Week 1 and 2

1. Explain the term of Corporate Governance

First version

A set of criteria and tools needed to ensure value creation that is consistently sustainable and
ensures the effectiveness of the strategy and operational efficiency of the organization by always
complying with rules and regulations.
The concept of Corporate Governance above develops and contains the following assumptions:

The purpose of each group / company is sustainable steady value creation.

The benefit of leadership is to make the mission coherent and converging with the expectations
of all stakeholders.
Corporate Governance basically concerns the framework and process of how the company is
managed. Corporate Governance is the way in which decisions are made and the results
obtained are monitored.

What is Corporate Governance?

From several definitions, how many conclusions can be drawn concerning the important points
of Corporate Governance, namely:

A relationship between stakeholders that is used to determine and control strategic policies and
organizational performance in achieving its objectives
Associate with identifying how to ensure that strategic decisions are made effectively.
Authority in regulating and reporting business risks
By considering all of the above, we can conclude the main elements as requirements and
determination of Corporate Governance:

Corporate governance focuses on the method (structure) from which the determination of
company objectives is carried out and the method for achieving these objectives is monitored
periodically.
Corporate governance leads to the determination of roles, responsibilities and separation of
powers in complex systems.
Basic Principles of Corporate Governance
In 1999, during the wave of crisis in Asia, the Organization for Economic Cooperation and
Development (OECD) established a set of principles, standards and guidelines for the
development of Corporate Governance at the international level. This principle was updated in
2004 and is used as a basic framework for Corporate Governance. The basic principles of
corporate governance from the OECD are based on four main standards which include fairness,
transparency, accountability and responsibility.

Accountability
The corporate governance framework must provide certainty in the company's strategic
guidelines, effective management oversight by directors, and board responsibilities for
companies and shareholders.

Transparency
The corporate governance framework must be able to ensure that periodic and accurate
reporting is made for all significant matters relating to the company including financial situation,
performance, ownership and corporate governance.

Responsibility
The corporate governance framework must understand the rights of stakeholders as stipulated
in regulations and encourage active collaboration between companies and stakeholders in
creating the company's welfare, employment and financial resilience. This principle recognizes
that companies must be regulated by regulations and regulations in the countries where they
operate.

Fairness
The concept of fairness can be divided into two different types, namely:

The corporate governance framework must protect the rights of shareholders

The corporate governance framework must ensure appropriate treatment of all shareholders,
including minority and foreign shareholders. All shareholders must have the opportunity to obtain
appropriate compensation for violations of their rights.
Governance Theory: Different Needs - Different systems
A different governance system states that company goals on the road are different, depending
on which main concerns are taken as the main focus:
Social / Stakeholder Expectations
How many countries focus on the need to meet social expectations, generally the needs of
employees and other stakeholders (including suppliers, creditors, taxes and the communities
where the company operates). This approach is often referred to as a stakeholder perspective,
where companies are established and operationalized for the purpose of maximizing the welfare
of other parties (stakeholders) associated with the company. This view is prominent in Europe
(such as Germany, Francis and the Netherlands) and several countries in Asia.

Rights of company owner / Shareholder

Other countries emphasize the rights of the owner of the company and focus on the company's
objectives to gain profits for the shareholders in the long run. This approach is often referred to
as a shareholder perspective where the company is established and operationalized for the
purpose of maximizing shareholder welfare as a result of the investment it makes

Corporate Governance: Other Important Issues

Whatever the objective corporate perspective is taken, effective management ensures that the
board and manager are responsible for achieving it. The rules of corporate governance in
convincing boards and responsible management are very important for the community for a
number of reasons. In essence, effective corporate governance:

Promote efficient resource use in larger companies and economies. Debt and wealth must flow
to companies that are able to invest it efficiently to produce goods

Second Version
Corporate governance is the system of rules, practices and processes by which a firm is directed
and controlled. Corporate governance essentially involves balancing the interests of a
company's many stakeholders, such as shareholders, management, customers, suppliers,
financiers, government and the community. Since corporate governance also provides the
framework for attaining a company's objectives, it encompasses practically every sphere of
management, from action plans and internal controls to performance measurement and
corporate disclosure.
 Third Version

What Is Corporate Governance?

If you understand a company as a union of some extremely diverse interest groups –
employees, owners, investors, managers, business partners, creditors and customers – then
it's clear that you're going to need a system for realizing the best possible handling of
relationships between the individual groups so no one gets cheated or exploited. That's
essentially the idea behind corporate governance. The technical definition is a system of
processes, policies and rules that direct and control a company's behavior. Essentially, it's a
code of conduct in business for the good management of companies.

