This document provides an introduction to corporate governance. It defines key terms like corporation and corporate governance. It explains that a corporation is a legal entity created under state law that has distinct privileges and liabilities from its members, including limited liability. Corporate governance involves how corporations are directed and controlled. The document discusses shareholder and stakeholder models of corporate governance and factors that have increased the prominence of corporate governance, such as privatization, growth of pension funds, and mergers and takeovers.

1. PART III
CORPORATE GOVERNANCE

2. LESSON ONE
•INTRODUCTION TO CORPORATE
GOVERNANCE

3. INTRODUCTION
•This part of the course will teach the fundamental
theories and practice of corporate governance.
The aim of the course is to equip the student with
the key issues and knowledge on how modern
organizations are governed.

4. INTRODUCTION CONT’D
•It covers the purpose of the corporation,
governance dimensions and elements, the
theories of corporate governance and
boards of directors

5. INTRODUCTION
• How corporations or enterprises are governed is the main determinant
of their survival. Firms without good governance are likely to become
extinct with dire consequences for the economy. This introductory
lesson to the course seeks to explain the key concepts in corporate
governance. At the end of the lesson the student should be able to:
• Define corporate governance
• Explain the key issues in corporate governance
• Identify the key factors that have accounted for the prominence of
corporate
• Explain the benefits of good corporate governance

6. DEFINITION OF CORPORATION
•A corporation is a legal entity created under
the laws of a state that has privileges and
liabilities that are distinct from those of its
members. One distinguishing feature of a
corporation is limited liability.

7. Definition of Corporation Cont’d
The limited liability feature of a corporation
implies that if a corporation fails, shareholders may
lose their investments, and employees may lose
their jobs, but neither will be liable for the debts of
the corporation.

8. Definition of corporation cont’d
•Legally, corporations are recognized as artificial human
beings having rights and responsibilities like natural
persons. Conceptually, they are deemed immortal but
they can die when they are dissolved either on account
of statutory operation, order of court (insolvency) or
voluntary action initiated by shareholders.

9. Definition of corporation cont’d
•Insolvency action initiated by creditors of a
corporation may also result in its extinction.
•Insolvency occurs when a corporation is unable to
honor its debt obligations.
•This compels creditors to initiate insolvency to
force the liquidation and dissolution of the
corporation under court order.

10. Definition of Corporation cont’d
•Notwithstanding the differences in corporate law in
many jurisdictions, four main features separate
corporations from other business entities:
•Legal personality
•Limited liability
•Transferable shares
•Centralized management under a board structure

11. Definition of Corporation Cont’d
•Corporate governance is discussed in the context
of corporations. The course is about decisions
made by corporations and how corporations
resolve the numerous conflicts inherent in their
operations. The next section defines corporate
governance.

12. DEFINITION OF CORPORATE GOVERNANCE
Corporate governance is a multi-faceted concept. It has
many definitions which definitions can be classified into
regulatory, stakeholder, and agency conflict categories.
The regulatory definition states that corporate
governance is the system by which companies are
controlled and directed (Bosch 1993).

13. Definition of Corporate Governance Cont’d
• Regulatory Definition
•Organization for Economic Cooperation and
Development (OECD) defines corporate
governance as the system by which firms are
directed and controlled.

14. Definition of Corporate Governance cont’d
The corporate governance structure stipulates the
distribution of rights and responsibilities among
different participants in the corporation, such as,
the board, managers, shareholders and other
stakeholders and specifies out the rules and
procedures for making decisions in corporate
affairs.

15. Definition of Corporate Governance cont’d
•The system also provides the structure through
which the company objectives are set and the
means of attaining those objectives and
monitoring performance.

16. Definition of Corporate Governance cont’d
•The regulatory definition of OECD shows corporate
governance as involving the relationship of a company
to its shareholders and to society; the promotion of
fairness, transparency and accountability; reference to
mechanisms that are used to "govern" managers and to
ensure that actions taken are consistent with the
interests of key stakeholder groups.

17. Definition of Corporate Governance cont’d
The fundamental points of interest in corporate
governance, therefore, include issues of
transparency and accountability, the legal and
regulatory environment, appropriate risk
management measures, information flows and the
responsibility of senior management and the board
of directors.

