Chapter 2

What is Corporate
Governance
What is Corporate governance?
Corporate governance is the system of rules, practices and processes by which a company is directed and controlled.
Definition of Corporate governance
Corporate governance involves a set of relationships between a companys management, its board, its shareholders and other
stakeholders also the structure through which objectives of the company are set, and the means of achieving those objectives and
monitoring performance are determined.
The definition of corporate governance most widely used is "the system by which companies are directed and controlled" (Cadbury
Committee, 1992). More specifically it is the framework by which the various stakeholder interests are balanced.
Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as:
Shareholders, Management, Customers, Suppliers, Financiers, Government & The community.
Corporate governance Consists of two elements:
1. The long-term relationship which has to deal with checks and balances, incentives for managers and communication between
management and investors.
2. The transactional relationship which involves dealing with disclosure and authority.
Good Corporate governance Consists of five elements which the board must consider:
Long-term strategic goals
Employees: past, present, future
Environment/Community
Customers/Suppliers
Compliance(legal/regulatory)

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 Corporate Governance aims :
1. Define relationships between a companys management, its board, shareholders and other stakeholders.
2. Provide a structure through which the companys objectives are set, and how they are achieved and monitored.
3. Recognize the value of business ethics and corporate awareness of society interests to reputation and long-term success.
Why Corporate Governance?
1. Better access to external finance.
2. Lower costs of capital interest rates on loans.
3. Improved company performance sustainability.
4. Higher firm valuation and share performance.
5. Reduced risk of corporate crisis and scandals.
Corporate Governance Parties
1. Shareholders : those that own the company.
2. Directors : Guardians of the Companys assets for the Shareholders.
3. Managers: who use the companys assets.
Four Principals of Corporate Governance
1. Accountability
Ensure that management is accountable to the Board of Directors.
Ensure that the Board of Directors is accountable to shareholders.
2. Fairness
Protect Shareholders rights.
Treat all shareholders including minorities, equitably.
Provide effective redress for violations.
3. Transparency
Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate
governance.
4. Independence
Independent Directors and Advisers i.e. free from the influence of others. 3
Elements of Corporate Governance
1.Good Board practices
Clearly defined roles and authorities.
Duties and responsibilities of Directors understood.
Board is well structured.
Appropriate work and mix of skills.
Appropriate Board procedures.
Director compensation in line with best practice.
Board self-evaluation and training conducted.
2.Control Environment
Internal control procedures.
Risk management framework present.
Disaster recovery systems in place.
Media management techniques in use.
Business stability procedures in place.
Independent external auditor conducts audits.
Independent audit committee established.
Internal Audit Function.
Management Information systems established.
Compliance Function established.
3.Transparent Disclosure
Financial Information disclosed.
Non-Financial Information disclosed.
Financials prepared according to International. Financial Reporting
Standards (IFRS).
Companies Registry filings up to date.
High-Quality annual report published.
Web-based disclosure.
4.Well-defined shareholder rights
Minority shareholder rights formalized.
Well-organized shareholder meetings conducted.
Policy on related party transactions.
Policy on extraordinary transactions.
Clearly defined and explicit dividend policy.
5.Board Commitment
The Board discusses corporate governance issues and has created a
corporate governance committee.
The company has a corporate governance champion.
Appropriate resources are committed to corporate governance
initiatives.
Policies and procedures have been formalized and distributed to
relevant staff.
A corporate governance code has been developed.
The company is recognized as a corporate governance leader.
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What is good Corporate Governance &Why? iv.Obligation to the Employee
i. Obligation to the society at large 1. Fair employment practices
1. National Interest 2. Equal opportunist employer
2. Political non-alignment 3. Training
3. Legal complacence's 4. Humane treatment
4. Rule of law 5. Participation
5. Honest and ethical conduct 6. Empowerment
6. Ethical behavior v.Marginal obligation
7. Social concerns 1. Protecting companies assets
8. Corporate social responsibilities 2. Behavior towards Govt. agencies
9. Environmental friendliness 3. Control
10. Healthy, safety & working environment 4. Consensus oriented
11. Competition 5. Gifts & donation
12. Trusteeship 6. Role & responsibilities of corporate Board & Directors
13. Accountability 7. Direction & Management must be distinguished
14. Effectiveness & Efficiency 8. Managing & whole time Directors
15. Timely responsibleness
ii.Obligation to the Investors
1. Measure promoting transparency & informed shareholder
participation
2. Transparency
3. Financial reporting and records
iii.Obligation to the Customer
1. Quality of product and service
2. Products at affordable prices
3. Unwavering commitment to customer satisfaction
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Corporate Governance in BD
Problems:
1.Inadequate sanctions & enforcement
2.No control mechanisms
3.Lack of professionalism of Directors
4.Poor commitment
5.Board of Directors are not professional
6.Dependent independent directors
7.Too many unlisted company
8.Poor shareholder participation
9.Obligation to the Auditors
However things are improving now in BD
1.The market is competitive-Driven
2.Professional new players are coming in.
3.High growth in market-Capitalization
4.Well forced, well researched portfolio investors
5.Media influence
6.Influence of Banks & Financial institutions