What Are the Basic Principles of Corporate Governance?

Originally, corporate governance was put in place to stop entrepreneurs and owners acting
abusively or even criminally on behalf of a company. This is still a key objective today, but the
concept has evolved to include all the ways a company should behave in order to foster the
trust of investors and other stakeholders. Some of the key aims of corporate governance
include:

 Giving stakeholders confidence that the business is being run to important legal standards so
that it never violates applicable laws or regulations, including the unwritten rules of good,
ethical behavior.
 Providing transparency in the company's decision-making processes both in good and bad
times.
 Regulating efficient cooperation between a supervisory board of directors and the
management of a company.
 Ensuring the company exercises prudence in strategy-setting and decision-making so that the
best interests of all stakeholders are taken into account.
 Providing a framework for action if there's a violation of the company's code of conduct.
 Ensuring the company is geared toward long-term value creation, not short-term gains.

When the company's management works according to a well-defined corporate governance

structure, the well-being of everyone involved in the company should automatically be taken
care of.

What Are the Key Elements of Corporate Governance?

The key principles of good corporate governance differ depending on the country, industry,
regulator and stock exchange. However, most codes of governance include several major
characteristics:

Independent leadership: Companies should have an independent leadership to oversee and

guide management, such as an independent chairperson or a lead independent director. An
owner who selects friends and family members to sit on the board with him runs the risk of
nepotism and prejudice. Independent judgement is almost always in the best interest of the
company and its stakeholders.
Transparency: One of the fundamental objectives of corporate governance is for
organizations to develop transparent business practices and a solid structure and organization
so that it can trace all the company's dealings effectively. Another aspect of transparency is
the company should provide free and easy-to-understand information to everyone who may be
affected by the company's corporate governance policies, such as clear financial reports. That
way, everyone can understand the company's strategies and track its financial performance.

Consensus building/ stakeholder relations: The company should consult with the different
categories of stakeholders in an ongoing discourse to reach a consensus of how it can best
serve everyone's needs sustainably.

Accountability: Consensus building goes hand-in-hand with the principle of accountability,

which says the company must be accountable to those who are affected by its decisions.
Precisely who is accountable for what should be written down in the company's code of
conduct. Large companies often keep corporate governance web pages that indicate specific
things the company is doing to meet the expectations of each stakeholder group.

Inclusion or corporate citizenship: The principle of inclusion and corporate citizenship

maintains, enhances or generally improves the well-being of all the stakeholder groups. This
element of corporate governance typically includes an aspect of social and environmental
responsibility, such as using the company's human, technological and natural resources
responsibly and acting for the benefit of the community as a whole. Corporate citizenship
provides a compelling message regarding the company's value to society.

The rule of law: The company shall operate within the legal frameworks that are enforced by
regulatory bodies, for the full protection of stakeholders.

Who Is Responsible for Corporate Governance?

The board of directors is pivotal for the governance of its company. The board's role is to set
the company's strategic direction, provide the leadership to put those strategies into effect and
supervise the management of the company. Consequently, corporate governance is about the
way the board behaves and how it sets the values of the business. This is different from the
daily operational management of the company by executives.

Shareholders play a role, too, and must actively participate in corporate governance for it to
have any bite. Their role is to appoint the right directors and approve major decisions such as
mergers and buyouts. Shareholders have the collective power to take legal action against a
company that does not exercise good governance.

From a legal perspective, corporate governance is regulated by state corporate laws, federal
securities laws such as the Sarbanes-Oxley Act of 2002 and the listing rules of the New York
Stock Exchange and Nasdaq. Together, these codes and laws regulate board size and
composition, stock issues, shareholder voting rights, financial reporting and the audit
obligations of companies that are listed on a national securities exchange. Failure to follow the
regulations could expose the company to lawsuits and fines.
 2. Explain the basic cause of corporate agency problem

An agency relationship occurs when a principal hires an agent to perform some duty. A conflict,
known as an "agency problem," arises when there is a conflict of interest between the needs of
the principal and the needs of the agent.

In finance, there are two primary agency relationships:

 Managers and stockholders

 Managers and creditors

1. Stockholders versus Managers

 If the manager owns less than 100% of the firm's common stock, a potential agency
problem between mangers and stockholders exists.
 Managers may make decisions that conflict with the best interests of the shareholders.
For example, managers may grow their firms to escape a takeover attempt to increase
their own job security. However, a takeover may be in the shareholders' best interest.

