You may understand about corporate governance & Ethics by this note

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Corporate Governance & Ethics
Chapter:06

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Corporate Governance & Ethics
1. Introduction to Corporate Governance
2. Principles of Good Governance
3. Corporate Governance Structures
4. Ethics in Business
5. Regulatory Environment
6. Corporate Social Responsibility (CSR)
7. Global Perspectives on Governance and Ethics
8. Future Trends in Corporate Governance and Ethics

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1. Introduction to Corporate Governance
 Corporate governance is a multifaceted system of rules, practices, and processes
by which a company is directed and controlled.
 It essentially defines the relationship between a company's management, its board
of directors, its shareholders, and other stakeholders (such as employees,
customers, suppliers, and the community).
 The overarching goal of corporate governance is to ensure that a company is run
ethically, transparently, and in a way that maximizes long-term value for its
shareholders while also considering the interests of all stakeholders.

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1.1 Definition
Corporate governance is the framework that guides how a company operates, makes
decisions, manages risks, and aligns its activities with its strategic objectives. It
establishes who has power, who makes decisions, and who is accountable.
“The system of rules, practices, and processes
by which a company is directed and
controlled.”

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1.2 Purpose
The primary purpose of corporate governance is to facilitate effective, entrepreneurial, and
prudent management that can deliver the long-term success of the company. It's about setting
the tone for ethical behaviour, promoting accountability, and building trust.

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2. Principles of Good Governance

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Accountability:
The board of directors and management are responsible for their decisions and the
company's performance. They must be able to justify their actions to shareholders and
other stakeholders.
Transparency:
Companies should provide clear, accurate, and timely disclosure of all material
information regarding their financial situation, performance, ownership, and
governance practices. This includes financial reports, annual reports, details about board
members, executive compensation, and significant events.

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Fairness (Equitable Treatment):
All shareholders, especially minority and foreign shareholders, should be treated
equitably and fairly. This means equal access to information, equal voting rights for
shares of the same class, and protection against abusive self-dealing or insider trading. It
also extends to treating all stakeholders (employees, customers, suppliers) with fairness
and respect.
Responsibility:
The board and management have a fiduciary duty to act in the best interests of the
company and its shareholders, taking into account long-term value creation and
sustainability. This encompasses not only financial performance but also ethical conduct
and consideration of environmental, social, and governance (ESG) factors.

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Risk Management:
Good governance involves establishing and maintaining robust systems for identifying,
assessing, monitoring, and mitigating various risks that could impact the company's
operations, finances, reputation, and long-term viability.
Independence:
The board should have a sufficient number of independent directors who can provide
objective judgment and challenge management decisions effectively, free from conflicts
of interest or undue influence.

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Integrity:
Companies should operate with honesty, strong ethical principles, and high standards of
conduct. This forms the foundation of trust with all stakeholders.
Communication/Engagement:
Effective communication channels should exist between the company and its
shareholders, as well as other stakeholders. This includes not just formal disclosures but
also proactive engagement to understand and address concerns.

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3. Corporate Governance Structures
Corporate governance structures define how a company is directed and controlled,
outlining the roles, responsibilities, and relationships between stakeholders like the
board, management, and shareholders.

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3.1 Key Components of a Corporate Governance Structure:
Board of Directors:
Elected by shareholders, the board sets the strategic direction, approves policies,
oversees management, and makes major decisions.
Shareholders:
Own company shares and can influence board decisions through voting on issues like
board appointments.
Management:
Led by the CEO, management manages day-to-day operations according to the board's
strategy and is accountable to both the board and shareholders.

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Internal Control Systems:
These are policies and practices that ensure the accuracy of financial reporting, asset
protection, and legal compliance.
Committees:
Boards often form committees (e.g., audit, compensation, nomination) to handle specific
tasks and provide focused oversight.

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3.2 Different Governance Structures:
Unitary Board:
 Combines management and oversight functions in a single board.
(This is the most common board structure in Anglo-American countries (e.g., USA, UK, Canada, Australia)).
Two-Tier Board:
 Separates supervisory and management boards for enhanced accountability.
(Prevalent in countries like Germany, the Netherlands, and some other Continental European and Asian nations.)
State-Owned Enterprises (SOEs):
 Government ownership significantly influences decision-making.
Family Businesses:
 Family members often hold key decision-making roles.

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4. Ethics in Business
Business ethics refers to the moral principles and values that guide a company's conduct in all
aspects of its operations, including its interactions with stakeholders, employees, customers,
and the environment.

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4.1 Core Principles
Honesty and Integrity: Businesses should be truthful in their dealings and maintain high
levels of integrity in all transactions.
Fairness: Treating all stakeholders equitably and without discrimination is crucial.
Transparency: Being open and honest about business practices and decisions fosters trust.
Social Responsibility: Businesses should consider the impact of their actions on society and
the environment.
Respect: Treating all individuals with respect, regardless of their position or background.
Accountability: Taking responsibility for actions and decisions, both positive and negative.
Loyalty: Demonstrating loyalty to employees, customers, and the company itself.

