountable and
responsible for the efficient and effective governance of the
corporation so as to achieve corporate objectives, prosperity and
sustainability.
• Change the composition of a Board that does not perform to
expectation or in accordance with the mandate of the corporation
Principle 2

Leadership
• Every corporation should be headed by an
effective Board that should exercise
leadership, enterprise, integrity and
judgment in directing the corporation so
as to achieve continuing prosperity and to
act in the best interest of the enterprise in
a manner based on transparency,
accountability and responsibility.
Principle 3

Appointments to the Board

• Appointments to the Board of Directors
should, through a managed and effective
process, ensure that a balanced mix of
proficient individuals is made and that
each of those appointed is able to add
value and bring independent judgment to
bear on the decision-making process.
Principle 4
Strategy and Values
• The Board of Directors should determine
the purpose and values of the corporation,
determine the strategy to achieve that
purpose and implement its values in order
to ensure that the corporation survives
and thrives and that procedures and
values that protect the assets and
reputation of the corporation are put in
place.
Principle 5

Structure and Organization

• The Board should ensure that a proper
management structure [organization,
systems and people] is in place and make
sure that the structure functions to
maintain corporate integrity, reputation
and responsibility.
Principle 6
Corporate Performance, Viability and
Financial Sustainability
• The Board should monitor and evaluate
the implementation of strategies, policies
and management performance criteria
and the plans of the corporation. In
addition, the Board should constantly
review the viability and financial
sustainability of the enterprise and must
do so at least once every year.
Principle 7

Corporate Compliance
• The Board should ensure that the
corporation complies with all relevant
laws, regulations, governance practices,
accounting and auditing standards.
Principle 8

Corporate Communication
• The Board should ensure that the
corporation communicates with all its
stakeholders effectively.
Principle 9

Accountability to Members
• The Board should serve the legitimate
interests of all members and account to
them fully.
Principle 10
Responsibility to Stakeholders
• The Board should identify the corporation’s
internal and external stakeholders; agree on a
policy or policies determining how the
corporation should relate to, and with them,
in creating wealth, jobs and the sustainability
of a financially sound corporation while
ensuring that the rights of stakeholders
[whether established by law or custom] are
respected, recognized and protected.
Principle 11

Balance of Powers
• The Board should ensure that no one
person or group of persons has unfettered
power and that there is an appropriate
balance of power on the Board so that it
can exercise objective and independent
judgment.
Principle 12

Internal Control Procedures

• The Board should regularly review
systems, processes and procedures to
ensure the effectiveness of its internal
systems of control so that its decision-
making capability and the accuracy of its
reporting and financial results are
maintained at the highest level at all
times.
Principle 13
Assessment of Performance of the Board of
Directors
• The Board should regularly assess its
performance and effectiveness as a whole
and that of individual members, including the
Chief Executive Officer. A summary of the
major findings together with a statement
confirming that the Board has carried out a
self-assessment exercise should be made to
the annual general meeting.
Principle 14
Induction, Development and Strengthening of
Skills of Board Members
• The Board should recognize the need for new
members to be inducted into their roles and
for all Board members to develop and
strengthen their governance skills in light of
technological developments, changing
corporate environment and other variables.
The Board should accordingly organize for the
systematic induction and continuous
development of its members.
Principle 15
Appointment and Development of Executive
Management
• The Board should appoint the Chief Executive
Officer and participate in the appointment of
all senior management, ensure motivation
and protection of intellectual capital crucial
to the corporation, ensure that there is
appropriate and adequate training for
management and other employees and put in
place a succession plan for senior
management.
Principle 16

Adoption of Technology and Skills

• The Board must recognize that to survive
and thrive it has to ensure that the
technology, skills and systems used in the
corporation are adequate to run the
corporation and that the corporation
constantly reviews and adopts the same in
order to remain competitive.
Principle 17

Management of Corporate Risk

• The Board must identify key risk areas and
key performance indicators of the
corporation’s business and constantly
monitor these factors.
Principle 18

Corporate Culture
• The Board should define, promote and
protect the corporate ethos, ethics and
beliefs on which the corporation premises
its policies, actions and behaviour in its
relationships with all who deal with it.
Principle 19
Social and Environmental Responsibility
• The Board should recognize that it is in the
enlightened self-interest of the corporation to
operate within the mandate entrusted to it by
society and shoulder its social responsibility.
For this reason, a corporation does not fulfill
its social responsibility by short-changing
beneficiaries or customers, exploiting its
labour, polluting the environment, failing to
conserve resources, neglecting the needs of
the local community, evading taxation or
engaging in other anti-social practices.
Principle 20
Recognition and Utilization of Professional Skills
and Competencies
• The Board should recognize and encourage
professional development and, both collectively
and individually, have the right to consult the
corporation’s professional advisers and, where
necessary, seek independent professional advice at
the corporation’s expense in the furtherance of
their duties as directors. [This is in addition to and
not a substitute to their personal duty to acquire
competence, training and information that would
help them make informed, independent and astute
decisions on issues relevant to the corporation.]
Principle 21
Recognition and Protection of Members’
Rights and Obligations
• Members of the corporation have a right
to receive any information that would
materially affect their membership, to
participate in any meeting of members
and to participate in the election of
directors and be facilitated to fully
participate in all other resolutions of
interest to them as members.
 2. Corporate governance:
Objectives and guiding
principles
• There are inherent conflicts of interest in
corporations in which the ownership and
management are separate.
• Objectives of corporate governance:
– To eliminate or mitigate conflicts of interest.
• Particularly those between corporate managers
and shareholders; and
– To ensure that the assets of the company are
used efficiently and productively and in the
best interests of its investors and other
stakeholders.
FORMS OF BUSINESS AND
CONFLICT OF INTEREST
 3. Forms of business
and conflicts of interest
The form of business will dictate, in part, the
relationship between the owners of the
business and management.
❖The degree of separation may be minimal (e.g.,
sole proprietorship), or significant (e.g., large
corporation).
❖When there is a separation between owners and
managers, there is a potential for agency
problems, which may affect the value of the
business.
❖We will examine three business forms: the sole
proprietorship, the partnership, and the
corporation.
 Sole proprietorship
• A sole proprietorship is owned and operated
by a single person
• Sole proprietorships are the most numerous
in terms of number of businesses.
• Who bears governance risk in a sole
proprietorship?
– There are few risks with respect to governance
from the perspective of the owner.
– Creditors, including trade creditors, have the
highest risk with respect to governance.
 Partnership
• A partnership has two or more
owner/managers.
• Who bears governance risk in a
partnership?
– There are few risks with respect to
governance from the perspective of the
owners, with ownership rights and
responsibilities detailed in the partnership
agreement.
– Creditors, including trade creditors, have the
higher risk with respect to governance.
 Corporation