2. Stockholders versus Creditors

 Creditors decide to loan money to a corporation based on the riskiness of the company,
its capital structure and its potential capital structure. All of these factors will affect the
company's potential cash flow, which is a creditors' main concern.
 Stockholders, however, have control of such decisions through the managers.
 Since stockholders will make decisions based on their best interests, a potential agency
problem exists between the stockholders and creditors. For example, managers could
borrow money to repurchase shares to lower the corporation's share base and increase
shareholder return. Stockholders will benefit; however, creditors will be concerned given
the increase in debt that would affect future cash flows.

Motivating Managers to Act in Shareholders' Best Interests

There are four primary mechanisms for motivating managers to act in stockholders' best
interests:

 Managerial compensation
 Direct intervention by stockholders
 Threat of firing
 Threat of takeovers
1. Managerial Compensation
Managerial compensation should be constructed not only to retain competent managers, but to
align managers' interests with those of stockholders as much as possible.

 This is typically done with an annual salary plus performance bonuses and company
shares.
 Company shares are typically distributed to managers either as:
 Performance shares, where managers will receive a certain number shares
based on the company's performance
 Executive stock options, which allow the manager to purchase shares at a future
date and price. With the use of stock options, managers are aligned closer to the
interest of the stockholders as they themselves will be stockholders.

2. Direct Intervention by Stockholders

Today, the majority of a company's stock is owned by large institutional investors, such as
mutual funds and pensions. As such, these large institutional stockholders can exert influence
on mangers and, as a result, the firm's operations.

3. Threat of Firing
If stockholders are unhappy with current management, they can encourage the existing board of
directors to change the existing management, or stockholders may re-elect a new board of
directors that will accomplish the task.

4. Threat of Takeovers

If a stock price deteriorates because of management's inability to run the company effectively,
competitors or stockholders may take a controlling interest in the company and bring in their own
managers.

In the next section, we'll examine the financial institutions and financial markets that help
companies finance their operations.
 3. Identify the key issues in Corporate Governance
First Version
Corporate governance is the term used to describe the balance among participants in the corporate structure
who have an interest in the way in which the corporation is run, such as executive staff, shareholders and
members of the community. Corporate governance directly impacts the profits and reputation of the company,
and having poor policies can expose the company to lawsuits, fines, reputational damage, and loss of capital
investment. Here are five common pitfalls your corporate governance policies should avoid.

1) CONFLICTS OF INTEREST
Avoiding conflicts of interest is vital. A conflict of interest within the framework of corporate governance
occurs when an officer or other controlling member of a corporation has other financial interests that directly
conflict with the objectives of the corporation. For example, a board member of a solar company who owns a
significant amount of stock in an oil company has a conflict of interest because, while the board he or she
serves on represents the development of clean energy, they have a personal financial stake in the success of the
oil industry. When conflicts of interest are present, they deteriorate the trust of shareholders and the public
while making the corporation vulnerable to litigation.

2) OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight of the company’s
procedures and practices. Oversight is a broad term that encompasses the executive staff reporting to the board
and the board’s awareness of the daily operations of the company and the way in which its objectives are being
achieved. The board protects the interests of the shareholders, acting as a check and balance against the
executive staff. Without this oversight, corporate staff might violate state or federal law, facing substantial fines
from regulatory agencies, and suffering reputational damage with the public.

3) ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level executives to lower-tier
employees, each level and division of the corporation should report and be accountable to another as a system
of checks and balances. Above all else, the actions of each level of the corporation is accountable to the
shareholders and the public. Without accountability, one division of the corporation might endanger the success
of the entire company or cause stockholders to lose the desire to continue their investment.

4) TRANSPARENCY
To be transparent, a corporation must accurately report their profits and losses and make those figures available
to those who invest in their company. Overinflating profits or minimizing losses can seriously damage the
company’s relationship with stockholders in that they are enticed to invest under false pretenses. A lack of
transparency can also expose the company to fines from regulatory agencies.

5) ETHICS VIOLATIONS
Members of the executive board have an ethical duty to make decisions based on the best interests of the
stockholders. Further, a corporation has an ethical duty to protect the social welfare of others, including the
greater community in which they operate. Minimizing pollution and eschewing manufacturing in countries that
don’t adhere to similar labor standards as the U.S. are both examples of a way in which corporate governance,
ethics, and social welfare intertwine.
Second Version

Example case: Rules are critically important in business. A quick look at scandals like Enron and
WorldCom shows just what can happen when a business goes too far in pursuing its self-interest
and breaks its own internal guidelines. Corporate governance, encompassing all the principles of
open and responsible management, is a way of ensuring that a company keeps within clear
ethical lines. It has been top of the policymaker's agenda for some time now, but can be a
challenge for businesses on several levels.

