CHAPTER 1
INTRODUCTION TO CORPORATE GOVERNANCE
Objectives:
Describe what governance involves
Understand how the principles of good governance can be applied
Definition of Governance
Governance refers to a process whereby elements in society wield
power, authority and influence and enact policies and decisions
concerning public life and social upliftment.
Governance therefore means the process of decision-making and
the process by which decisions are implemented (or not implemented)
through the exercise of power or authority by leaders of the country and /
or organizations.
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Characteristics of good governance
1. Participation – by both men and women is a key cornerstone, of good
governance. Participation could be either direct or through legitimate
institutions or representative. It is important to point out that
representative democracy does not necessarily mean that the
concerns of the most vulnerable in society would not be taken into
consideration in decision making.
2. Rule of law – good governance requires fair legal frameworks that are
enforced impartially. It also requires full protection of human rights,
particularly those of minorities.
3. Transparency – means that decisions taken and their enforcement
are done in a manner that follows rules and regulations. It means that
information is freely available and directly accessible to those who will
be affected by such decisions and their enforcement.
4. Responsiveness – good governance requires that institutions and
processes try to serve the needs all stakeholders within a reasonable
timeframe.
5. Consensus oriented – good governance requires mediation of the
different interests in society to reach a broad consensus on what is in
the best interest of the whole community and how this can be
achieved.
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6. Equity & Inclusiveness – ensures that all its members feel that have a
stake in it and do not feel excluded from the mainstream of society.
7. Effectiveness & Efficiency – good governance means that processes
and institutions produce results that meet the needs of society while
making the best use of resources at their disposal.
8. Accountability – is a key requirement of good governance. Not only
governmental institutions but also the private sector and civil society
organizations must be accountable to the public and to their
institutional stakeholders.
Corporate governance: An overview
Corporate governance is defined as the system of rules, practices
and processes by which business corporations are directed and
controlled. It basically involves balancing the interests of a company’s
many stakeholders, such as shareholders, management, customers,
suppliers, financiers, government and the community.
Purpose of corporate governance
The purpose of corporate governance is to facilitate effective,
entrepreneurial and prudent management that can deliver long term
success of the company.
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Objectives of corporate governance
1. Fair and equitable treatment of shareholders
A corporate governance structure ensures equitable and fair
treatment of all shareholders of the company.
2. Self-assessment
Corporate governance enables firms to assess their behavior and
actions before they are scrutinized by regulatory agencies.
3. Increase shareholders wealth
Another corporate governance main objective is to protect the long-
term interests of the shareholders.
4. Transparency ad full disclosure
Good corporate governance aims at ensuring a higher degree of
transparency in an organization by encouraging full disclosure of
transactions in the company accounts.
Basic principles of effective corporate governance
1. Transparency and full disclosure
a. Does the board meet the information needs of investment
communities?
b. Does it safeguard integrity in financial reporting?
2. Accountability
a. Does the board clarify its role and that of management?
b. Does it promote objective, ethical and responsible decision
making?
3. Corporate control
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a. Has the board built long term sustainable growth in shareholder’s
value for the corporation?
b. Does is create an environment to take risk?
Corporate governance responsibilities and accountabilities
Many of the characteristics of good governance are relevant to
both SME’s and large listed public companies. As an organization grows
in size and influence, these issues become increasingly important.
However, it is also important to recognize that good corporate
governance is based on principles underpinned by consensus and
continually developing notions of good practice.
Relationship between shareholders / owners and other
stakeholders
While shareholders / owners delegate responsibilities to various
parties within the corporations, they also require accountability as to how
well the resources that have been entrusted to management and the
board have been used. For example, the owners want accountability on
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such things as:
1. Financial performance
2. Financial transparency – financial statements that are clear with full
disclosure and that reflect the underlying economics of the company.
3. Stewardship, including how well the company protects and manages
the resources entrusted to it.
4. Quality of internal control
5. Composition of the board of directors and the nature of its activities,
including information on how well management incentive systems are
aligned with the shareholders best interest.
Parties involves in corporate governance: Their respective broad
role and specific responsibilities
PARTY BROAD ROLE
Shareholders Provide effective oversight through election of
board members, approval of major initiatives
such as buying or selling of stock, annual reports
on management compensation, from the board
Board of The major representative of stockholders to
Directors ensure that the organization is run according to
the organization’s charter and that there is proper
accountability
Non- The same as the broad role of the entire board of
Executive or directors
Independent
Directors
Management Operations and accountability. Manage the
organization effectively; provide accurate and
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timely reports to shareholders and other
stakeholders.
Audit Provide oversight of the internal and external
Committees audit function and the process of preparing the
of the Board annual financial statements as well as public
of Directors reports on internal control
Regulators Set accounting and auditing standards dictating
(a) Board of underlying financial reporting and auditing
Accountancy concepts; set the expectations of audit quality
and accounting quality
(b) Securities Ensure the accuracy, timeliness and fairness of
and public reporting of financial and other information
Exchange for public companies
Commission
External Perform audits of company financial statements
Auditors to ensure that the statements are free of material
misstatements including misstatements thay may
be due to fraud
Internal Perform audits of companies for compliance with
Auditors company policies and laws, audits to evaluate
the efficiency of operation and periodic
evaluation and tests of controls
For further discussion please refer to the link provided: Introduction to Corporate Governance
https://www.youtube.com/watch?v=AKiEWxQvWwM
For further discussion please refer to the link provided: Corporate Governance Responsibilities
and accountabilities
https://www.youtube.com/watch?v=nuP8olIyzcI
For further discussion please refer to the link provided: Shareholders vs. Stakeholders
https://www.youtube.com/watch?v=Rn3iOh38sB4
Reference Book:
Corporate Governance, Business Ethics, Risk
Management and Internal
7 Control (2019-2020
Edition)
By: Ma. Elenita Balatbat Cabrera, BBA, MBA, CPA,
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