18. Definition of Corporate Governance cont’d
Corporate governance is the set of processes,
customs, policies, laws and institutions affecting
how a corporation or firm is directed,
administered or controlled. It also includes the
relationships among stakeholders of a corporate
institution or firm.

19. Definition of Corporate Governance Cont’d
•These stakeholders are shareholders, the board of
directors, employees, customers, creditors, suppliers
and the community at large. The pivotal theme of
corporate governance is accountability through
mechanisms that abate or remove the agency
problem (or principal-agent problem).

20. Definition of Corporate Governance cont’d
•Gillan and Starks (1998) define corporate governance as
the system of laws, rules, and factors that control
operations at a company. Regardless of the particular
definition employed, researchers often see corporate
governance mechanisms as belonging to one of two
categories: those internal to firms and those external to
firms (Gillan, 2006).

21. Definition of Corporate Governance cont’d
•Ferrell et al. (2011) define corporate governance as the
formal system of oversight, accountability, and control for
organizational decisions and resources. Oversight relates
to a system of checks and balances that limit employees’
and managers’ opportunities to deviate from policies and
codes of conduct.

22. Definition of Corporate Governance cont’d
•Accountability relates to how well the
content of workplace decisions is aligned
with a firm’s stated strategic direction.
Control involves the process of auditing and
improving organizational decisions and
actions.

23. Definition of Corporate Governance cont’d
•Corporate governance establishes fundamental systems
and processes for oversight, accountability, and control.
This requires investigating, disciplining and planning for
recovery and continuous improvement. Effective
corporate governance creates compliance and values so
that employees feel that integrity is at the core
competitiveness.
•

24. Definition of Corporate Governance cont’d
• Stakeholder Definition of Corporate Governance
•The stakeholder definition of corporate governance
refers to the process by which firms respond to the
rights and concerns of stakeholders (Demb and
Neubauer 1992). Siladi (2006) states that corporate
governance mediates the relationship between the
corporation and its stakeholders.

25. Definition of Corporate Governance cont’d
•According to Daily, Dalton, and Cannella (2003)
the governance of companies lies with boards of
directors whose primary responsibility is to use all
possible resources to resolve conflicts among the
stakeholders in the company

26. Definition of Corporate Governance cont’d
•John and Senbet (1998) describe corporate governance as the
mechanism used by stakeholders to protect their interest by
exercising control over management and corporate insiders.
Turnbull (1997) defines corporate governance as all of the
influences that affect the institutional process.

27. Definition of Corporate Governance cont’d
•Corporate governance deals with mechanisms by
which stakeholders of a corporation exercise
control over corporate insiders and management
such that their interests are protected (John and
Senbet, 1998).

28. Definition of Corporate Governance cont’d
•The primary reason for corporate governance is the
separation of ownership and control, and the agency
problems it engenders (John and Senbet, 1998). John
and Senbet, (1998) views corporate governance in the
context of control mechanisms designed for efficient
operation of a corporation on behalf of its stakeholders.

29. Definition of Corporate Governance cont’d
•The control mechanisms themselves are occasioned by
separation of ownership and control that is prevalent in
a market economy. Thus, corporate governance is a
means by which various stakeholders exert control over
a corporation by exercising certain rights as established
in the existing legal and regulatory frameworks as well
as corporate bylaws (John and Senbet, 1998).

30. Definition of Corporate Governance cont’d
Agency Conflict Definition
•The agency conflict definition of corporate governance
focuses on the divergence of the interests for both
principals and agents. The study by Shleifer and Vishny
(1997) defines corporate governance as the mechanism in
which the suppliers of finance can assure themselves of
receiving some return on their investment.

31. Definition of Corporate Governance cont’d
•Fan (2004) refers to corporate governance as
the mechanisms and procedures that address
the agency problem between managers and
owners.

32. Definition of Corporate Governance cont’d
•In line with the agency definition of corporate
governance, Aldamen (2010) defines corporate
governance as the methods employed by the
owners via the board of directors to mitigate the
debt agency conflict and to align the interests of
managers and owners with those of the debt-
holders.