What Are the Issues in Corporate Governance?

Good governance is an ideal which is difficult to achieve in its totality. For the implementation
of a rigorous corporate governance code, companies and institutions must come together
regionally and internationally to draft corresponding guidelines. One of the main issues, at
least in the U.S., is that plenty of well-intentioned people have brought their ideas and
experiences to the policy-making table but it hasn't resulted in any clear-cut framework.

To give this context, countries such as the U.K. have had powerful codes of conduct since the
1990s – the position in the U.K. is that every company listed on the London Stock Exchange
must comply with the national corporate governance code or explain why it would not.
Noncompliance serves as a massive red flag to investors. Generally, this code is considered
as the benchmark for sound corporate governance in operations of all sizes.

In the U.S., stock exchanges compete for listings and imposing rigorous corporate governance
responsibilities might lose them business. The Securities and Exchange Commission, the
primary regulator of listed companies, is hot on the issue of transparency and comes down
hard on companies that don't prepare their financial reports properly or disclose information to
stakeholders in the appropriate way. However, it doesn't look beyond the issue of disclosure.

So, for example, a company might defy shareholders' wishes and offer a large cash bonus to
an unpopular and under-performing director. On the face of it, the decision is an example of
poor governance as there's no consensus, inclusion or stakeholder accountability in the
decision-making. But the SEC would allow it as long as the company made full disclosure in its
reports. This type of regulation has been likened to a stop sign – useful to prevent serious
accidents, but in no way a substitute for skillful and judicious driving.

What Are the Challenges of Corporate Governance?

The main problem with corporate governance is that it doesn't stand alone; it has to work in
conjunction with a company's mission and values statement to give directors and stakeholders
a clear guide about how they should behave. There are several problems that a business
might struggle with as follows:

Conflicts of interest: A conflict of interest occurs when a controlling member of the company
has other financial interests that could influence his decision-making or conflict with the
objectives of the company. For example, a board member of a wind turbine company who
owns a significant amount of stock in an oil company is likely to be conflicted, because she
has a financial interest in not representing the advancement of green energy. Conflicts of
interest erode the trust of stakeholders and the public and potentially open the business up to
litigation.

Governance standards: A board can have all the equitable rules and policies it likes but if it
can't propagate those standards throughout the business, what chance does the company
have? Resistant managers can subvert good corporate governance at the operational level,
leaving the business exposed to state or federal law violations and reputational damage with
stakeholders. A policy of corporate governance needs a clear enforcement mechanism,
applied consistently, as a check and balance against the actions of executive staff.

Short-termism: Good corporate governance requires that boards should have the right to
manage the company for the long-term, to create sustainable value. This is problematic for a
couple of reasons. First, the rules governing a listed company's performance tend to prioritize
short-term performance for the benefit of shareholders. Managers face an unrelenting
pressure to meet quarterly earnings targets, since dropping the earnings per share by even a
cent or two could hit the company's stock price. Sometimes a company has to go private to
achieve the kind of sustainable innovation that cannot be achieved in the glare of the public
markets.

The second problem is that directors only sit on boards for a brief period and many face re-
election every three years. While this has some benefits – there's an argument that directors
cannot be considered independent after 10 years of service – short tenures could rob the
board of long-term oversight and critical expertise.

Diversity: It's common sense that boards should have an obligation to ensure the proper mix
of skills and perspectives in the boardroom, but few boards take a hard look at their
composition and ask whether it reflects the age, gender, race and stakeholder composition of
the company. For example, should workers be given a place on the board? This is the norm
across most of Europe and evidence suggests that worker participation leads to companies
having lower pay inequalities and a greater regard for their workforce. It's a balancing act,
however, as companies may focus on protecting jobs instead of making tough decisions.

Accountability issues: Under the current model of corporate governance, the board is
positioned squarely between shareholders and management. Authority flows from the
shareholders at the top and accountability flows back the other way. In other words, it's
shareholders – not stakeholders generally – who are most protected by corporate governance
and shareholders – not stakeholders – who get to withhold critical votes unless certain reforms
are implemented.

While it's certainly not undesirable to have the actions of the board checked by shareholders in
this way, the future of corporate governance is perhaps more holistic. Companies can and do
have ethical obligations to their communities, customers, suppliers, creditors and employees,
and must take care to protect the interests of non-owner stakeholders in the company code of
conduct.
4. Concept that apply to sound corporate governance