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ETHICS & CORPORATE GOVERNANCE

BM055-3-2

Introduction to Corporate Governance

Learning Outcomes
A brief history of developments in corporate governance since the early 1990s is provided. The objectives of good corporate governance, and the issues and concepts involved, are also explored. After reading and understanding the contents of this chapter and working through the sample questions, you should be able to:

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Define corporate governance. Explain the importance of good corporate governance. Identify the stakeholders in a company. Explain the key issues in corporate governance. Explain the different approaches to good corporate governance: the shareholder value approach, shareholder approach and the stakeholder or pluralist approach.
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Defining Corporate Governance


Governance refers to the way in which an entity or body of people is governed and to the functions of governing, such as the structural framework, the procedures and the way power and actions are carried out by various authorities and people that forms the groups being governed, with a certain objective.

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The governance of a country, for example, refers to the powers and actions of the legislative assembly, the executive government and the judiciary. The democratic process of election for members to sit in Parliament as representatives of the citizens, the sharing of powers executed within the legal frameworks.
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Corporate governance refers to the way in which companies are governed, and to what purpose. It is concerned with practices and procedures for trying to ensure that a company is run in such a way that it achieves its objectives, with certain amount of checks and balances to minimize abuse of power and fair treatment of the stakeholders
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The terms corporate governance has no standard definitions, but could be described in manner ways. (a) Corporate governance is the system by which companies are directed and controlled' (Cadbury Report, 1992).The Cadbury Report was a major UK inquiry into corporate governance, and this is a generally accepted definition.

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The Organisation for Economic Cooperation & Development (OECD) (2004) describes corporate governance as involving a set of relationships between a companys management, its board, its shareholders and other stakeholders, and provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.
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Professor Bob Tricker, (1984) in his book on Corporate Governance differences between governing and managing in companies by saying: Whilst management processes have been widely explored, relatively little attention has been paid to the processes by which companies are governed. If management is about running businesses, governance is about seeing that it is run properly.
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Monks and Minow (2001) defined corporate governance as the relationship among various participants in determining the direction and performance of corporations, shareholders, the management led by the chief executive officer, and the board of directors; whilst other participants include the employees, customers, suppliers, creditors and the community.
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The Malaysian Code on Corporate Governance (2000) defined corporate governance as 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 objective of realizing long-term shareholder value, whilst taking into account the interests of other stakeholders.
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The Malaysian Code on Corporate Governance (2000) defined corporate governance as 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 objective of realizing long-term shareholder value, whilst taking into account the interests of stakeholders.
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Importance of Corporate Governance


Day to day management by business executives to find a way in which the interests of shareholders, directors and other interest groups (stakeholders) Good corporate governance support capital markets good for the country and the corporations that support the economy to show that (adequate) corporate governance & practices are being carried out by the BOD & the participants
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Concepts of Sound Corporate Governance


openness, honesty and transparency; independence; accountability; responsibility; fairness; reputation; social responsibility

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Whistleblowing
A whistleblower is normally an employee or anyone who provides information about his or her company which he or she reasonably believes provides evidence of (a) a violation of a law or regulation by the company; (b) a miscarriage of justice; (c) a financial malpractice; or (d) a danger to public health or safety.
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In the government sector, a whistleblower might also provide evidence of a gross waste of public funds or gross misuse of power and corrupt practices by elected persons in power. Presumably, the whistleblower in each case disapproved of the transaction and believed that the company was aware that it was in breach of the law, but intended to go through with the sale.
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An employee may have evidence that his or her superiors are in breach of company regulations and so reports the facts to someone else in a position of seniority within the company, such as a managing director An employee may honestly believe that there is, has been or could soon be serious malpractice by someone within the company, but feel unable to report his or her concerns in the normal way.
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This could be because the individual to whom he or she normally reports is involved in the suspected malpractice.

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Practice Questions:
1. Explain in your own words what is corporate governance. 2. Why is corporate governance important? 3. In companies structures, who are the people in power to make decisions? 4. What can be seen as organs in a corporation? 5. What is a one-tier and two-tier board structure? 6. How would you define whistleblowing?
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