Corporate Strategic

Management
Lectures on
Corporate
Governance
Iyanda Abdulwasiu
Learning objectives;
At the end of this study session, students should be able to:
• Identify and explain the nature, significance and scope of enterprise
governance and threats to effective governance.
• Identify and based on a given scenario assess the role and responsibilities of an effective board.
• Identify and based on a given scenario assess the issues of accountability of
• management to a board, private and institutional shareholders.
• Identify and based on a given scenario evaluate the issues of transparency for an entity.
• Explain the importance of probity as a principle of governance assessing
• issues and their implications in a given scenario.
• Assess the extent to which a board is focusing on sustainable long-term
• success in a given scenario.
THE SCOPE OF GOVERNANCE CORPORATE GOVERNANCE

Cadbury (1992) defined corporate governance as a system by which

companies are directed and controlled. Corporate Governance is
concerned with matters such as:
1. In whose interest is a company governed?
2. Who has the power to make decisions for a company?
3. For what aims or purposes are those powers used?
4. In what manner are those powers used?
5. Who else might influence the governance of a company?
6. Are the governors of a company held account for the way in which
they usetheir powers?
7. How are risks managed?
THE SEPARATION OF OWNERSHIP FROM CONTROL
This is a basic feature of a company law
1. A company is a legal person
2. The constitution of a company usually delegates the powers to manage a
company to its board of directors.
3. The directors act as agents for the company.
4. However, it is widely accepted that companies should be governed in the
interests of their owners, the shareholders. However interests of other groups
might also have a strong influence on the directors.
Problems arising from separation of ownership and control
5. The director of a company might be able to run the company in a way that is not
in the best interests of the shareholders.
6. But shareholders might not be able to prevent the directors from doing this,
because the directors have the power to control what the company does.
CORPORATE GOVERNANCE: LAWS AND GUIDELINES
7. Bad governance occurs when an entity is governed in a way that is inconsistent
with certain concepts and practices.
8. Good governance is based on certain key concepts and practice, which are
described later.
 NEEDS/ SIGNIFICANCE/OBJECTIVESOF CORPORATE GOVERNANCE.

• To restore lack of confidence perceived by the public as regards

financial information and reporting.
• To reduce the excessive remuneration of directors, despitethe poor
Performance of their companies,
• To fight against corruption and promote good labour relationship
and safeguard the rights of consumers,
• To restore confidence in the ability of auditors to provide the
assurances needed by users of accounts.
• To ensure that audit committee assist the board of directors
instriving for integrity and accuracy of financial statements.
• To ensure the protection of shareholders rights and privileges.
• To prevent corporate theft and fraud.
• To prevent expropriation
 THREATS TO EFFECTIVE CORPORATEGOVERNANCE (PROBLEMS)

 
• Lack of information to shareholders
• Poor Attendance of AGM's by investors
• Persistent manipulation of financial statements through window dressing and
fleeting
• Lack Of compliance with accounting and ethical standards
• Poor internal control systems and procedures
• Lack of probity, transparency and accountability by directors
• Lack of corporate code of ethics
• Agency problems between directors and shareholders
 CORPORATE GOVERNANCE FAILURES AND CAUSES

Headline hitting corporate failures in Europe, USA andUK led to recognition of the need for some
sort of control in an attempt to prevent similar failures.
Common elements identified in many of the failed companies include:
1. Poor entity management by directors;
2. Single dominant individual;
3. Unreliable financial reporting;
4. Ineffective internal controls;
5. Incompetent directors;
6. Lack of close involvement of institutional shareholders;
7. Non compliance with standards
8. Single proprietorship business
9. Ineffective audit committee
10. Lack of diversification or expansion
11.Window dressing
12.Poor risk Management
13.Capitalisation of expensive
14.Weak internal control systems. Etc
 Corporate Governance Issues

1. The role and responsibility of the Board

2. Shareholders Right
3. The composition and balance of the Board of Directors
4. Financial Reporting/Narrative reporting and auditing:
5. Directors’ Remuneration:
6. Risk Management and Internal Control
7. Corporate social responsibility and ethical behavior by companies (business
ethics):
CORE PRINCIPLES OF GOOD COPORATE GOVERNANCE FOR PUBLIC SERVICE
The public at large is a key stakeholder in public sector entities. Their focus is
likely to be on value for money rather than the achievement of profits. The
public is often concerned that public sector organisations are over-
bureaucratic and unnecessarily costly. In the UK, a Good Governance
Standard was published by the Independent Commission for Good
Governance in Public Service. This sets out six core principles of good
corporate governance for public service corporations.
1. Good governance means focusing on the organisation’s purpose and on
outcomes for citizens and service users. This means having a clear
understanding of the purpose of the organisation and making sure that
users of the service receive high-quality service and that taxpayers (who
pay for the service) get value for money.
2. Good governance means performing effectively in clearly defined
functions and roles, the responsibilities of executive management should
be clear.
3. Good governance means promoting values for the whole organisation and
demonstrating the values of good governance through behaviour. Integrity and
ethical behaviour are therefore seen as core governance issues in public sector
entities

4. Good governance means taking informed, transparent decisions and

managing risk.