• A corporation is a legal entity that has

rights similar to an individual.
– For example, a corporation can enter into
contracts.
• Corporations account for most business
revenue around the world.
– Corporations around the world: Limited
Company (U.K.), Gesellschaft (German);
Societé Anonyme (France), 公司 (China);
şirket (Turkey); บริษท
ั (Thailand)
 Advantages of the
corporate form
1.A corporation can raise capital.
– Grant ownership stakes (that is, issue stock) or
borrow (that is, issue bonds).
2.Owners need not know how to run the
business.
– The corporation hires experts to manage the
business.
3.Ownership interests are transferrable.
 Disadvantages of the
corporate form
1. Corporations are more highly regulated than are
partnerships or sole proprietorships.
– For example, in the U.S. there are State laws pertaining to
corporations and the Securities and Exchange Commission
requires specific disclosures.
2. Separation of owners and managers.
– This is the agency relationship, in which someone (the
agent) acts on behalf of another person (the principal).
– The potential conflict between owners and managers is
the agency problem or principal-agent problem,
• Principals: shareholders
• Agents: Management and members of the board of directors
– There are costs to this agency relationship arising from
conflicts of interest.
 3. Forms of business and
conflicts of interest
Characteristic Sole Proprietorship Partnership Corporation

Ownership Sole owner Multiple owners Unlimited ownership

Legal requirements and regulation Few; entity easily Few; entity easily Numerous legal
formed formed requirements

Legal distinction between owner None None Legal separation

and business between owners and
business

Liability Unlimited Unlimited but shared Limited

among partners

Ability to raise capital Very limited Limited Nearly unlimited

Transferability of ownership Non-transferable Non-transferable Easily transferable

(except by sale of
entire business)

Owner expertise in business Essential Essential Unnecessary

Corporate Governance in Kenya
Non-Executive Director

Means a director who is not involved in the

administrative or managerial operations of
the Company.
Independent Director
Means a director who:
1. Has not been employed by the Company in an executive capacity
within the last five years;
2. Is not associated to an adviser or consultant to the Company or a
member of the
3. Company’s senior management or a significant customer or
supplier of the Company or with a not-forprofit entity that receives
significant contributions from the Company; or within the last five
years, has not had any business relationship with the Company
(other than service as a director) for which the Company has been
required to make disclosure;
4. Has no personal service contract(s) with the Company, or a
member of the Company’s senior management;
5. Is not employed by a public listed company at which an executive
officer of the Company serves as a director;
6. Is not a member of the immediate family of any person
described above; or
7. Has not had any of the relationships described above with any
affiliate of the Company.
Appointment of the Board

• There should be a formal and transparent

procedure in the appointment of directors
to the board and all persons offering
themselves for appointment, as directors
should disclose any potential area of
conflict that may undermine their position
or service as director.
Multiple Directorship
• Every person save a corporate director who is
a director of a listed company shall not hold
such position in more than five public listed
companies at any one time to ensure
effective participation in the board and in the
case where the corporate director has
appointed an alternate director, the
appointment of such alternate shall be
restricted to three public listed companies, at
any one time, subject to the requirements
under the Capital Markets (Securities) (Public
Offers, Listing and Disclosures) Regulations,
2002.
Re Election of Directors
1. All directors except the managing director should
be required to submit themselves for re-
2. election at regular intervals or at least every
three years.
3. Executive directors should have a fixed service
contract not exceeding five years with a provision
to renew subject to:
1. Regular performance appraisal; and
2. Shareholders approval.
4. Disclosure should be made to the shareholders at
the annual general meeting and in the annual
reports of all directors approaching their
seventieth (70th) birthday that respective year.
Resignation of Directors

Resignation by a serving director should be

disclosed in the annual report together with
the details of the circumstances
necessitating the resignation.
Role of Chairman and CEO
• There should be a clear separation of the role and
responsibilities of the chairman and chief executive, which will
ensure a balance of power of authority and provide for checks
and balances such that no one individual has unfettered
powers of decision making. Where such roles are combined a
rationale for the same should be disclosed to the shareholders
in the annual report of the Company.

• Every person who is a Chairperson of a public listed company

shall not hold such position in more than two public listed
companies at any one time, in order to ensure effective
participation in the board, subject to the requirements under
the Capital Markets (Securities) (Public Offers, Listing and
Disclosures) Regulations, 2002.
Approval of major decisions
by the Shareholders
• There should be shareholders participation
in major decisions of the Company. The
board should therefore provide the
shareholders with information on matters
that include but are not limited to major
disposal of the Company’s assets,
restructuring, takeovers, mergers,
acquisitions or reorganization.
AGM
• The board should provide to all its shareholders
sufficient and timely information concerning the date,
location and agenda of the general meeting as well as
full and timely information regarding issues to be
decided during the general meeting;

• The board should make shareholders expenses and

convenience primary criteria when selecting venue
and location of annual general meetings; and