33. Definition of Corporate Governance cont’d
•Corporate governance is concerned with the
resolution of collective action problems among
dispersed investors and the reconciliation of
conflicts of interest between various corporate
claimholders (Becht et al, 2005)

34. Definition of Corporate Governance Cont’d
•In the publication of the Principles for Corporate
Governance in the Commonwealth by the
Commonwealth Association for Corporate Governance,
corporate governance has been described as “corporate
governance is essentially about leadership; for efficiency,
for probity, with responsibility, and leadership which is
transparent and accountable”.

35. DISTINCTION BETWEEN MANAGEMENT AND
GOVERNANCE
•Management refers to the operational aspect of running a
company by a hierarchal system of accountability while
governance conveys the strategic responsibilities that lie with the
board of directors (Ziolkowski 2005). In the words of Professor
Colin Tricker who originally coined the term corporate
governance back in 1984, “if management is about running
business, governance is about seeing that it is run properly.”

36. MODELS OF CORPORATE GOVERNANCE
•Two main models:
•Shareholder model
•Stakeholder model

37. SHAREHOLDER MODEL
•The shareholder model of corporate governance is
founded in classical economic precepts including the
maximization of wealth for investors and owners. This
orientation drives management decisions towards what
is in the best interest of investors. Figure 1.1 represents
shareholder orientation of corporate governance.

38. Shareholder/Balance Sheet Model of Corporate
Governance
•
Internal
External
Board of Directors
Management
Debt
Assets
Equity
Debt holders
Shareholders

39. Shareholder Model of Governance
•Figure 1.1 indicates that internal and external
governance structures in public limited companies. The
left-hand side of the diagram represents the basics of
internal governance. The board of directors is at the
apex of the internal control systems and is responsible
for overseeing the activities of senior management.

40. Shareholder Model cont’d
•It is the board’s responsibility to hire, fire and compensate senior
management. Senior management as the agents of shareholders
are tasked with the responsibility of deciding which assets to
invest and how to finance the investments (Gillan, 2006). The
right-hand side of Figure 1.1 represents the external dimension of
corporate governance which comes from the need for the firm to
raise external capital to finance its operations.

41. Shareholder Model Cont’d
•It shows that in a public company there is separation of
ownership and control. The owners of a public company
are not the managers. This creates the demand for
corporate governance structures. The suppliers of capital
(shareholders and debt holders) rely on corporate
governance structures to ensure that they get a return on
their investment in the firm (Shleifer and Vishny, 1997).

42. Shareholder Model Cont’d
•As the diagram depicts, shareholders as the
residual claimants to the assets (shareholders get
their share of assets during company liquidation
when creditors and debt holders have been served)
are vested with the right to elect board members of
the firm.

43. STAKEHOLDER MODEL OF CORPORATE
GOVERNANCE
It must be stated that corporate governance does not
involve only the board of directors, management, debt
holders and shareholders as the shareholder model
argues. There are other stakeholders who have stakes in
how the firm is managed. These include employees,
customers, suppliers, government and communities.

44. Stakeholder Model cont’d
•The stakeholder model of corporate governance argues
that although a company has a responsibility for economic
success and viability, it must also answer to other parties
including employees, suppliers, government agencies,
communities and groups with which it relates. The model
presumes a collaborative and relational approach to
business and its constituents.

45. Stakeholder Model cont’d
 For lack of time, the model submits that management of the firm
should focus attention on primary stakeholders. Management
must identify primary stakeholders and implement appropriate
corporate governance mechanisms to promote the development
of long-term relationships. Primary stakeholders include
stockholders, suppliers, customers, employees, the government
and the community.

46. Stakeholder Model cont’d
It emphasizes a corporate governance system that
considers stakeholder welfare in tandem with
corporate needs and interests. Many businesses have
evolved into the stakeholder model as a result of
government initiatives, consumer activism, industry
activism and other external forces (Ferrell et al.,
2011).

47. Stakeholder Model cont’d
Figure 1.2 below expands the Balance Sheet Model of the
firm by incorporating these stakeholders (i.e. those who
have actual or potential interests in the operations of the
firm) into the corporate governance model. These
stakeholders are the community, the political
environment (politics), laws and regulations and the
markets of the firm.

