Corporate governance involves directing and controlling corporations through specifying the distribution of rights and responsibilities among stakeholders such as boards, managers, shareholders, and others. It establishes rules and procedures for decision making regarding corporate affairs and provides the structure to set objectives, attain them, and monitor performance. Key aspects of corporate governance include promoting efficient resource use and investor trust, as well as maintaining integrity, managing risk, and protecting investor rights through transparency and independence.

1. 1
What is Corporate Governance?What is Corporate Governance?

2. 2
Corporate Governance - DefinitionCorporate Governance - Definition
• the system by which business corporations are directed andthe system by which business corporations are directed and
controlledcontrolled
• specifies the distribution of rights and responsibilities amongspecifies the distribution of rights and responsibilities among
different participants in the corporation, such as the board,different participants in the corporation, such as the board,
managers, shareholders and other stakeholdersmanagers, shareholders and other stakeholders
• spells out the rules and procedures for making decisions onspells out the rules and procedures for making decisions on
corporate affairscorporate affairs
• provides the structure through which the company objectivesprovides the structure through which the company objectives
are set, and the means of attaining those objectives andare set, and the means of attaining those objectives and
monitoring performancemonitoring performance

3. 3
Corporate GovernanceCorporate Governance
• Promote the efficient use of scarce resourcesPromote the efficient use of scarce resources
• Promote the trust of investorsPromote the trust of investors
• Good corporate governance has a positive linkGood corporate governance has a positive link
to economic development and good corporateto economic development and good corporate
performanceperformance
• Funds will flow to entities which are seen toFunds will flow to entities which are seen to
have internationally accepted standards ofhave internationally accepted standards of
corporate governancecorporate governance

4. 4
Corporate GovernanceCorporate Governance
• Corporate Governance also plays an importantCorporate Governance also plays an important
role in maintaining corporate integrity androle in maintaining corporate integrity and
managing the risk of corporate fraud,managing the risk of corporate fraud,
combating against management misconductcombating against management misconduct
and corruptionand corruption

5. 5
Corporate GovernanceCorporate Governance
• Investors are not willing to invest inInvestors are not willing to invest in
countries/companies that are corrupt, prone to fraud,countries/companies that are corrupt, prone to fraud,
poorly managed and lacking sufficient protection forpoorly managed and lacking sufficient protection for
investors’ rightsinvestors’ rights
• Securities and company law protection may help, butSecurities and company law protection may help, but
not enoughnot enough
• Corporate Governance supplements the legalCorporate Governance supplements the legal
frameworkframework

6. 6
Corporate GovernanceCorporate Governance
Why is it important?Why is it important?
• Proliferation of financial scandals and crisisProliferation of financial scandals and crisis
• Loss of trust of investorsLoss of trust of investors
• Globalization lead to increasing cross-borderGlobalization lead to increasing cross-border
investment opportunities but investors may notinvestment opportunities but investors may not
have knowledge about the regulatoryhave knowledge about the regulatory
framework of overseas investeesframework of overseas investees

7. OBJECTIVE OF CORPORATEOBJECTIVE OF CORPORATE
GOVERNANCEGOVERNANCE
a) TO BUILD UP AN ENVIRONMENT OFa) TO BUILD UP AN ENVIRONMENT OF TRUST ANDTRUST AND
CONFIDENCECONFIDENCE AMONGST THOSE HAVING COMPETING ANDAMONGST THOSE HAVING COMPETING AND
CONFLICTING INTERESTCONFLICTING INTEREST
b) TO ENHANCEb) TO ENHANCE SHAREHOLDERS’ VALUESHAREHOLDERS’ VALUE AND PROTECT THEAND PROTECT THE
INTEREST OF OTHERINTEREST OF OTHER STAKEHOLDERSSTAKEHOLDERS BY ENHANCING THEBY ENHANCING THE
CORPORATE PERFORMANCE AND ACCOUNTABILITYCORPORATE PERFORMANCE AND ACCOUNTABILITY
7