• The directors should provide sufficient time for

shareholders questions on matters pertaining to the
Company’s performance and seek to explain to the
shareholders their concern.
The Role and Responsibilities
of the Board of Directors
• The board of directors should assume a primary responsibility of
fostering the long-term business of the corporation consistent with
their fiduciary responsibility to the shareholders. The board of
directors should accord sufficient time to their functions and act on
a fully informed basis while treating all shareholders fairly, in the
discharge of the following responsibilities, among others:
1. Define the company’s mission, its strategy, goals, risk policy plans
and objectives including approval of its annual budgets;
2. Oversee the corporate management and operations, management
accounts, major capital expenditures and review corporate
performance and strategies at least on a quarterly basis;
3. Identify the corporate business opportunities as well as principal
risks in its operating environment including the implementation of
appropriate measures to manage such risks or anticipated changes
impacting on the corporate business;
4. Development of appropriate staffing and remuneration policy
including the appointment of chief executive and the senior staff,
particularly the finance director, operations director and the
company secretary as may be applicable;
The Role and Responsibilities
of the Board of Directors
1. Review on a regular basis the adequacy and integrity
of the Company’s internal control, acquisition and
divestitures and management information systems
including compliance with applicable laws,
regulations, rules and guidelines; and
2. Establish and implement a system that provides
necessary information to the shareholders including
shareholder communication policy for the Company.
3. Monitor the effectiveness of the corporate
governance practices under which the Company
operates and propose revisions as may be required
from time to time.
4. Take into consideration the interests of the
Company’s stakeholders in its decision making
process.
A Balanced Board
Constitutes an Effective
• The board of directors of every listed company should reflect a
balance between independent, non-executive directors and
executive directors.
• The independent and non-executive directors should form at least
one third of the membership of the board.
• The structure of the board should also comprise a number of
directors, which fairly reflects the Company’s shareholding structure.
The board composition should not be biased towards representation
by a substantial shareholder but should reflect the Company’s broad
shareholding structure. The composition of the board should also
provide a mechanism for representation of the minority
shareholders without undermining the collective responsibility of
the directors.
• A substantial shareholder, for the purpose of these guidelines is a
person who holds not less than fifteen per cent of the voting shares
of a listed company and has the ability to exercise a majority voting
A Balanced Board
Constitutes an Effective
• In circumstances where there is no major shareholder but there is a
substantial shareholder the board should exercise judgment in
determining the representation on the board of such shareholder
and of the other shareholders that effectively reflects the
shareholding structure of the Company.
• The board should disclose in its annual report whether independent
and non-executive directors constitute one third of the board and if
it satisfies the representation of the minority shareholders.
• The size of the board should not be too large to undermine an inter-
active discussion during board meetings or too small such that the
inclusion of a wider expertise and skills to improve the effectiveness
of the board is compromised.
• The board should monitor and manage potential conflict of interest
at management, board and shareholder levels.
Appointment and
Qualifications of Directors
• The board of every public listed company should appoint a
nominating committee consisting mainly of independent and
nonexecutive directors with the responsibility of proposing new
nominees for the board and for assessing the performance and
effectiveness of directors in the Company.
• The nominating committee should consider only persons of
caliber, credibility and who have the necessary skills and
expertise to exercise independent judgment on issues that are
necessary to promote the Company’s objectives and
performance in its area of business.
• The nominating committee should also consider candidates for
directorship proposed by the chief executive and shareholders.
• The board, through the nominating committee, should on an
annual basis review its required mix of skills and expertise that
the executive directors as well as independent and nonexecutive
directors bring to the board and make disclosure of the same in
the annual report.
Appointment and
Qualifications of Directors
• The board should also implement a process of assessing the
effectiveness of the board as a whole, the committees of the board,
as well as of each individual director and such task should be
assigned to the nominating committee.
• Newly appointed directors should be provided with necessary
orientation in the area of the Company’s business in order to
enhance their effectiveness in the board.
• The nominating committee should recommend to the board
candidates for directorship to be filled by the shareholders as the
responsibility of nominating rests on the full board, after considering
the recommendations of the nominating committee.
• The process of the appointment of directors should be sensitive to
gender representation, national outlook and should not be
perceived to represent single or narrow community interest.
• No person shall be a director in more than five public listed
companies at any one time in order to ensure effective participation
in the board.
Remuneration of the
Directors
• The board of directors of every listed company should appoint a
remuneration committee or assign a mandate to a nominating
committee consisting mainly of independent and non-executive
directors to recommend to the board the remuneration of the
executive directors and the structure of their compensation
package.
• The determination of the remuneration for the nonexecutive and
independent directors should be a matter for the whole board.
• The remuneration of the executive director should include an
element that is linked to corporate performance including a share
option scheme so as to ensure the maximization of the
shareholders’ value.
• The consolidated total remuneration of the directors should be
disclosed to the shareholders in the annual report specifying the
following categories:
• total remuneration for executive directors;
• total fees for non-executive and independent directors.
Best Practices Relating to the Position of Chairman
and Chief Executive

• Every public listed company should as a matter of best

practice separate the role of the chairman and chief
executive in order to ensure a balance of power and
authority and provide for checks and balances.
• Where the role of the chairman and the chief
executive is combined, there should be a clear
rationale and justification which must:
• be for a limited period;
• be approved by the shareholders;
• include measures that have been implemented to ensure that
no one individual has unfettered powers of decision in the
Company; and
• include plan for separation of the role where such combined
role is deemed necessary for a limited period during the
restructuring or change process.
Best Practices Relating to the Position of
Chairman and Chief Executive

• Chairmanship of a public listed company should be held by an

independent and non-executive director.
• No person shall be a chairman in more than two public listed
companies at any one time in order to ensure effective
participation in the board.
• Every public listed company should also have a clear
succession plan for its chairman and chief executive in order
to avoid unplanned and sudden departures, which could
undermine the company’s and shareholders’ interest.
• The chief executive should be responsible for implementing
the board corporate decision and there should be a clear flow
of information between management and the board in order
to facilitate both quantitative and qualitative evaluation and
appraisal of the company’s performance.
Best Practices Relating to the Position of
Chairman and Chief Executive

• The chairman of the board should

undertake a primary responsibility for
organizing information necessary for the
board to deal with and for providing
necessary information to the directors on
a timely basis.
• The chief executive is obliged to provide
such necessary information to the board
in the discharge of the board’s business.
Best Practices Relating to the
Rights of the Shareholders

1. The essence of good corporate governance practices is to promote and

protect shareholders’ rights.
2. A board of a public listed company should ensure equitable terms of
shareholders including the minority and foreign shareholders.
3. All shareholders should receive relevant information on the company’s
performance through distribution of regular annual reports and accounts,
half-yearly results and quarterly results as a matter of best practice.
4. The shareholders should receive a secure method of transfer and
registration of ownership as well as a certificate or statement evidencing
such ownership in the case of a central depository environment.
5. Every shareholder shall have a right to participate and vote at the general
shareholders meeting including the election of directors.
6. Every shareholder shall be entitled to ask questions, seek
7. clarification on the Company’s performance as reflected in the annual
reports and accounts or in any matter that may be relevant to the
Company’s performance or promotion of shareholders’ interests and to
receive explanation by the directors and/or management.
8. Every shareholder shall be entitled to distributed profit in form of
dividend and other rights for bonus shares, script
Best Practices Relating to the
Rights of the Shareholders
1. All shareholders should be encouraged, to participate in the annual general meetings and
to exercise their votes.
2. Institutional investors are particularly encouraged to make direct contact with the
Company’s senior management and board members to discuss performance and
corporate governance matters as well as vote during the annual general meetings of the
Company.
3. Companies, as a matter of best practice, are encouraged to organize regular investor
briefings and in particular when the half-yearly and annual results are declared or as may
be necessary to explain their performance and promote interaction with investors.
4. Every public listed company should encourage the establishment and use of the
Company’s website by shareholders to ease communication and interaction among
shareholders and the Company.
5. Every public listed company should encourage and facilitate the establishment of a
Shareholders’ Association to promote dialogue between the Company and the
shareholders. The Association should play an important role in promoting good
corporate governance and actively encourage all shareholders to participate in the annual
general meeting of the Company or assign necessary voting proxy.
6. Shareholders while exercising their right of participation and voting during annual
general meetings of the Company should not act in a disrespective manner as such
action may undermine the Company’s interest.
Best Practices relating to the
conduct at annual general
meetings
• The Board of a public listed company should
ensure that shareholders’ right of full
participation at annual general meetings are
protected by giving shareholders:
1. sufficient information on voting rules or
procedures;
2. the opportunity to quiz management;
3. the opportunity to place items on the agenda at
annual general meetings;
4. the opportunity to vote in absentia;
5. sufficient information to enable them to
consider the costs and benefits of their votes.
Audit Committee
• The board shall establish an audit committee
of at least three independent and non-
executive directors who shall report to the
board, with written terms of reference, which
deal clearly with its authority and duties. The
chairman of the audit committee should be
an independent and non-executive director.
The board should disclose in its annual report
whether it has an audit committee and the
mandate of such committee.
Attributes of an Audit
Committee
Important attributes of committee members
should include:
1. broad business knowledge relevant to the
Company’s business;
2. keen awareness of the interests of the
investing public and familiarity with basic
accounting principles; and
3. objectivity in carrying out their mandate and
no conflict of interest.
Duties of Audit Committees
• Audit Committees should have adequate resources
and authority to discharge their responsibilities.
The members of the audit committee shall:

1. be informed, vigilant and effective overseers of the

financial reporting process and the
Company’s internal controls;
2. review and make recommendations on
management programs established to monitor compliance
with the code of conduct;
3. consider the appointment of the external auditor, the
audit fee and any questions of resignation or dismissal of
the external auditor;
4. discuss with the external auditor before the audit
commences, the nature and scope of the audit, and
ensure co-ordination where more than one audit firm is
involved;
Duties of Audit Committees
• review management’s evaluation of factors related
to the independence of the Company’s external
auditor. Both the audit committee and
management should assist the external auditor
• in preserving its independence;
• review the quarterly, half-yearly and year-end
financial statements of the Company, focusing
particularly on:
– any changes in accounting policies and practices;
– significant adjustments arising from the audit;
– the going concern assumption; and compliance with
International Accounting
– Standards and other legal requirements;
Duties of Audit Committees
• Discuss problems and reservations arising from the interim
and final audits, and any matter the external auditor may wish
to discuss (in the absence of management where necessary);
• Review any communication between external auditor(s) and
management;
• Consider any related party transactions that may arise within
the company or group;
• Consider the major findings of internal
investigations and management’s response;
• Have explicit authority to investigate any matter within its
terms of reference, the resources that it needs to do so and
full access to information;
• Obtain external professional advice and to invite outsiders
with relevant experience to attend, if necessary; and
• Consider other issues as defined by the Board including
regular review of the capacity of the internal audit function.
Audit Committee and
Internal Audit Functions
• The Board should establish an internal audit function. The internal
audit function should be independent of the activities they audit
and should be performed with impartiality, proficiency and due care.
The Audit Committee should determine the remit of the internal
audit function and in particular:
• Review of the adequacy, scope, functions and resources of the
internal audit function, and ensure that it has the necessary
authority to carry out its work;
• Review the internal audit program and results of the
internal audit process and where necessary ensure that appropriate
action is taken on the recommendations of the internal audit
function;
• Review any appraisal or assessment of the performance of
members of the internal audit function;
• ensure that the internal audit function is independent of the
activities of the company and is performed with impartiality,
proficiency and due professional care;
Audit Committee and
Internal Audit Functions
• determine the effectiveness of the internal
audit function; and
• be informed of resignations of internal
audit staff members and provide the
resigning staff members an opportunity to
submit reasons for resigning.
Participation in the Meetings of
Audit Committees
• The finance director, the head of internal audit (where such a
function exists) and a representative of the external auditors
shall normally attend meetings of the audit committee while
other board members may attend meetings upon the
invitation by the audit committee.
• At least once a year the committee shall meet with the
external auditors without executive board members present.
• The audit committee should meet regularly, with adequate
notice of the issues to be discussed and should record its
conclusions.
• The board should disclose in an informative way, details of the
activities of audit committees, the number of audit committee
meetings held in a year and details of attendance of each
audit committee member at such meetings.
Duties of a company
secretary
1. Advising Chairman on legal rules and
regulations affecting the company
2. Convening board, board committee and
company (shareholder) meetings
3. Advising on and guiding board and board
committee procedures
4. Advising the chairman on the agenda and
writing the minutes for the chairman’s
approval
5. Maintaining the company statutory records
such as the register of directors and their
interest and director’s
Duties of Company Secretary
• Filing company law returns with the company
registrar or regulatory authority.
• Ensuring compliance with company
legislation including various filing
requirements, the corporate governance
codes and where appropriate the stock
exchange listing requirements
• Ensuring compliance with other relevant
regulations and laws
• Administering changes to the company
memorandum and association
Thank You
Corporate Governance Theories
Agency Theory
•
Agency theory, or principal–agent theory as some
writers refer to it, looks at corporate governance
practices and behaviour through the lens of the
agency dilemma. In essence, the theory perceives
the governance relationship as a contract between
shareholder (the principal) and director (the
agent). Directors, it is argued, seek to maximize
their own personal benefit, to take actions that are
advantageous to themselves, but detrimental to
the shareholders.
Agency Theory
• As the early proponents of agency theory, Jensen and
Meckling (1976), explained: agency theory involves a
contract under which one or more persons (the
shareholders) engage other persons (the directors) to
perform some service on their behalf which includes
delegating some decision-making authority to the
agent. If both parties to the relationship are utility
maximizers there is good reason to believe the agent
will not always act in the best interests of the principal.
• Agency theory offers a statistically rigorous insight into
corporate governance processes. Because of its
simplicity and the availability of both reliable data and
statistical tests, agency theory has provided a powerful
approach to corporate governance theory building.
Agency Theory
• Agency theory having its roots in economic theory.
• It was exposited by Alchian and Demsetz (1972) and
further developed by Jensen and Meckling (1976).
• Agency theory is defined as “the relationship
between the principals, such as shareholders and
agents such as the company executives and
managers”.
• In this theory, shareholders who are the owners or
principals of the company, hires the agents to
perform work.
• Principals delegate the running of business to the
directors or managers, who are the shareholder’s
agents (Clarke, 2004).
Factors that Influence Agency
Theory
• First, the theory is conceptually and simple
theory that reduces the corporation to two
participants of managers and
shareholders.
• Second, agency theory suggests that
employees or managers in organizations
can be self-interested.
Agency Theory cont’

• The agency theory shareholders expect

the agents to act and make decisions in
the principal’s interest.
• On the contrary, the agent may not
necessarily make decisions in the best
interests of the principals (Padilla, 2000).
Such a problem was first highlighted by
Adam Smith in the 18th century.
Agency Theory Cont’
• In agency theory, the agent may be succumbed to self-
interest, opportunistic behaviour and falling short of
congruence between the aspirations of the principal and the
agent’s pursuits. Even the understanding of risk defers in its
approach.
• Although with such setbacks, agency theory was introduced
basically as a separation of ownership and control.
• Instead of providing fluctuating incentive payments, the
agents will only focus on projects that have a high return and
have a fixed wage without any incentive component. Although
this will provide a fair assessment, but it does not eradicate or
even minimize corporate misconduct. Here, the positivist
approach is used where the agents are controlled by principal-
made rules, with the aim of maximizing shareholders value.
Agency Theory Cont’
• Agency theory can be employed to explore
the relationship between the ownership and
management structure. However, where
there is a separation, the agency model can
be applied to align the goals of the
management with that of the owners. Due to
the fact that in a family firm, the
management comprises of family members,
hence the agency cost would be minimal as
any firm’s performance does not really affect
the firm performance.
Agency Theory Cont’
• The model of an employee portrayed in the
agency theory is more of a self-interested,
individualistic and are bounded rationality
where rewards and punishments seem to
take priority.
• This theory prescribes that people or
employees are held accountable in their tasks
and responsibilities. Employees must
constitute a good governance structure
rather than just providing the need of
shareholders, which maybe challenging the
governance structure.
Agency Theory Model
Hires & delegate

