Corporate Governance - Chapter 1
(Definitions and issues in corporate
governance)
Origins of the term corporate governance - answer1. dictionary defines 'governance' as
"the way that organisations or countries are managed at the highest level, and the
system for doing this"
2. 1970's: Bob Tricker realised 'governance' is different from 'management'.
3. Bob Tricker's 1983 article, 'Perspectives on corporate governance: intellectual
influences in the exercise of corporate governance' was the first time the term 'corporate
governance' was used.
4. Sir Adrian Cadbury picked up the CG term when chairing a May 1991 committee by
the FRC, LSE and accountancy profession (bc lack of investor confidence int eh
honesty and accountability of listed companies)
5. 1992 Cadbury Report: The committee recommendations in this report underpin many
of the corporate governance laws, regulations, standards and codes adopted globally
today --> board effectiveness; professional advice; directors' training; board structures
and procedures; role of the CoSec; directors' responsibilities; internal financial controls;
internall audit
Is there one definition of corporate governance? - answerNo.
Definitions of corporate governance - answer1. Bob Tricker, 1984: 'If management is
about running business, governance is about seeing that it is run properly. All
companies need governing as well as managing.'
2. Cadbury Committee, 1992: 'the system by which companies are directed and
controlled'
3. OECD, 1999, Corporate Governance Principles: a set of relationships between a
company's management, its board, its shareholders and other stakeholders... also
provides the structure though which the objectives of the company are set, and the
means of attaining those objectives and monitoring performance are determined
4. NEPAD (New Partnership for African Development), 2004: CG is being concerned
with ethical principles, values and practices which facilitate the balance between
economic and social goals and b/w individual and communal goals. The aim is to align
as nearly as possible individual, corporate and societal interests within a framework of
sound governance and the common good.
5. G20 & OECD, 2015, CG Principles: CG should help build an environment of trust,
transparency and accountability necessary for fostering long-term investment, financial
stability and business integrity, thereby supporting stronger growth and more inclusive
societies.
, 6. King IV Report on CG for South Africa, 2016: The exercise of ethical and effective
leadership by the governing body towards achievement of the following governance
outcomes: ethical cultures, good performance, effective control & legitimacy.
7. UK Corporate Governance Code 2016: facilitate effective, entrepreneurial and
prudent management that can deliver the long-term success of the company. CG is
about what the board of a company does and how it sets the values of the company. It
is to be distinguished from the day to day operational management of the company by
full-time executives.
8. UK Corporate Governance Code,
What are the theories of corporate governance? (2 main, one related) -
answerShareholder value approach to corporate governance
1. Shareholder primacy theory
2. Agency theory (related to 1.)
=================================
Stakeholder approach to corporate governance
3. Stakeholder theory
Explain shareholder primacy theory. - answerFocus is on maximising the value to
shareholders before considering other corporate stakeholders (eg employees,
customers, suppliers, society as a whole).
Because shareholders own companies and directors / managers / employees are
engaged by the company to maximise shareholder wealth.
Explain agency theory. - answerA theory based on the separation of ownership from
control in a large organisation and the conflict of interest between the individuals who
direct the organisation and the people who own it. Directors act as agents for
shareholders and the conflict of interests between them should be controlled.
Issue of: agency conflict and agency costs.
Explain stakeholder theory - answerThe purpose of CG should be to satisfy, as far as
possible, the objectives of all key stakeholders.
Shareholders don't actually own the company. Company is its own separate legal entity
in and of itself which should comply with societal norms for that country. Companies
should act as good corporate citizens (i.e. with due regard for its responsibilities as a
member of society in which it operates). Otherwise issues of: (1) inappropriate
stewardship; and (2) short-termism.
Stakeholders = everyone that has an interest in the company. E.g. investors,
employees, suppliers, customers, government, regulators, creditors, local communities,
general public. ==> Boards to balance interests of different stakeholders on a case-by-
case basis.