8. • HONESTY.HONESTY. CCorporate communications with both internalorporate communications with both internal
and external audiences, including public financial reports,and external audiences, including public financial reports,
should be accurate, fair, transparent, and trustworthyshould be accurate, fair, transparent, and trustworthy
• RESIELNCE.RESIELNCE. A resilient corporate governance structure isA resilient corporate governance structure is
sustainable and enduring in the sense that it will easilysustainable and enduring in the sense that it will easily
recuperate from setbacks and abuses.recuperate from setbacks and abuses.
• RESPONSIVENESS.RESPONSIVENESS. Effective corporate governanceEffective corporate governance
responsive to the interests and desires of all stakeholders,responsive to the interests and desires of all stakeholders,
as well as responsive to emerging initiatives, and changes inas well as responsive to emerging initiatives, and changes in
political, regulatory, social, and environmental issues.political, regulatory, social, and environmental issues.
• TRANSPARENCY.TRANSPARENCY. Transparency means that the companyTransparency means that the company
is not hiding relevant information, and disclosures are fair,is not hiding relevant information, and disclosures are fair,
accurate, and reliable.accurate, and reliable.
Corporate GovernanceCorporate Governance
PrinciplesPrinciples

9. 1.1. OVERSIGHT FUNCTION.OVERSIGHT FUNCTION. The board of directors shouldThe board of directors should
provideprovide strategic advice to managementstrategic advice to management and overseeand oversee
managerial performance, yet avoid micromanaging.managerial performance, yet avoid micromanaging.
2.2. MANAGERIAL FUNCTION.MANAGERIAL FUNCTION. The effectiveness of thisThe effectiveness of this
function depends on thefunction depends on the alignment of management’salignment of management’s
interests with those of shareholders.interests with those of shareholders.
3.3. COMPLIANCE FUNCTION.COMPLIANCE FUNCTION. The set of laws,The set of laws, regulations,regulations,
rules, standards, and best practicesrules, standards, and best practices developed by state anddeveloped by state and
federal legislators, regulators, standard-setting bodies, andfederal legislators, regulators, standard-setting bodies, and
professional organizations to create a complianceprofessional organizations to create a compliance
framework for public companies in which to operate andframework for public companies in which to operate and
achieve their goals.achieve their goals.
Corporate GovernanceCorporate Governance
FunctionsFunctions

10. 4.4. INTERNAL AUDIT FUNCTION.INTERNAL AUDIT FUNCTION. Assurance and consultingAssurance and consulting
services to the company in the areas ofservices to the company in the areas of operational efficiency,operational efficiency,
risk management, internal controls,risk management, internal controls, financial reporting, andfinancial reporting, and
governance processes.governance processes.
5.5. LEGAL AND FINANCIAL ADVISORY FUNDTIONS.LEGAL AND FINANCIAL ADVISORY FUNDTIONS. LegalLegal
advice and assists the company, its directors, officers, andadvice and assists the company, its directors, officers, and
employees in complying with applicable laws and other legalemployees in complying with applicable laws and other legal
obligations and fiduciary duties.obligations and fiduciary duties.
6.6. EXTERNAL AUDIT FUNCTION.EXTERNAL AUDIT FUNCTION. External auditors lend credibilityExternal auditors lend credibility
to the company’s financial reports and thus add value to itsto the company’s financial reports and thus add value to its
corporate governance through their integrated audit of bothcorporate governance through their integrated audit of both
internal control over financial reporting and financial statements.internal control over financial reporting and financial statements.
7.7. MONITORING FUNCTION.MONITORING FUNCTION. Shareholders, particularly institutionalShareholders, particularly institutional
shareholders, empowered to elect and, if warranted, removeshareholders, empowered to elect and, if warranted, remove
directors.directors.
Corporate GovernanceCorporate Governance
FunctionsFunctions

11. • The corporate governance structure isThe corporate governance structure is
shaped byshaped by internal and externalinternal and external
governance mechanismsgovernance mechanisms, as well as policy, as well as policy
interventions through regulations.interventions through regulations.
• Both internal and external corporateBoth internal and external corporate
governance mechanisms of the companygovernance mechanisms of the company
have evolved over time to monitor, bondhave evolved over time to monitor, bond
and control management.and control management.
Corporate GovernanceCorporate Governance
MechanismsMechanisms

12. Four PillarsFour Pillars
of Corporate Governanceof Corporate Governance
• AccountabilityAccountability
• FairnessFairness
• TransparencyTransparency
• IndependenceIndependence

13. AccountabilityAccountability
• Ensure that management is accountable to theEnsure that management is accountable to the
BoardBoard
• Ensure that the Board is accountable toEnsure that the Board is accountable to
shareholdersshareholders

14. FairnessFairness
• Protect Shareholders rightsProtect Shareholders rights
• Treat all shareholders including minorities, equitablyTreat all shareholders including minorities, equitably
• Provide effective redress for violationsProvide effective redress for violations

15. TransparencyTransparency
Ensure timely, accurate disclosure on all materialEnsure timely, accurate disclosure on all material
matters, including the financial situation, performance,matters, including the financial situation, performance,
ownership and corporate governanceownership and corporate governance