Self
interest

Principals Agents Self

interest

Performs
Stewardship Theory
• Stewardship theory reflects the classical ideas of
corporate governance. Directors’ legal duty is to their
shareholders not to themselves, nor to other interest
groups. Contrary to agency theory, stewardship theory
believes that directors do not always act in a way that
maximizes their own personal interests: they can and
do act responsibly with independence and integrity. As
Lord Cairns said in the London High Court in 1874, ‘no
man, acting as agent, can be allowed to put himself
into a position in which his interest and his duty will be
in conflict’. Stewardship theorists argue that, clearly,
this is what most directors actually do. Of course,
some fail, but this does not invalidate the basic
concept.
Stewardship Theory
• In essence, each company is incorporated as a
separate legal entity. The shareholding members of
the company nominate and appoint the directors, who
then act as stewards for their interests. The directors
report to them on the results of that stewardship,
subject to a report from an independent auditor that
the accounts show a true and fair view. Ownership is
the basis of power over the corporation. Directors
have a fiduciary duty to act as stewards of the
shareholders’ interest. Inherent in the concept of the
company is the belief that directors can be trusted.
Stewardship exponents recognize that 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.
Stewardship Theory
• They argue that conflicts of interest between stakeholder groups
and the company should be met by competitive pressures in free
markets, backed by legislation and legal controls to protect
customers (monopoly and competition law), employees
(employment law; health and safety law), consumers (product safety
law; consumer protection law), suppliers (contract law; credit
payment law), and society (environmental law; health and safety
law; taxation law). We will explore so-called stakeholder theory later
in this chapter, and the growing interest in corporate social
responsibility and a wider range of responsibilities for boards later.
stewardship theory provides precise boundaries for the company,
clearly identifying its assets and liabilities, its shareholders and its
directors. Stewardship theory emphasizes the responsibility of
boards to maximize shareholder value sustainably in the long term.
It also facilitates the creation of complex pyramids, chains, and
networks of corporate groups, as we will explore later.
Stewardship Theory
• Stewardship theory has its roots from psychology and
sociology and is defined by Davis, Schoorman &
Donaldson (1997) as “a steward protects and maximises
shareholders wealth through firm performance, because
by so doing, the steward’s utility functions are
maximised”.
• In this perspective, stewards are company executives and
managers working for the shareholders, protects and
make profits for the shareholders. Unlike agency theory,
stewardship theory stresses not on the perspective of
individualism (Donaldson & Davis, 1991), but rather on
the role of top management being as stewards,
integrating their goals as part of the organization.
Stewardship Theory
• The stewardship perspective suggests that
stewards are satisfied and motivated when
organizational success is attained.
• Agency theory looks at an employee or people as
an economic being, which suppresses an
individual’s own aspirations. However, stewardship
theory recognizes the importance of structures
that empower the steward and offers maximum
autonomy built on trust .It stresses on the position
of employees or executives to act more
autonomously so that the shareholders’ returns
are maximized. Indeed, this can minimize the costs
aimed at monitoring and controlling behaviours.
Stewardship Theory
• In order to protect their reputations as decision makers in
organizations, executives and directors are inclined to operate
the firm to maximize financial performance as well as
shareholders’ profits. In this sense, it is believed that the firm’s
performance can directly impact perceptions of their
individual performance.
• According to Fama (1980) he contend that executives and
directors are also managing their careers in order to be seen
as effective stewards of their organization, whilst, Shleifer and
Vishny (1997) insists that managers return finance to investors
to establish a good reputation so that that can re-enter the
market for future finance.
• Stewardship model can have linking or resemblance in
countries like Japan, where the Japanese worker assumes the
role of stewards and takes ownership of their jobs and work at
them diligently.
Stewardship Theory
• Stewardship theory suggests unifying the
role of the CEO and the chairman so as to
reduce agency costs and to have greater
role as stewards in the organization.
• It was evident that there would be better
safeguarding of the interest of the
shareholders. It was empirically found that
the returns have improved by having both
these theories combined rather than
separated (Donaldson and Davis, 1991).
 Stewardship Theory Model
Shareholders’
profits and