48. Stakeholder Model
•The argument is that corporate governance
structures are influenced by the interests of
these stakeholders. The model further argues
that the firm is the nexus of contracts.

49. Stakeholder Model
Law/Regulation
Politics
Markets
Culture Communities
Figure 1. 2. Corporate Governance: Beyond the Balance Sheet Model. Adapted from Gillan, S.L.
(2006) Recent Developments in Corporate Governance: An Overview, Journal of Corporate
Finance, 12, pp.381– 402
Firm=nexus of contracts
Suppliers
Employees
Shareholders
Customers Creditors
Customers
Management
Board of Directors
Debt
Assets
Equity

50. Stakeholder Model cont’d
•In Figure 1.2, Gillan (2006) expands the balance sheet
model by diving both internal and external governance
structures into five categories. Five elements that
constitute internal governance are:
•The board of directors (their role, structure, and
incentives),

51. Stakeholder Model Cont’d
•The board of directors (their role, structure, and
incentives),
•Managerial incentives: Managerial incentives can
be in the form of ownership of shares in the firm
or a compensation package.
•Capital Structure,

52. Stakeholder Model Cont’d
•Bylaw and Charter Provisions (or
antitakeover measures),
•Internal control systems

53. Stakeholder Model Cont’d
•Five groups forming the external governance are:
•Law and Regulation, specifically federal law, self
regulatory organizations, and state law;
•Markets 1 (including capital markets, the market for
corporate control, labor markets, and product markets);

54. Stakeholder Model Cont’d
•Markets 2: This emphasizes providers of capital market
information (such as that provided by credit, equity, and
governance analysts);
•Markets 3: It focuses on accounting, financial and legal services
from parties external to the firm (including auditing, directors’
and officers’ liability insurance, and investment banking advice);
and
•Private sources of external oversight, particularly the media and
external lawsuits.
•

55. FACTORS THAT HAVE ACCOUNTED FOR PROMINENCE
OF CORPORATE GOVERNANCE
• Corporate governance has become popular for the past two
decades due to a lot of factors. Five of these factors are:
•The world-wide privatization wave: The world-wide
wave has contributed significantly to the prominence of
corporate governance. Latin America, Western Europe, Asia and
the former Soviet Union have all experienced the privatization
phenomenon.

56. Factors Accounting for Governance prominence cont’d
•It is estimated that, on average, since 1990 OECD
privatization initiatives have chalked proceeds
equivalent to 2.7% of GDP and in some cases up to 27%
of country GDP. The wave began in the United Kingdom
(UK) in the early 1990s and since 1995 Australia, Italy,
France, Japan and Spain have recorded 60% of total
privatization revenues.

57. Factors Accounting for Governance prominence cont’d
Pension funds and active investors: The increase in
defined contribution pension plans has resulted in an
increasing fraction of household savings channeled
through mutual and pension funds. This has created a
constituency of investors that is large and powerful
enough to influence corporate governance.

58. Factors Accounting for Governance prominence
cont’d
As institutional investors, pension funds have become
more powerful especially in OECD countries over the
last two decades due to their large financial assets
holdings and are thus actively influencing corporate
governance.

59. Factors Accounting for Governance prominence
cont’d
Mergers and Takeovers: Mergers and takeovers have also
contributed to the prominence of corporate governance.
For instance, the hostile takeover wave in the USA in the
1980s as well as one in Europe in the 1990s is worthy of
mention. The successful $199 billion cross-border hostile
bid of Vodafone for Mannesmann in 2000 was the largest
ever to take place in Europe.

60. Factors Accounting for Governance prominence cont’d
Deregulation and Capital Market Integration: Corporate
governance rules have been promoted in part as a way of
protecting and encouraging foreign investment in Eastern Europe,
Europe, Asia and other emerging markets. The greater integration
of world capital markets (especially in the European Union
following the introduction of the Euro) and the growth in equity
capital throughout the 1990s have also been a significant factor in
in rejuvenating interest in corporate governance issues.

61. Factors Accounting for Governance prominence
cont’d
The 1998 Russia/East Asia/Brazil Crisis: The East Asia crisis has
brought to light the poor protections investors in emerging
markets have and beamed the spotlight on the weak corporate
governance practices in these markets. The crisis has also
triggered a reassessment of the Asian system of industrial
organization and finance around highly centralized and
hierarchical industrial groups controlled by management and
large investors.