(Definitions and issues in corporate
governance)
Origins of the term corporate governance - answer1. dictionary defines 'governance' as
"the way that organisations or countries are managed at the highest level, and the
system for doing this"
2. 1970's: Bob Tricker realised 'governance' is different from 'management'.
3. Bob Tricker's 1983 article, 'Perspectives on corporate governance: intellectual
influences in the exercise of corporate governance' was the first time the term 'corporate
governance' was used.
4. Sir Adrian Cadbury picked up the CG term when chairing a May 1991 committee by
the FRC, LSE and accountancy profession (bc lack of investor confidence int eh
honesty and accountability of listed companies)
5. 1992 Cadbury Report: The committee recommendations in this report underpin many
of the corporate governance laws, regulations, standards and codes adopted globally
today --> board effectiveness; professional advice; directors' training; board structures
and procedures; role of the CoSec; directors' responsibilities; internal financial controls;
internall audit
Is there one definition of corporate governance? - answerNo.
Definitions of corporate governance - answer1. Bob Tricker, 1984: 'If management is
about running business, governance is about seeing that it is run properly. All
companies need governing as well as managing.'
2. Cadbury Committee, 1992: 'the system by which companies are directed and
controlled'
3. OECD, 1999, Corporate Governance Principles: a set of relationships between a
company's management, its board, its shareholders and other stakeholders... also
provides the structure though which the objectives of the company are set, and the
means of attaining those objectives and monitoring performance are determined
4. NEPAD (New Partnership for African Development), 2004: CG is being concerned
with ethical principles, values and practices which facilitate the balance between
economic and social goals and b/w individual and communal goals. The aim is to align
as nearly as possible individual, corporate and societal interests within a framework of
sound governance and the common good.
5. G20 & OECD, 2015, CG Principles: CG should help build an environment of trust,
transparency and accountability necessary for fostering long-term investment, financial
stability and business integrity, thereby supporting stronger growth and more inclusive
societies.
, 6. King IV Report on CG for South Africa, 2016: The exercise of ethical and effective
leadership by the governing body towards achievement of the following governance
outcomes: ethical cultures, good performance, effective control & legitimacy.
7. UK Corporate Governance Code 2016: facilitate effective, entrepreneurial and
prudent management that can deliver the long-term success of the company. CG is
about what the board of a company does and how it sets the values of the company. It
is to be distinguished from the day to day operational management of the company by
full-time executives.
8. UK Corporate Governance Code,
What are the theories of corporate governance? (2 main, one related) -
answerShareholder value approach to corporate governance
1. Shareholder primacy theory
2. Agency theory (related to 1.)
=================================
Stakeholder approach to corporate governance
3. Stakeholder theory
Explain shareholder primacy theory. - answerFocus is on maximising the value to
shareholders before considering other corporate stakeholders (eg employees,
customers, suppliers, society as a whole).
Because shareholders own companies and directors / managers / employees are
engaged by the company to maximise shareholder wealth.
Explain agency theory. - answerA theory based on the separation of ownership from
control in a large organisation and the conflict of interest between the individuals who
direct the organisation and the people who own it. Directors act as agents for
shareholders and the conflict of interests between them should be controlled.
Issue of: agency conflict and agency costs.
Explain stakeholder theory - answerThe purpose of CG should be to satisfy, as far as
possible, the objectives of all key stakeholders.
Shareholders don't actually own the company. Company is its own separate legal entity
in and of itself which should comply with societal norms for that country. Companies
should act as good corporate citizens (i.e. with due regard for its responsibilities as a
member of society in which it operates). Otherwise issues of: (1) inappropriate
stewardship; and (2) short-termism.
Stakeholders = everyone that has an interest in the company. E.g. investors,
employees, suppliers, customers, government, regulators, creditors, local communities,
general public. ==> Boards to balance interests of different stakeholders on a case-by-
case basis.