returns
Intrinsic and
Shareholders Stewards extrinsic
motivation

Protects and maximise

shareholders
wealth
Resource Dependency Theory
• Resource dependency theory takes a strategic view of
corporate governance. It sees the governing body of a
corporate entity as the linchpin between company and the
resources it needs to achieve its objectives. These resources
could include, for example, links to relevant markets including
potential customers and competitors, access to capital and
other sources of finance, provision of know-how and
technology, and relationships with business, political and
other societal networks and elites. The directors are viewed as
boundary-spanning nodes of networks able to connect the
business to its strategic environment. Studies from this
perspective focus on the interdependence of companies in a
market and can serve to reduce uncertainty in corporate
decisions. The theory finds its roots in organization theories,
for example Pfeffer (1972).
Resource Dependency Theory
• The theory of social networks recognizes that those
involved in corporate governance processes are often
linked through networks. Individuals at the nodes may
have things in common including, perhaps, social
standing, class, income, education, institutional or
corporate links and so on. Lifestyle theory, focusing on
the backgrounds of key players, has also been used.
Some individuals in the networks, such as the
chairman or CEO, may be pivotal nodes in a number of
networks, increasing their communication leverage.
Such social networks can enhance or adversely
interfere with independent and objective governance
activities. Identifying such networks and monitoring
their activities provides another insight into
governance processes and powers.
Psychological and organisational
perspectives
• Corporate governance research from a psychological
perspective seeks to understand how individual directors
perceive their board-level work and what they believe leads to
effective performance. Cognitive maps, produced by repertory
grid techniques (Kelly, 1955, 1963), can be used to chart
directors’ mindsets. Constructs of language, using the
language of the director not words imposed by the researcher,
can help to describe and interpret board-level experiences. If
words such as ‘involvement’, ‘leadership’, ‘participation’,
‘reputation’, or ‘teamwork’ are used by the director, or moral
values such as trust, harmony, or ethical standards mentioned,
these become the frame of reference for the researcher.
Psychological theories have yet to make a significant impact in
understanding corporate governance, but the relevance of
individuals at board level in the overall governance process
suggests that this field has potential.
Psychological and
organisational perspectives
• Viewing corporate governance from a longitudinal
perspective has also provided some insights.
Filatotchev and Wright (2005) collected material
looking at the evolution of corporate governance
practices over the life cycles of enterprises and
institutions. Further light has been thrown onto
corporate governance from the perspective of
political economics. Roe (2003), writing about
political and social conflict in corporations and the
institutions of corporate governance, showed how
a nation’s political economy interacts with its legal
structures and financial markets. Game theory has
also been applied to corporate governance issues.
Societal Perspective
• Finally, we turn to perspectives on corporate governance at a
societal level: so-called stakeholder theory. ‘Stakeholder’, a word
coined to stand in juxtaposition to ‘shareholder’, recognizes the
interests of all those affected by companies’ decisions, including
customers, employees, and managers, partners in the supply chain,
customers, bankers, shareholders, the local community, broader
societal interests for the environment, and the state. Companies,
stakeholder advocates suggest, owe a duty to all those affected by
their behaviour. Some advocates go further and call for directors to
be accountable and responsible to a wide range of stakeholders far
beyond companies’ current company law responsibility to
shareholders. Such responsible behaviour, the stakeholder
advocates argue, should be the price society demands from
companies for the privilege of incorporation, granting shareholders
limited liability for the company’s debts. Stakeholder thinking is
concerned with values and beliefs about the appropriate
relationships between the individual, the enterprise, and the state.
Societal Perspective
• It involves a discourse on the balance of responsibility,
accountability, and power throughout society. It is not a predictive
theory. Consequently, this societal view of corporate governance is
probably better thought of as a philosophy rather than Stakeholder
thinking is concerned with values and beliefs about the appropriate
relationships between the individual, the enterprise, and the state.
It involves a discourse on the balance of responsibility,
accountability, and power throughout society. It is not a predictive
theory. Consequently, this societal view of corporate governance is
probably better thought of as a philosophy rather than a theory. In
1975, the UK Accounting Standards Steering Committee produced a
discussion paper, the Corporate Report, which recommended that
all large economic entities should produce regular accountability
reports to all stakeholder groups whose interests might be affected
by the decisions of that entity. The political implications of such a
heroic idea quickly relegated the report to the archives. In the
United States, proposals for new company her than a theory. In
1975, the UK Accounting Standards Steering Committee.
Enlightened shareholder
theory
• Enlightened shareholder theory recognizes that the
satisfaction of stakeholder needs and interests is crucial to
corporate success and the creation of long-term wealth. The
theory recognizes that companies generate profits and
increase shareholder wealth only by satisfying stakeholder
needs and responding to their interests. Shareholders benefit
when boards satisfy stakeholder interests, because profits are
made and they are primary stakeholders. The theory is
grounded in continuing shareholder primacy, but differs from
classical stewardship theory because boards are required to
take stakeholder interests into account, explaining their
actions to all stakeholders, including the way in which their
decisions have exposed the company to risk. In Chapter 9, on
corporate social
Systems Theory
• It takes a similar approach to understanding
situations. All phenomena can be perceived and
classified as a hierarchy of systems. For example,
consider road traffic, which can be thought of as a
set of systems—the overall road traffic system, a
specific vehicle, the engine of that vehicle, the
carburettor in the engine, the molecules that make
up a component of that carburettor: each system
offers an appropriate way of thinking about parts
of the overall road transport system. Each is useful
in context; none tells the whole story. Systems
theory offers a useful way of looking at a situation.
Systems Theory
The classical view of systems uses three criteria to
identify a system:
● The system’s boundaries—that is, determining what is
to be considered as within the system itself and what in
the system’s environment (systems are man-made
artefacts to help us to understand a situation; moreover,
each system can be further broken down to suit the
needs of the user);
● The system’s level of abstraction—that is, the level at
which the system is perceived and the amount of detail
treated within it;
● The system’s function—that is, what occurs between
the system’s inputs and outputs.
Governance and Management
The Scope of Corporate
Governance
• Different definitions of Corporate
Governance reflect alternative viewpoints
on the subject. There are 5 perspectives
on Corporate Governance namely:
1. An Operational perspective
2. A Relationship perspective
3. A Stakeholders perspective
4. A Financial Economics perspective
5. A Societal perspective
An Operational Perspective
• Focus is on governance structures, processes and
practices.
• The first corporate governance report, Sir Adrian
Cadbury’s report on the Financial Aspects of
Corporate Governance 1992.
• Corporate Government as the system by which
companies are directed and controlled. The board
of directors are responsible for the governance of
their companies, while 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.
An Operational Perspective
• The boards key role is to ensure that
corporate management is continuously and
effectively striving for above average
performance, taking account of risk, which is
not to deny the board’s additional role with
respect to shareholder protection.
• Organization for Economic Co-operation and
Development (2001) Corporate governance is
about the procedures and processes
according to which an organization is directed
and controlled.
An Operational Perspective

• Focusing on the shareholders, the board

and the management are the basis of
Corporate Governance.
A Relationship Perspective
• The OECD report strengthened the
operational perspective by including the
relationship among various participants.
• It emphasizes on the rights and
responsibilities among different participants
in the organization; board, managers,
shareholders and other stakeholders.
• Corporate Governance is a relationship
among the shareholders, directors and
management of a company as defined by the
corporate charter, by laws, formal policy and
rule of law.
A Relationship Perspective

• Corporate Governance involves the

relationship among various participants
including the CEO, Management,
shareholders and employees in
determining the direction and
performance of corporations.
A stakeholders perspective

• Corporate Governance is about the

activities of the board and its relationships
with the shareholders or members and
with those managing the enterprises as
well as with the external auditors,
regulators and other stakeholders.
A Financial Economics
Perspective
• It deals with the way suppliers of finance
assure themselves of getting a return on
their investment
A societal perspective
• It places a fresh perspective of corporate
entity in society.
• Corporate governance is concerned with
holding the balance between economic
and social goals and between individual
and communal goals. The corporate
governance framework is there to
encourage the efficient use of resources
and equally to require accountability for
the stewardship of those resources.
Conclusion