16. IndependenceIndependence
• Procedures and structures are in place so as toProcedures and structures are in place so as to
minimise, or avoid completely conflicts of interestminimise, or avoid completely conflicts of interest
• Independent Directors and Advisers i.e. free from theIndependent Directors and Advisers i.e. free from the
influence of othersinfluence of others

17. Corporate GovernanceCorporate Governance
• Does good governance matter?Does good governance matter?
• Certainly, as in the case of Enron, many of theCertainly, as in the case of Enron, many of the
improprieties were overlooked as long as theimproprieties were overlooked as long as the
company’s share price continued to risecompany’s share price continued to rise
• However, after the fall of Enron, and theHowever, after the fall of Enron, and the
substantial losses sustained by investors,substantial losses sustained by investors,
employees and society as a whole, many wouldemployees and society as a whole, many would
say that corporate governancesay that corporate governance
matters a lotmatters a lot

18. 0%
5%
10%
15%
20%
25%
30%
35%
40%
M
orocco
Egypt
RussiaTurkeyIndonesia
ChinaArgentinaVenezuela
BrazilPoland
IndiaM
alaysia
Philippines
South
Africa
JapanSingaporeColom
bia
South
KoreaThailandM
exicoTaiw
an
Chile
Italy
Sw
itzerland
U.S.
SpainGerm
anyFranceSw
eden
U.K.Canada
The Value of Good GovernanceThe Value of Good Governance
Source: “McKinsey Global Investor Opinion Survey on Corporate Governance, 2002,” McKinsey & Company, July 2002.
How much more (what premium) would you be willing to pay for a share in a ‘good
governance’ company in the following countries?

19. Potential Responses to ShareholderPotential Responses to Shareholder
DissatisfactionDissatisfaction
Shareholder
Dissatisfaction
Initiate a Takeover Maximum Threat
Change Management Shareholder Activism
Sell the Shares Walk-Away
Remain Quietly Disgruntled The Past
What counts is that the management of a publicly-quoted company, and its
board of directors, know that the company can become the subject of a hostile
takeover bid if they fail to perform.
Possible Action Popular Term

20. Mini Case: The Failure of CorporateMini Case: The Failure of Corporate
Governance at EnronGovernance at Enron
• On December 2, 2001, Enron Corporation filed for bankruptcyOn December 2, 2001, Enron Corporation filed for bankruptcy
protection under Chapter 11protection under Chapter 11
• Enron failed as a result of a complex combination of businessEnron failed as a result of a complex combination of business
and governance failuresand governance failures
• How did the system allow this to happen?How did the system allow this to happen?
• Why did the many structures and safeguards within the U.S.Why did the many structures and safeguards within the U.S.
corporate governance system not catch, stop, or prevent thecorporate governance system not catch, stop, or prevent the
failure of Enron?failure of Enron?
• Please review the case, and the following exhibit in preparation for the casePlease review the case, and the following exhibit in preparation for the case
questions.questions.

21. Enron’s Earnings by SegmentEnron’s Earnings by Segment
(IBIT, millions)(IBIT, millions)
-$500
$0
$500
$1,000
$1,500
$2,000
$2,500
1996 1997 1998 1999 2000
Transp & Dist Wholesale Energy Retail Energy Broadband E&P Other
* IBIT is income before interest and taxes

22. Mini Case Questions: The Failure ofMini Case Questions: The Failure of
Corporate Governance at EnronCorporate Governance at Enron
• Which parts of the corporate governance system (internal andWhich parts of the corporate governance system (internal and
external) failed Enron the most?external) failed Enron the most?
• How could individual stakeholders and/or components of theHow could individual stakeholders and/or components of the
corporate governance system have prevented the problems atcorporate governance system have prevented the problems at
Enron? How could they have acted to resolve these problems?Enron? How could they have acted to resolve these problems?
• Do you believe this was an isolated incident, or are we to expectDo you believe this was an isolated incident, or are we to expect
more collapses like Enron’s in the future? Why?more collapses like Enron’s in the future? Why?
• Will recent changes in Corporate Governance law help?Will recent changes in Corporate Governance law help?