5. Good governance means developing the capacity and capability of the

governing body to be effective. This issue is concerned with the composition
and balance of the governing body

6. Good governance means engaging stakeholders and making accountability

real. In companies, the relationship between shareholders and the board of
directors is an important aspect of governance, and companies and
shareholders are encouraged to engage in constructive dialogue with each
other
 Principles of Corporate Governance

1. Fairness: This refers to the principle that all stakeholders should receive fair
treatment from the directors. At a basic level, it means that all the equity
shareholders in a company should be entitled to equal treatment, such as onevote
per share at general meeting of the company and the right to dividends per share.
2. Openness/transparency: Means “not hiding anything”. Intention should be clear,
and information should not be withheld from individuals who ought to have a right
to receive it.
3. Independence: Means freedom from the influence of someone else. It meansthat
board of directors are to make judgements and give opinions that are in the best
interests of the company, without bias or pre-conceived ideas.
4. Honesty and integrity (probity): It means behaving in accordance with high
standards of behaviour and a strict moral or ethical code of conduct.
5. Responsibility and accountability: The directors of a company are
given most of the powers for running the company. Many of these
powers are delegated to executive managers, but the directors remain
responsible for the way in which those powers are used. The board of
directors should be accountable to the shareholders.

6. Reputation: The reputation of a company is based on a combination

of several qualities, including commercial success and management
competence.

7. Judgement: All directors are expected to have a sound judgement

and to be objective in making their judgement (avoiding bias and
conflict of interest).
Stakeholders are those that are affected by or can
affect the activities or decision of an organization or
company. They are also a group of people who can
affect or be affected by the achievements of the
organization’s objectives.

A stakeholder is any group or individual who can

affect or (be) affected by the achievement of
organization objectives.
 CLASSSES/CATEGORIES OF STAKEHOLDERS

1. Narrow and Wide Stakeholders

2. Active and Passive Stakeholders

3. Voluntary and Involuntary Stakeholders

4. Known and Unknown Stakeholders

5. Legitimate and Illegitimate Stakeholders

6. Internal and External Stakeholder.

7. Primary and Secondary Stakeholders

 AGENCY THEORY

AGENCY CONFLICT
1. Time Horizon
2. Earnings Retention
3. Effort Level
4. Risk Aversion
5. Moral Hazard
AGENCY COST
• Monitory Cost
• Bonding Cost
• Residual loss or cost
REDUCING AGENCY COST
i. Devising a good Remuneration
Package
ii. Monitoring of Executives
Directors.
iii. Having large proportion of
debt in the Capital Structure.
 OTHER THEORIES OF CORPORATE GOVERNANCE
The agency theory of corporate governance is based on the view that the directors
of a company are agents of the company’s owners, the shareholders. Since the
directors as agents do not have the same attitude as their principals, the
shareholders, some measures are necessary to ensure that governance is effective
in protecting shareholders’ interests. Other theories of corporate governance, or
ways of looking at corporate governancehave been developed from agency theory.

1. Transaction cost theory: this attempts to explain companies not just as ‘economic
units’ but as organisations consisting of people with differing views and objectives.
A large part of the theory is concerned with what makes an organisation grow to the
size that it achieves: how many operations does it undertake ‘in house’ and how
much does it buy from external suppliers
2. Class hegemony theory: is a Marxist-based theory that considers the
business elite (the ‘upper class’) as a group of individuals who control
the governance of companies to perpetuate their power base.

3. Managerial hegemony theory: is similar to class hegemony theory in

that the system of governance under the BOD is seen as the tool of
management. It argues that the real power in corporate governance
lies with management and that they can take advantage of
shareholders weakness to pursue their selfinterest.

4. Psychological theory: This takes the view that governance depends

largely on informal structures and behaviours within an organisation.
Decisions by a BOD and the performance of the BOD are influenced
byinter-personal tactics and relationships.

5. An organisational perspective theory: is based on the voew that the

performance of the BOD, company ownership and remuneration and
other incentives for executives may differ according to the legal system
and institutional characteristics in a specific country.
6. Stakeholders theory: is that governance depends on the inter-
relationships and relative strength of the different stakeholders of a
company.