• All the different perspectives are not

mutually exclusive; they overlap. None are
all inclusive; each can be relevant in
context. Key is to adopt the perspective
that is appropriate to the matter under
review.
The Scope of Corporate
Governance
• Central to corporate governance is shareholders,
the board of directors and the management.
• External auditors plays a crucial role in corporate
governance though not presented to its study.
• For public, listed companies, the stock markets and
their listing rules are clearly, vitally significant to
corporate governance. The rules that govern the
stock market and specifically the requirements laid
down for listing are fundamental to the effective
governance of listed companies.
The significance of
constitutions for corporate
entities
• Every corporate entity needs a constitution.
• A corporate entity is formed whenever a
group of members organizes a company,
institution, society, association or other entity
to serve their purpose.
• Being artificial, corporate entities have to be
created hence the need for a constitution.
• Corporate Governance is about the way in
which these corporate entities are governed.
The constitution defines the rights and duties
of its members and lay down the rules about
the way in which it is to be governed.
The significance of
constitutions for corporate
entities
• Every company director should be ensure
that they understand the company’s
memorandum and articles of association.
• A corporate entity is formed whenever a
group of members organize a company,
institution, society , association or other
entity to serve their purpose. Being artificial,
corporate entities have to be created and for
that they need some form of constitution,
which may be formal under the law. Refer to
book
The Memorandum and
Articles of association
• The documents states the company name
• Purpose for which it was created.
• Gives the address of its registered office
• Lists the nominal amounts
• Liability of its members is limited to the equity
capital subscribed.
• Details of initial subscribing members are included.
• The Articles of Association are in effect the rules
by which the company is governed.
• Memorandum and Articles are public documents
and anyone may request copies.
Other Forms of Incorporation
• Savings and loan associations, Building societies,
Cooperatives for farmers and consumer
cooperatives are incorporated under legislation
designed to facilitate and regulate the specific
sector.
• The legislature provides the new organization with
its own facilitating legislation which defines and
creates the entity and determines its governance
processes including its mission and accountability,
the form of governing body, and how directors are
appointed mostly through Government or state
agencies.
Other Forms of Incorporation
• Charities are set up as not for profit, incorporated
bodies and registered under the charities law in
the relevant jurisdiction. Most of this entities
follow corporate Governance however they can
develop their own corporate governance
principles, codes and best practice guidelines.
• Partnership provide another form of corporate
entity. In partnership all partners are liable for
their partnership debts in line with the agreement
between the partners. But in some jurisdictions it
is now possible to incorporate limited liability
partnerships which have more attractive to some
audit firms to provide a cap to an individual
partners liability.
The difference between
Governance and Management
• The CEO or Managing Director has an overall management
responsibility with other managers reporting to him,
representing a top down hierarchy. Management operates
through hierarchy
• Boards tend to appear on Organization charts, it is not part of
the management structure nor is it hierarchy based. Each
director has equal responsibility and similar duties and powers
under the law.
• In a unitary board with both executive and non executive
outside directors- The executive directors hold a managerial
role in addition to their responsibilities as members of the
board of directors. Independent non executive directors have
no with the company and have no links with it.
• Governance is the work of the board of directors or other
governing body while management is the work of the
executive management team.
Alternative Board Structures

• Unitary Boards
• Two Tier Boards
• Advisory boards
Unitary Boards
• It has a single governing body.
• Found in many small firms and start up businesses.
• Company has not reached a stage of non executive director
• There are four possible structures.
❖ A board with only executive directors
❖ A board with a majority executive directors
❖ A board with a majority non executive directors
❖ A board with only non executive directors
• In all director executive board, the top managers are also the
directors. There a no outside non executive directors.
• Clear demarcation between management and directors.
• In the US, we have one or two executive directors i.e the CEO
and CFO and sometimes COO with 3 or 4 times the number of
outside directors.
• In the US it is possible to combine the Chairman and the CEO.
Unitary Boards

• There are 4 categories of board structures

1. Board Comprising of non executive
directors.
2. All Executive Director Board- No outside
non executive board
3. Majority- Executive Director Board
4. Majority non executive director Board
Two Tier Boards
• The all non executive board has the same structure
as the European two tier or supervisory board
architecture.
• In the German approach large and public
companies require to have 2 tier board structure;
The upper supervisory board (Aufsichatsrat) and
lower lower management board or committee
called (Vorstand)
• The supervisory Board comprises of outside
directors and management board entirely of
executive directors.
• The believe in co determination through informal
partnership between labour and capital.
Advisory Board

• Also referred to as advisory committee.

• May be created by companies operating
in various parts of the world.
• Prominent business leaders, politicians
and other influential people are invited to
serve in boards but not given executive
powers.
• This board was prevalent in the 1970s and
1980s
 Comparison of Corporate
Governance Board Structures
Country Chairman/CEO Average Board Size % outside directors
separation

Australia Very High 8 High

Belgium High 15 High

Brazil Low 6 Moderate

Canada High 13 Very High

France Nil 13 High

Hongkong Very Low 8 Low

Italy Total 11 High

Corporate Social Responsibility
and Sustainability
 What is CSR?
• It is about corporate entities acting as good corporate citizens.
• CSR has acquired a range of meanings, which overlap yet focus
on different aspects of the topic, as can be seen in the following
alternative viewpoints.
• The societal perspective This view holds that companies have
responsibilities beyond just obeying the law and paying their
taxes, because their activities have an overall impact on society.
A commitment to CSR recognizes that companies should be
accountable not only for their financial performance, but also for
their impact on society. The definition used by Business for
Social Responsibility, a non-profit organization based in San
Francisco is: ‘CSR involves operating a business in a manner that
meets or exceeds the ethical, legal, commercial, and public
expectations that society has of business.’
• In the 21st century, the world won’t tolerate businesses that
don’t take that partnership seriously, but it will eventually
reward companies that do.’
CSR Perspectives

