CHAPTER 1: CORPATION AND CORPORATE GOVERNANCE

CORPORATION
*artificial being
*having the right of succession
*and the powers attributes and properties expressly authorized by law or incident to its existence
STAKEHOLDERS:
1.
2.
3.
4.
5.
6.
7.

MANAGEMENT party with authority to implement policies

CREDITORS lend corporate goods, services or money
SHAREHOLDERS investors
EMPLOYEES contribute their skills and abilities
CLIENT the very reason for the existence of the corporation
GOVERNMENT regulate and set standards of corporate activities
PUBLIC

PURPOSES OF A CORP:

Early stage survival

To increase profit (Milton Friedman: social responsibility of business)
To offer vital services to the general public
To offer goods and services to the mass market

SHAREHOLDERS/ STOCKHOLDERS

Artificial or natural persons: OWNERS

BONDHOLDERS

Person or entity that is the holder of a currently outstanding bond

BOARD OF DIRECTORS (BOD)

Collegial body; exercises corporate powers

MUTINATIONAL CORPORATIONS (MNC)

Have the investment in other countries; dont have coordinated product offers

TRANSNATIONAL CORPORATION (TNC)

Registered and operates in more than one country at a time

CORPORATE GOVERNANCE
-

Defined as the structures and processes by which companies are directed and controlled. Good
GC helps companies operate more efficiently, mitigate risk and safeguard against
mismanagement, and prove access to capital that will fuel their growth. It makes companies

more accountable and transparent to investors and gives them the tools to respond to
stakeholder concerns, including implementation of good environmental and social practices.
Accrdg to Sir Adrian Cadbury, GC is concerned with holding the balance between economic and
social goals and between individual and communal goals
Accrdg to the SEC Memorandum Circular No.2, Series of 2002, Code of Corporate Governance:
GC refers to a system whereby shareholders, creditors and other stakeholders of a corporation
ensure that management enhances the value of the corporation as it competes in an
increasingly global market place.
Accrdg to the Wall Street Journal, GC in principle refers to the joint responsibility imposed on
the BOD and management to protect shareholder rights and enhance shareholder value. In
practice, the Board is the real representative of shareholders and acts as a check against
management. The Board must ensure, among other things, that the company is accountable to
shareholders, that I gives equitable treatment to all its owners, small as well as large, and that
it acts transparently.
Accrdg to the Malaysian High Level Finance Committee Report on Corporate Governance, GC is
the process and structure used to direct and manage the business and affairs of the company
towards enhancing business prosperity and corporate accountability with the ultimate object of
realizing long-term shareholder value, whilst taking into account the interests of other
stakeholders.

GOOD GOVERNANCE PROMOTES:

TRANSPARENCY is vital, critical (Thomas Jefferson: information is the currency of democracy)

ACCOUNTABILITY recognition and assumption of responsibility
PRUDENCE care, caution and good judgment

BENEFITS OF GOOD GOVERNANCE:

Reduced vulnerability
Marketability
Credibility
Valuation

AGENCY PROBLEMS
-

In traditional approach corporation is treated as a single entity (holistic approach)

AGENCY RELATIONSHIPS & COSTS:

1.
2.
3.
4.

PRINCIPAL-AGENT PROBLEM connection between owners and mangers

AGENCY RELATIONSHIP the conflict
INDIRECT AGENCY COST a lost opportunity
DIRECT AGENCY COST two types:
a. CORPORATE EXPENDITURE benefits management
b. EXPENSES ARISING FROM THE NEED TO MONITOR MANAGEMENT ACTIONS

AGENCY THEORY

Firm can be viewed as a loosely defined contract between resource providers and resource
controllers

EFFECTS OF AGENCY:
1.
2.
3.
4.
5.

Conflict of interest
Managerial opportunity
Incurrence of agency cost
Shareholder activism
Managerial defensive

GOAL CONGRUENCE
-

The harmony and alignment of goals of both principal and the agent

NON-EXECUTIVE DIRECTOR
-

Member of the BOD of a company who does not take part in the executive function.
ROLE:
to give a meaningful contribution to the board by providing objective criticism.
RESPONSIBILITIES:
o Strategy
o Establishing networks
o Monitoring of performance
o Audit

CHIEF FINANCIAL OFFICER (CFO)

-

Corporate officer principally accountable for managing financial risks of the corporation
ROLES:
o Implements internal controls
o Supervises major impact projects
o Develops relations with financing resources
o Adviser to management
o Drives major strategic issues
o Risk manager
o Relationship role
o Objective referee

AUDIT COMMITTEE
-

An essential component overall corporate government system

AUDITING
-

A systematic process by which a competent, independent person objectively obtains and

evaluates