23. Stakeholder approach toStakeholder approach to
Corporate governanceCorporate governance

24. Bit of DefinitionsBit of Definitions
StakeStake
= an interest or a share in an undertakingan interest or a share in an undertaking
(i.e. legal right, moral right, ownership)(i.e. legal right, moral right, ownership)
StakeholderStakeholder
= A group or an individual, that has either aA group or an individual, that has either a
materialmaterial oror immaterial stakeimmaterial stake in the corporationin the corporation
(R. Freeman (1984): Strategic Management. A Stakeholder Approach)(R. Freeman (1984): Strategic Management. A Stakeholder Approach)

25. CorporationSuppliers Customers
TheThe production view of the firmproduction view of the firm

26. TheThe managerial view of the firmmanagerial view of the firm
Employees
Corporation
Shareholders
Suppliers Customers

27. The stakeholder view of the firmThe stakeholder view of the firm
Enviromental
groups
Local
communities
CreditorsGovernment
Suppliers Customers
Employees
Corporation
Shareholders

28. Classification and Division ofClassification and Division of
stakeholdersstakeholders
ClassificationClassification
 Generic groupsGeneric groups of stakeholdersof stakeholders
Specific groupsSpecific groups of stakeholdersof stakeholders
DivisionDivision
 InternalInternal vs.vs. ExternalExternal stakeholdersstakeholders
 PrimaryPrimary vs.vs. SecondarySecondary stakeholdersstakeholders

29. Internal vs. External stakeholdersInternal vs. External stakeholders
Enviromental
groups
Local
communities
CreditorsGovernment
Suppliers Customers
Employees
Corporation
Shareholders

30. Enviromental
groups
Local
communities
CreditorsGovernment
Suppliers Customers
Primary vs. Secondary stakeholderPrimary vs. Secondary stakeholder
groupsgroups
Employees
Corporation
Shareholders

31. EmployeesEmployees
 StakeStake
 livelihood in the present daylivelihood in the present day
 pensions ensured by the company’s pension schemepensions ensured by the company’s pension scheme
 whistle-blowing procedureswhistle-blowing procedures
 training programs, working conditions, equal opportunities,training programs, working conditions, equal opportunities,
employees share schemeemployees share scheme
 trade unionstrade unions

32. CreditorsCreditors
 StakeStake
 the company’s ability to repay their debtsthe company’s ability to repay their debts
 to maintain the confidence of these providersto maintain the confidence of these providers

33. SuppliersSuppliers
 StakeStake
 to be paid in a timely fashion for the goods and services theyto be paid in a timely fashion for the goods and services they
suppliedsupplied
 interest in the continuance of the companyinterest in the continuance of the company
 treat their suppliers with understanding and ensure thattreat their suppliers with understanding and ensure that
they settle their debts on timethey settle their debts on time

34. Local communitiesLocal communities
 Stake - in the companies which operate in their regionStake - in the companies which operate in their region
 in the interest of sustained employment levelsin the interest of sustained employment levels
 act in an environmentally friendly wayact in an environmentally friendly way

35. Environmental groupsEnvironmental groups
 StakeStake
 the companies operate to both national and internationalthe companies operate to both national and international
environmental standards (CERES Principles and the Globalenvironmental standards (CERES Principles and the Global
Reporting Initiative (GRI) Sustainability Guidelines)Reporting Initiative (GRI) Sustainability Guidelines)
 environmentally responsible company will not subject itsenvironmentally responsible company will not subject its
workers to potentially hazardous processes withoutworkers to potentially hazardous processes without
adequate protection, will not pollute the environment, andadequate protection, will not pollute the environment, and
will, where possible, use recyclable materials or engage in awill, where possible, use recyclable materials or engage in a
recycling processrecycling process

36. GovernmentGovernment
 StakeStake
 to make sure the companies act in a socially responsible wayto make sure the companies act in a socially responsible way
taking account of socially, ethical and environmentaltaking account of socially, ethical and environmental
considerationsconsiderations
 to analyze corporate trends for various purposes such asto analyze corporate trends for various purposes such as
employment levels, monetary policy, and market supply andemployment levels, monetary policy, and market supply and
demand of goods and servicesdemand of goods and services
 looking at various aspects to do with fiscal policy such as capitallooking at various aspects to do with fiscal policy such as capital
allowances, incentives for investing in various industries or variousallowances, incentives for investing in various industries or various
parts of the country, and of course the taxation raised fromparts of the country, and of course the taxation raised from
companiescompanies

37. ConclusionConclusion
 the involvement of shareholders and/orthe involvement of shareholders and/or
stakeholders depends on national laws andstakeholders depends on national laws and
customscustoms
‘…‘…directors as a board are responsible for relations withdirectors as a board are responsible for relations with
stakeholders; but they are accountable to shareholders…’stakeholders; but they are accountable to shareholders…’