1. Societal
2. Strategy Driven
3. Stakeholder
4. Ethical
5. Political
6. Philanthropic
Societal Perspective
• The societal perspective This view holds that
companies have responsibilities beyond just obeying
the law and paying their taxes, because their activities
have an overall impact on society.
• A commitment to CSR recognizes that companies
should be accountable not only for their financial
performance, but also for their impact on society.
• ‘CSR involves operating a business in a manner that
meets or exceeds the ethical, legal, commercial, and
public expectations that society has of business.
• In the 21st century, the world won’t tolerate
businesses that don’t take that partnership seriously,
but it will eventually reward companies that do.’
Strategy Driven Strategy
• It starts from the proposition that business social
responsibility is an integral part of the wealth creation
process. A company runs in a socially responsible way because
its CSR strategies and policies are business-driven, in both the
short and long terms. Such companies make a solid business
case for their CSR policies based on cost-effective criteria.
• All corporate strategies—research, exploration, product
development, production, marketing, human resources, and
financial—are contingent with the CSR objectives.
• The business case for taking a stakeholder approach to
corporate governance is that it enhances competitiveness,
increases customer satisfaction, improves employee relations,
improves the cost of capital, and enhances shareholder value,
while also investing in communities and increasing wealth
creation in society.
Strategy Driven Strategy
• CSR that is strategy-driven and rooted in a
solid business case also produces a more
sustainable result long-term. This approach to
CSR is now found in many European
boardrooms and, increasingly, in the United
States. Critics have argued that CSR distracts
from the fundamental economic role of
business, although studies have actually
shown a positive correlation with improved
shareholder returns, albeit small.
Stakeholders Perspective
• The stakeholder perspective Companies with this
perception see CSR as the alignment of corporate values
and actions with the expectations and needs of their
stakeholders—shareholders, customers, employees,
suppliers, communities, regulators, other interest groups,
and society as a whole.
• Their CSR policies describe the company’s commitment
and responsibility to its stakeholders.
• CSR as ‘a concept whereby companies integrate social
and environmental concerns in their business operations
and in their interaction with their stakeholders on a
voluntary basis’.
Stakeholder Perspective
• If companies fail to achieve acceptable CSR
standards, costs can be incurred such as legal
damages, restitution costs, legal fees, or product
recalls. The loss of reputation can be even higher,
affecting sales, costs, and employee turnover.
• CSR behaviour in the employment of children in
manufacturing in developing companies, the
alleged ill-treatment of animals in pharmaceutical
product testing, and pollution in the oil drilling and
transport industries, even though such practices
may be perfectly legal in the places where they
occur.
Ethical Perspective
• Corporate entities, like individuals, have an
obligation to act for the benefit of society as a
whole, contributing to society while doing no harm
to others.
• The board needs to be the conscience of the
company—responsible for establishing its
corporate values. Ethical codes may be needed
that are understood throughout the organization
and reflected in the directors’ own behaviour.
• An ethical standpoint is likely to produce voluntary
CSR policies that go well beyond the requirements
of laws and guidelines.
Importance of Codes of Ethics
1. Define and create the value system required
for the organization.
2. Define and set standards of expected
behaviour
3. Improve individuals ethical awareness and
judgement
4. Promote high standards of practice
5. Set benchmarks for self evaluation and
monitoring by peers and others
6. Inform external stakeholders of the values of
the organization
Political Perspective
• CSR is no more than vested self-interest at best
and a public relations window-dressing exercise at
worst. Some have called for legislation to impose
standards of CSR on companies, particularly
multinationals.
• CSR should remain market-driven and voluntary.
CSR policies should reflect companies’ activities
and the context in which they operate,
• Some business leaders concur with this opinion,
feeling that their companies do not have a
mandate, nor are they equipped, to pursue
broader social goals.
Philanthropic Perspective
• For many years, some companies have sought to ‘put
something back’ into the society that provided their
customers, their employees, and their success.
• Corporate philanthropy may involve charitable giving
to support communities, charities, or other causes, in
money or services such as employees’ time.
• CSR is seen as ‘a concept whereby companies decide
voluntarily to contribute to a better society and a
cleaner environment’.
• Philanthropic approach to CSR is essentially peripheral
to the main business. When times get hard, it is also
one of the easiest expenditures to cut.
CSR Competency Framework

• It is used to encourage commitment to

CSR practices, the British government
created a CSR competency framework—a
flexible tool, which is offered as a ‘way of
thinking’ for companies of all sizes.
• The framework has six core
characteristics, with five levels of
attainment for each one.
Core Characteristics

● Building capacity –Working with others to build the capability to

manage the business effectively, helping suppliers and employees to
understand your environment and to apply social and environmental
concerns in their day-to-day roles
● Questioning ‘business as usual’ –Constantly questioning your
business in relation to a more sustainable future and being open to
improving people’s quality of life and the environment, acting as an
advocate, engaging with bodies outside the business who share this
concern for the future
●Understanding society –A knowledge of how the business
operates in the broader societal context and a knowledge of the
impact that the business has on society, plus a recognition that the
business is an important player in society, seeking to make that
impact as positive as possible
Core Characteristics
• Stakeholder relations –Recognizing that stakeholders
include all those who have an impact on, or are impacted
by, your business, understanding the opportunities and
risks they present, and working with them through
consultation, taking their views into account
● Strategic view –Ensuring that social and environmental
concerns are included in the overall business strategy so
that CSR becomes ‘business as usual’, with leadership
coming from the top and resulting in everyone in the
business having an awareness of the social and
environmental impacts in their day-to-day roles
● Harnessing diversity –Recognizing that people differ
and harnessing this diversity, reflected in fair and
transparent employment practices, promoting the
health, well-being, and views of staff with everyone in
Attainments
Awareness –The broad application of the core CSR characteristics
and how they might impinge on business decisions
Understanding –A basic knowledge of some of the issues, with the
competence to apply them to specific activities
Application –The ability to supplement this basic knowledge of the
issues, with the competence to apply it to specific activities

Integration –An in-depth understanding of the issues and an

expertise in embedding CSR into the business decision-making
process
Leadership –The ability to help managers across the organization in
a way that fully integrates CSR in the decision-making process.
Importance of CSR Competency
Framework
• CSR framework is to change employees’
mindsets
• Promote an appropriate CSR strategy
throughout the organization and between the
company and its stakeholders.
• Creating a strong CSR culture throughout an
organization.
• It creates CSR awareness that provides a cost-
effective, yet comprehensive, way of
managing social and environmental risk
across the organization.
United Nations Global
Reporting Initiative
• The UN Global Compact is a strategic initiative for
businesses that commit to aligning their strategies
and operations with ten universally acceptable
principles in the area of human rights, labour
environment and anti corruption.
• The compact calls for participating companies to
accept set core values in the area of Human Rights,
labour standards, the environment, anti
corruption, derived from universal declaration of
Human Rights, the International Labour
Organization’s Declarations of Fundamental
Principles and Rights at work, and the UN
Convention against corruption
Human Rights

• Principle 1: Business should support and

respect the protection of internationally
proclaimed human rights
• Principle 2: Make sure that they are not
complicit in human rights abuses.
Labour
• Principle 3: Businesses should uphold the
freedom of association and the effective
recognition of rights to collective bargaining
• Principle 4: Elimination of forced and
compulsory labour
• Principle 5: The effective abolition of child
labour
• Principle 6: The elimination of discrimination
in respect of employment and occupation
Environment

• Principle 7: Businesses should support

precautionary approach to environmental
challenges.
• Principle 8: Undertake initiatives to
promote greater environmental
responsibility.
• Principle 9: Encourage the development
and diffusion of environmentally friendly
technologies.
Anti corruption

• Principle 10: Businesses should

work against corruption in all its
forms, including extortion and
bribery.
Board Styles
Board Styles

• There are 4 Board styles.

1. Country Club Board
2. Professional Board
3. Rubber Stamp Board
4. Representative Board
Country Club Board

• This Board focusses more on personal

relationships than on the task in hand
Professional Board

• The Board that show a high concern for

board relationships and have a high
regards for the achievement of the boards
task.
Representative Board

• The Board that show a high

concern for board relationships
and have a low regards for the
achievement of the boards task.
Rubber Stamp Board

• The Board that show a low

concern for board relationships
and have a low regards for the
achievement of the boards task.
Behaviour of effective
Board
1. Commitment
2. Character
3. Collaboration
4. Competence
5. Creativity
6. Contribution
Thank You