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Lecture 3

CG basic recap
OECD defines it as ..

internal means by which corporations are operated and

controlled thus involves a set of relationships between a
companys management, its board, its shareholders and
other stakeholders.

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CG system

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CG core practices/values
1. Fairness:
The corporate governance framework/system should
protect shareholder rights and ensure equitable
treatment of all shareholders, including minority and
foreign shareholders.
2. Responsibility:
The corporate governance framework should recognize
the rights of stakeholders as established by law, and
encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
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Practices contd
3. Transparency:
The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the company, including its financial
situation, performance, ownership, and governance
structure.
4. Accountability:
The corporate governance framework should ensure the
strategic guidance of the company, the effective
monitoring of management by the board, and the
boards accountability to the company and shareholders.
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Illustration
Accountability

Responsibility
Effective Fairness

CG

Transparency

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OECG CG Principles
1. 1) Ensuring the basis for an effective corporate
governance framework
The corporate governance framework should promote
transparent and efficient markets, be consistent with the
rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory
and enforcement authorities.
2. The rights of shareholders and key ownership
functions
The corporate governance framework should protect and
facilitate the exercise of shareholders rights.
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Principles contd
3. The role of stakeholders in corporate governance

The corporate governance framework should recognize the rights

of stakeholders established by law or through mutual agreements
and encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the sustainability of
financially sound enterprises.

4. The equitable treatment of shareholders

The corporate governance framework should ensure the equitable
treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights.
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Principles contd
5. Disclosure and transparency
The corporate governance framework should ensure that
timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial
situation, performance, ownership, and governance of the
company.
6. The responsibilities of the board
The corporate governance framework should ensure the
strategic guidance of the company, the effective monitoring
of management by the board, and the boards accountability
to the company and the shareholders
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CG benefits Recap

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CG THEORIES AND CSR

1. Agency theory
The economic relationship that arises between two
individuals: Principal & Agent
Three conditions to operate relationship
1) The agent has the freedom to choose between
various course of actions
2) Actions of agent influence their own growth as well
as the principals
3) Difficult for the principal to observe the actions of
the agent as information is not enough

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Theory.
Under Agency theory
1) The supplier of finance need return on their investment
2) Principal needs assurance that agent does not steal the
investment
3) Principal needs to control the agent
4) Control is dispersed and less effective
Problems with agency theory
a) Utility maximizer (agent will not act in the best interest
of the principal
b) Unequal sharing of information
c) Element of risk (judge performance based on annual
reports )

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More agency concerns

Agency cost
Agency loss
How to reduce it
Focuses on quantitative and not qualitative aspect
To overcome the problems mentioned above:
Adopt Transparent accounting practices and
disclosure
Appoint Non executive independent directors

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Stewardship Theory

Built on premise that directors will fulfill their duties towards the
shareholders
Assumes that humans are good and directors are trustworthy
Directors are stewards whose motives are aligned with the objectives of
the principles
Directors take in to account the stake holders but after shareholders
Strengths
Trust is high and stewards are motivated
New ideas and growth
More liberal and believes in empowerment
Weaknesses
Causal relationship between governance and performance cannot be
assessed using this theory

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Stakeholder Theory
Developed by Freeman(1984)
Views CG as intended to guard the interests of
different categories of persons
Defines stakeholder as any group or individual who
can affect or is affected by the achievement of the
organizations objectives.
Management therefore has a NETWORK of
relationships to serve and not only there interests.
Theory assumes that all interests are relevant and not
only agent-principal relationship
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Resource Dependency theory

Explains CG in relation to Board of Director roles
Provides that the Board helps the company access
resources through board member linkage to the
external environment
Encourages the appointment if independent
representatives to increase access to external resources
Provides 4 board categories( insiders, business
experts, support specialists and community
influentials.

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Transaction Theory

Presents corporations as a composition of people with

different views and interests
Acknowledges that firms are now the largest controllers of
the market and set the cost/price
Managers are selfishly driven to undertake transaction that
benefits them personally
They transact/make decisions to benefit self at the expense
of other player thus the need to be governed
Strengths / weaknesses
Quantification is easy
Shareholders are residual receivers , concern about safety
of investment

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The Political theory

Views corporations as voting platforms by encouraging

internal shareholder voting power.
This theory also acknowledge the role of government
policy and law to enhance company governance
Strengths / weakness
Based on fair distribution through democracy
The challenge is that the board should not have
absolute powers and should know their roles
Government control, interference may increase
leading to constraints and red tape

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CSR
Corporate Social Responsibility

Refers voluntary activities of the firm to community

needs
Confirms stakeholder theory

Calls upon corporations to be apart of the solution to

corporation problems like pollution, extortion, work
hazard efforts among others.

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