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4.2 Importance of Business Ethics
Building Trust: Ethical practices build trust with customers, investors, and the public.
Enhancing Reputation: A strong ethical reputation can lead to increased customer loyalty,
positive brand image, and attract investors.
Improving Employee Morale: Ethical workplaces foster a positive environment, leading to
higher employee satisfaction and productivity.
Reducing Legal Risks: Adhering to ethical principles can help businesses avoid legal issues
and penalties.
Promoting Long-Term Sustainability: Ethical businesses are more likely to thrive in the long
run by building strong relationships and demonstrating social responsibility.

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4.3 Examples of Ethical Issues in Business
1. Discrimination: Treating employees or customers unfairly based on factors like race,
gender, or religion.
2. Bribery and Corruption: Offering or accepting bribes to gain unfair advantages.
3. Insider Trading: Using confidential information for personal gain.
4. Environmental Issues: Ignoring or minimizing the environmental impact of business
operations.
5. Misleading Marketing: Making false or deceptive claims about products or services.

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5. Regulatory
Environment
 The regulatory environment refers to the system of laws, regulations, and guidelines that
govern a specific industry, area of activity, or organization.
 It encompasses the rules and policies set by government agencies and other bodies that
dictate how businesses and individuals can operate.
 Understanding the regulatory environment is crucial for compliance, risk management, and
ensuring fair competition and social welfare.

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 Corporate governance is regulated by a combination of laws, regulations, and best
practice codes, with the Securities and Exchange Commission (SEC) playing a key
role in oversight for listed companies and market intermediaries.
 The Companies Act No. 7 of 2007 provides the legal framework for company
formation and management, while the SEC's Corporate Governance Rules and the CA
Sri Lanka's Code of Best Practice offer guidance on best practices.
 The Central Bank of Sri Lanka (CBSL) also plays a crucial role in regulating corporate
governance within the banking sector.
5. Regulatory Environment...

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5.1 Key Regulatory Bodies
Central Bank of Sri Lanka (CBSL):
The CBSL is the apex monetary and regulatory authority in Sri Lanka, responsible for
overseeing the banking and financial sectors.
Telecommunications Regulatory Commission of Sri Lanka (TRCSL):
The TRCSL is responsible for regulating the telecommunications industry in Sri Lanka,
ensuring fair pricing, preventing anti-competitive behaviour, and promoting universal
service.

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Securities and Exchange Commission of Sri Lanka (SEC):
The SEC regulates the securities market, including the Colombo Stock Exchange (CSE), and
ensures that financial institutions comply with AML/CFT (Anti-Money Laundering/Combating
the Financing of Terrorism) measures.
National Medicines Regulatory Authority (NMRA):
The NMRA is responsible for regulating the registration, licensing, manufacturing, and
importation of medicines, medical devices, and borderline products (like food supplements).
Other notable regulatory bodies:
Include the Insurance Regulatory Commission of Sri Lanka (IRCSL), the Sri Lanka Accounting
and Auditing Standards Monitoring Board (SLAASMB), and the Consumer Affairs Authority.
5.1 Key Regulatory Bodies...

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6. Corporate Social Responsibility (CSR)
 Corporate Social Responsibility (CSR) is a business approach where companies integrate
social and environmental concerns into their operations and interactions with
stakeholders.
 It's about being accountable for the impact a company has on society and the
environment, going beyond just making a profit.
 Essentially, CSR aims for a "triple bottom line" approach, considering economic, social, and
environmental factors.

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 Self-regulation: CSR is a voluntary practice where companies set their own standards for
ethical and sustainable behaviour.
 Impact on society: CSR initiatives aim to positively impact society through various actions
like philanthropy, environmental sustainability, ethical labour practices, and community
involvement.
 Stakeholder engagement: Companies consider the expectations of all stakeholders,
including employees, customers, communities, and the environment.
 Integration into business operations: CSR is not just a separate program, but a way of
doing business that is integrated into the company's core operations and decision-making
6.1 Key aspects of CSR:

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6.2 Examples of CSR initiatives
Philanthropy:
Donating to charitable organizations, sponsoring community events, or providing grants.
Environmental sustainability:
Reducing carbon footprint, implementing waste reduction programs, using sustainable
sourcing, and investing in renewable energy.
Ethical labour practices:
Ensuring fair wages, safe working conditions, and promoting diversity and inclusion.
Community involvement:
Supporting local communities through volunteer programs, educational initiatives, and
partnerships.

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7. Global Perspectives on Governance and Ethics
Global perspectives on governance and ethics highlight the diverse approaches and challenges
in ensuring responsible and ethical conduct across different nations and cultures. These
perspectives encompass various aspects, including corporate governance, AI ethics, and the role
of international law and organizations in promoting global public goods.