62. Factors Accounting for Governance prominence
cont’d
Scandals and failures at major USA corporations: The
factors enumerated above as accounting for the
prominence of corporate governance have played a less
important role in making corporate governance
prominent in the USA. Corporate governance is popular
in the USA following the discovery of scandals that led to
the collapse of most corporate giants.

63. FIVE MYTHS OF CORPORATE GOVERNANCE
•The structure of the board = the quality of the board: It is commonly
accepted that the structure of the board of directors reveals the
quality of the board. Thus, governance experts evaluate a board by
putting premium on its observable attributes such as whether or not
it is chaired by an independent person, the number of outside
directors on it, the independence of the directors on the board, the
independence of its committees, size, diversity, the number of ‘busy’
directors (directors who serve on multiple boards),

64. Myths of Governance cont’d
•and whether the board is interlocked (an interlocked board is one in
which senior executives sit reciprocally on each other’s boards).
However, research has shown that these board attributes have little
bearing on governance quality. Instead research has shown that
board quality depends on qualification and engagement of
individual directors, boardroom dynamics, and the processes by
which the board fulfills its duties.

65. Myths of Governance cont’d
•CEOs are systematically overpaid: Some experts of
corporate governance erroneously believe that CEOs of
corporations are overpaid, forgetting that CEOs are
inundated with pressures in their jobs for which reason
they need to be adequately compensated.

66. Myths of Governance cont’d
•Companies are prepared for a CEO succession: Another myth in
corporate governance is that the board of directors is prepared
to replace the CEO in event of a transition. Most companies do
not have operational succession plans to be able to immediately
replace their CEOs when they are asked to do so.

67. Myths of Governance cont’d
•Regulation improves corporate governance: Some corporate
governance experts erroneously believe that the passing of
legislations improves corporate governance. However, in reality
this is not the case. For instance, it is believed that the
promulgation of Sarbanes-Oxley Act of 2002 and the Dodd-
Frank Act of 2010 in the USA has not contributed significantly to
corporate governance in the USA.

68. Myths of Governance cont’d
•Best practices are the solution: Some corporate governance experts
erroneously believe that best practices exist, which if uniformly
observed, could lead to better oversight and performance. In reality,
best practices do not exist. Corporations are systems. Their success
depends on their external environment, the interactions of their
constituents, and the processes by which the corporate strategy is
planned and executed.

69. CORPORATE GOVERNANCE FRAMEWORK IN GHANA
•In Ghana corporate governance is regulated by the following
regulations:
•Companies Code 1963 ACT 179 regulating all companies;
•The Securities Industry Law (PNDCL 333) and the Securities
Industry (Amendment) ACT 2000 (ACT 590) regulating stock
exchanges. Investment advisors, securities dealers; collective
investment schemes that registered under the Securities
Exchange Commission;

70. Governance Framework in Cont’d
•Ghana Stock Exchange’s Listing Regulations 1990(L.I.
590) regulating listed companies;
•Bank of Ghana Regulations regulating bank and non-
bank financial institutions; and
•the National Insurance Commission regulating all
insurance companies in Ghana

71. BENEFITS OF CORPORATE GOVERNANCE
• Corporate governance has the following benefits for an entity:
• Good corporate governance ensures corporate success and economic
growth.
• Strong corporate governance maintains investors’ confidence, as a result of
which, company can raise capital efficiently and effectively.
• It lowers the capital cost.
• It positively impacts the share price of a firm

72. Benefits of Governance cont’d
• It provides proper inducement to the owners as well as managers to
achieve objectives that are in the best interests of shareholders and the
organization.
• Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
• It helps in brand formation and development.
• It ensures organization is managed in a manner that fits the best interests
of all

73. Benefits of Governance cont’d
•Corporate governance bridges the information gap, improves the
likelihood of monitoring management and increases the disclosure of
value relevant information (Anderson et al. 2004; Pittman and Fortin
2004). Consequently, companies experience a reduction in agency
conflicts and information asymmetries which in turn contribute to
decreasing default and information risk.