9 Good Governance

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GOOD

CORPORATEGOVERNANCE


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Corporate Governance

The system by which business corporations aredirected and controlled. Its structure specifes the

distribution o rights and responsibilities amongdierent participants in the corporation (board,managers, shareholder and other stakeholder), andspells out the rules and procedure or makingdecisions on corporate aairs. It also provide thestructure through which the company obectives

are set, and the means o attaining thoseobectives and monitoring perormance.

(!larke,T, "##$)


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Introduction Corporate Governance is concerned with:-

The way corporate entities are governed. Addresses the issues facing board of

directors, such as:-

Interaction with top management,

%elationships with the owners and

others interested in the aairs o thecompany (creditors, fnanciers, analysts,auditors, corporate regulators),


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Concern about corporateperformance throughinvolvement with strategyformulation and policy making.

Concern about corporateconformance through topmanagement supervision.

Accountability to stakeholders.


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The primary role of corporate governance

participants:-

&rotecting shareholders

%estoring investors confdence

'upporting strong and eicientcapital markets

nsures corporate

accountabilitynhances the reliability and

uality o public fnancial

inormation


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Corporate Governance is ultimately

about leadership and accountability:-*or eiciency and eectiveness o

operations to compete in the

markets.*or disclosure o accurate,

complete, and transparentinormation regarding corporate

perormance in areas o economicand social activities.

Transparent in ensuringtrustworthiness o the corporations.


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CG is an umbrella term that includes specicissues arising from those interactions:

!hareholder

!enior"anagement

#oards of$irectors

%ther !takeholders


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Implications

&as wider implication and is critical to economicand social well-being:-

i) &roviding incentives andperormance measures to achievebusiness success

ii) &roviding accountability andtransparency to ensure the euitabledistribution o the resulting wealth


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Theories of Ideas inCorporate Governance

'n the Company (aw, governance is based onthe belief that:-

'tewardship (o the company) will bee+ercised by the directors to whom thecompany has delegated responsibility andauthority, with appropriate responsibility.

It is predicted on the belie in the ust andhonest men, acting or the good o others,under the law.


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Issues in

CorporateGovernance The massive use of corporate

form in modern business hasbecome over-e)tended andneeds a clearer

understanding. !ome ma*or issues that havearisen:-


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The Emergence of Private Companies

'ncorporations are used principally toraise outside+e)ternal capital.

'n todays term, it is known as publiccompanies that is permitted to o/er

their shares to the public. &owever, there are so many private

companies in e)istence nowadays, suchas family rms.

Growth of these companies come fromretained earnings, and not publicsubscriptions.


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The cale and Comple!it" of Corporate

Groups Corporate entity could ac0uire shares in

other companies.

Company mergers and asset ac0uisitions

are common. All ma*or corporations nowadays trade

through groups of subsidiary andassociated companies.

'n some cases, these groups are relativelysimple with small hierarchy of whollyowned companies under a common parentcompany.


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The igni#cance of Institutional Investors

'nstitutional investors, such as banks,trusts, and provident+pension funds, havebecome a signicant in1uence on thecorporation.

2ith huge market capitali3ation on manystock e)changes, these investors haveshown a tendency to wield in1uencethrough formal participation in shareholdermatters, and direct contacts with directors.

This could pre*udice the rights of othershareholders to e0ual treatment.


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Calls for more Chec$s and %alances at%oard &evel

$emand for greaterindependence at #oard level

with an audit committee. This audit committee toliaise with e)ternal auditors.


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Corporate

GovernancePrinciples !everal Corporate

Governance 4rinciples:-

onesty

%esilience

%esponsiveness Transparency


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Honesty Telling the truth at all times, regardless of

the conse0uences. 'mportant, in establishing a trusting

relationship among corporate governanceparticipants.

Also means, corporate communicationwith e)ternal and internal audiences,including public nancial reports, shouldbe accurate, fair, transparent, trustworthy.


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A reputation for honesty can be earned

through truthful and transparent corporatecommunication.

't can also be easily destroyed through lies,deception, concealments, fraud.

'n todays 'CT world, access to veriableinformation on corporate trustworthinessand honesty is easily and convenientlyavailable.

Thus, public companies should maintainhonesty and good reputation.


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Resilience 5esilient corporate governance

structure is sustainable and enduring inthe sense that, it will easily recuperatefrom setback and abuses.

Corporate governance mechanisms aredesigned to prevent, detect, and correctabuses.


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Responsiveness The companys appropriate responses to

the re0uests + desires of all stakeholdersshow that the company has respect forconcerns and interests of others.

6/ective corporate governance is alsoresponsive to emerging initiatives andchanges in political, regulatory, social,and environmental issues.


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Transparency 't means that the company is not hiding

relevant information. $isclosures are fair, accurate, and

reliable.

Transparent corporate governance is

open and understandable to allconcerned, in terms of its goals,principles, mechanisms, and functions.


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CODE O' CORPORATEGOVERANCE 'OR (A&A)IA

The "alaysian Code on CorporateGovernance was developed by the

2orking Group on #est 4racticesin Corporate Governance

"'CG

#"(5


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The Code aims:-

To set out principles and best practiceson structures and processes thatcompanies may use in their operationstowards achieving the optimal

governance ramework. These structures and processes include the

issues such as:-

The composition o the -oard,

procedures or recruiting new directors,remuneration o directors, the use o

-oard committees, their mandate andactivities.


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The signicance of the Code:-

It allows or a more constructiveand e+ible response to raisestandards in corporate governance.

It recogni/es the act that there areaspects o corporate governancewhere statutory regulation isnecessary, but other aspects are

sel0regulated and complementedby market regulation.


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The Approach *nder The

(ala"sian Code OnCorporate Governance

There are 7 broad approaches to the issue ofcorporate governance that have been

undertaken by *urisdictions around theworld:-

&rescriptive 1pproach

2on0&rescriptive 1pproachybrid 1pproach


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A 4rescriptiveApproach

standard of

corporate Governanceis set by specifyingdesirable practices

coupled with there0uirement to disclosecompliance with them.

A 8on-4rescriptiveApproach

approach that simplyre0uires CG practicesin a company to bedisclosed without

specifying any standard

The &ybridApproach

Combination of therst two

8eed for theprescribing particularprinciples 9 structure

and should then applythese 1e)ibly


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C+A&&ENGE TOCORPORATE GOVERNANCE

The implementation of a high

standard in corporategovernance is the most primaryevaluation and attraction of

foreign direct investment ;$'

9 Good Governance

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