7. System theory: this considers a company as an overall system,

consisting of interlinked sub-systems. Governance depends on how
these sub-systems (and sub-subsystems etc) interlink with each
other

8. Stewardship theory: it is recognised that the director of a

company have a stewardship role. They look at the assets of the
company and manage them on behalf of the shareholders.
Governance and information technology With respect to
information technology, the directors’ duties include ensuring:

1. The adequate information technology and information system

are in place to enable the organization to achieve its
objectives.
2. Adequate funding is available to support the IT and IS
capabilities.
3. An information technology/information system strategy is in
place that aligns with the organizations overall goals, mission
and objectives.
4. A robust system of internal controls is in place to prevent or
detect and correct errors in the system.
5. To safeguard IT assets (both tangible and intangible) and data.
RULES BASED APPROACH TO CORPORATE GOVERNANCE
A rule-based approach to corporate governance is based on the view that companiesmust
be required by law (or by some other form of compulsory regulators) to comply with
established principles of good corporate governance.
Merits
1. Companies do not have the choice of ignoring the rules
2. All companies are required to meet the same minimum standard of corporate
governance.
3. Investor confidence in the stock market might be improved if all the stock market
companies are required to comply with recognised corporate governance rules.
4. Clear regulations – no subjectivity
5. Standard rules across the board
6. Punishment acts a deterrent
7. Provides a level playing field for all industries and companies
8. Suited for non knowledgeable shareholders
Demerits
9. The same rules might not be suitable for every company
10. There are some aspects of corporate governance that cannot be regulated easily i.e
negotiating the remuneration of directors.
11. High cost of compliance
THE RULE-BASED APPROACH IN THE US: SARBANES-OXLEY ACT 2002
In the United States, corporate governance was not regarded as important
until the collapse of several major companies in 2001 and 2002, and large
falls in the stock market prices of shares of all companies. MAIN
GOVERNANCE ASPECTS OF SARBANES-OXLEY The SARBANE-OXLEY act
introduced CORPORATE ACCOUNTABILITY LEGISLATION. A new regulator, the
PCAOB was also established to oversee the audit of public companies that are
subject to the securities laws. Some key provisions are described below:

1. CEO/CFO certification (section 302 of the Act): The Act requires all
companies in the US with a stock market listing (both US companies and
foreign companies) to include in their annual and quarterly accounts a
certificate to the Securities and Exchange Commission.
2. Loans to executives: The Act prohibits companies (other than bank) from
lending money to any directors or senior executives.
3. Forfeiture of bonuses: Any bonuses paid to the CEO/CFO in the previous
12 months must be paid back to the company.

4. Insider dealing: Directors and senior executives are not allowed to trade in
shares of their company during any “blackout period”.
5. Audit committees: Companies with a stock market listing must have an
audit committee consisting entirely of members who are independent of the
company.
6. Non-audit work by auditors: The Act restricted the types of non-audit
work that the company’s auditors can perform for the company.
7. Audit standards: Audit firm must have quality control standards in place
and retain working papers for at least 7years
8. Protection of Whistleblowers: The Act provides protection for any
employee who blows the whistle on illegitimate activities in a company. It
also prevents a company from taking any punitive action against an employee
that blew a whistle, such as terminating his or her employment.
 PRINCIPLE BASED
Advantage
1. Shareholders decide to what extent compliance needs
to be done
2. Flexible / Can be adopted according to industry,
company size and nature of risk
3. Able to address exceptional situations
4. Lower cost of compliance
Disadvantage
1. Subjective
2. Not suited for non-knowledgeable shareholders
3. Lack of consistency across industry
SOME INTERNATIONAL CORPORATE GOVERNANCE REPORTS
It is pertinent to note that there are International accredited independent committee's reports on
corporate governance which are expected to tackle re-occurrence of corporate failure are:
1. 1992, The Cadbury Report: This report recommends that directors of a company should ensure the
integrity and accuracy of annual reports to restore public confidence in financial reports and give
credibility to the assurance provided by auditors.
2. Greenbury Report 1995: This report recommends that director’s remuneration should be fair and
responsible and should be adequately disclosed, stating the chairman's package and the highest
paid director.
3. 2005, Turnbull Report: This report advocates an efficient and effective installation of sound
internal control systems and their constant reviews.
4. Hampell Report 1998: This report centered on general improvement of corporate governance with
emphasis that companies should obey legal, ethical, and moral principles.
5. Higgs Report 2003: This report talked extensively on the review of the role and effectiveness of
nonexecutive directors
6. Smith Report 2003: This report centered on the role of audit committees
6aN14, 6N15, 3cdM16, 2N16, 6N16, 1cM17, 6aM17, 7M17,

5N17, 6aN17, 2aM18, 2N18, 3N19, 3N20, 5aM21

3bN17, 2bcM18, 2N19, 3aM21

Legend:
M - May
N – November

Example:
1M19 stands for Question 1, May 2019.

3N18 stand for Question 3, November 2018.

 Thank You

GOD BLESS YOU ALL