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7.1 Key Areas of Focus
Corporate Governance:
This area examines how businesses operate ethically and responsibly, considering regional
and cultural differences in legal frameworks and governance codes. It explores the balance
between corporate interests and social responsibilities.
AI Governance and Ethics:
With the rapid advancement of artificial intelligence, there's a growing global conversation
about establishing ethical guidelines and governance structures for AI development and
implementation. This includes addressing potential biases, risks, and ensuring responsible use
across various sectors like healthcare, military, and criminal justice.

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7.1 Key Areas of Focus...
International Law and Organizations:
International law and treaties play a crucial role in establishing norms and standards for
global governance. Organizations like the UN work to address global challenges and promote
cooperation on issues like human rights, environmental protection, and economic
development.
Global Ethics:
This field explores universal values and principles that can guide ethical decision-making in a
globalized world. Philosophical approaches like universalism (shared human rights and
values) and utilitarianism (maximizing societal well-being) are often discussed in this context.

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7.1 Key Areas of Focus...
Professional Ethics:
While professional ethics provide specific guidelines for conduct within a particular field,
global ethics examines broader moral principles that apply across different cultures and
contexts.
Good Governance:
This involves establishing transparent, accountable, and participatory systems of governance
at all levels. It includes promoting public participation, combating corruption, and ensuring
the rule of law.

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7.2 Examples of Global Initiatives
China, Europe, India, and the US:
These regions are actively developing AI
governance and ethics initiatives, with varying
approaches and priorities.
The UN:
The UN plays a central role in promoting global
cooperation and addressing ethical dilemmas in
areas like humanitarian intervention and
environmental protection.

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8. Future Trends in Corporate Governance and Ethics
 Future trends in corporate governance and ethics are leaning towards increased
digitalization, a greater focus on sustainability and social responsibility, and a more
holistic, value-driven approach.
 Technology is being integrated to improve efficiency, transparency, and compliance, while
businesses are under growing pressure to demonstrate their commitment to
Environmental, Social, and Governance (ESG) factors.
 This includes a move beyond mere compliance to uphold the spirit of ethical practices,
with a greater emphasis on stakeholder engagement and long-term sustainability.

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8.1 Key future trends in corporate governance and ethics
1. Digital transformation for enhanced productivity:
 Technology has empowered experienced company secretaries in Sri Lanka to streamline
operations. Tools like Calendly allow seamless appointment scheduling, while platforms
such as Canva enable the creation of professional, branded communications.
 These tools save time and improve the efficiency of governance processes.
2. E-signature solutions revolutionising documentation:
 Gone are the days of manual paperwork. Tools like Adobe E-Signature and DocuSign
enable companies to handle legal documents securely and efficiently, transforming
compliance into a faster, more effective process.

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8.1 Key future trends in corporate governance and ethics...
3. AI integration for smarter workflows:
 AI-powered Solutions such as ChatGPT and Microsoft Copilot are becoming invaluable for
company secretaries.
 These tools assist in drafting and refining meeting minutes, resolutions, and other
governance documents, saving time and enhancing accuracy.
 Professional oversight, however, remains essential to ensure compliance with local
regulations.
4. Client relationship management tools:
 Building lasting relationships is essential for businesses. Platforms like HubSpot help track
client needs, update communications, and foster trust. These systems are indispensable for
maintaining strong, transparent relationships with clients.

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8.1 Key future trends in corporate governance and ethics...
5. Cloud-based bookkeeping for financial efficiency:
Cloud solutions like QuickBooks enable businesses to monitor income and expenses in real
time. Whether you are a local entrepreneur or exploring how a foreigner can register a
company in Sri Lanka, adopting such tools ensures streamlined financial management.
6. Rising emphasis on ESG practices:
With global trends focusing on Environmental, Social, and Governance (ESG) factors, Sri
Lankan businesses are aligning their practices to meet international standards. Technology
provides tools to monitor and report ESG metrics, enhancing corporate responsibility.

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8.1 Key future trends in corporate governance and ethics...
7. Cloud-based collaboration:
Cloud platforms enable secure collaboration and accessibility across teams, fostering
innovation while ensuring data security and efficiency.

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A Glimpse into the Future
E.g.: Department of the Registrar of Companies
 The registration and governance process was labour-intensive and paper-based. Drafting
documents involved careful manual effort using MS Word templates, and filing required
physically visiting the Registrar General of Companies in Colombo. Payments were made in
cash, and days of waiting were the norm before receiving certified copies.
Today, platforms like eROC have revolutionised company registration in Sri Lanka.
Digitalization has transformed filing processes, saving significant time and resources.
Meetings that once required travel now take place virtually via platforms such as MS
Teams, Zoom, or Google Meet, reducing costs and improving productivity.

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Technology will continue to redefine the corporate governance landscape. However,
challenges lie in the integration of AI-generated documents with local governance practices
and laws. Ensuring accuracy and legal compliance will require professional validation.
Additionally, the ability to keep up with rapid technological advancements will be critical for
staying competitive.
A Glimpse into the Future...

39. Voyage Continue...