Corporate Govenance and Ethical Considerations

What is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which a firm is
directed and controlled. Corporate governance essentially involves balancing the interests of
a company's many stakeholders, such as shareholders, senior management executives,
customers, suppliers, financiers, the government, and the community. Since corporate
governance also provides the framework for attaining a company's objectives, it
encompasses practically every sphere of management, from action plans and internal
controls to performance measurement and corporate disclosure.

KEY TAKEAWAYS

Corporate governance is the structure of rules, practices, and processes used to direct and
manage a company. A company's board of directors is the primary force influencing
corporate governance. Bad corporate governance can cast doubt on a company's reliability,
integrity, and transparency—all of which can have implications on its financial health

Eight Elements of Good Governance

Good governance has 8 major characteristics. It is participatory, consensus oriented,
accountable, transparent, responsive, effective and efficient, equitable and inclusive, and
follows the rule of law. Good governance is responsive to the present and future needs of
the organization, exercises prudence in policy-setting and decision-making, and that the best
interests of all stakeholders are taken into account.
1. Direction
Providing overall direction for the business, its leaders and employees is a major part of
corporate governance. Making strategic decisions and discussing current and future
concerns of the company are tactics of this element. Company mission and vision
statements stem from the governance role of business. These statements provide a sense of
purpose and illustrate primary motives for the company's business activities.
2. Independence of directors.
If the directors of a company are also the owners and/or their family members,
entrepreneurs appointed by friends, or individuals who are involved in the daily management
of the company, the board is unlikely to be impartial. Having a majority of non-executive
independent directors will help avoid prejudice and conflicts of interest between the board
and the management. Independent judgement is almost always in the best interest of the
company.
3. Effective Risk Management
Even if your company implements smart policies, competitors might steal your customers,
unexpected disasters might cripple your operations and economy fluctuations might erode
the buying capabilities of your target market. You can’t avoid risk, so it’s vital to implement
effective strategic risk management. For example, a company’s management might decide
to diversify operations so the business can count on revenue from several different markets,
rather than depend on just one.
4. Organisation
A solid structure and organisation within the company is essential to fluidly implementing and
dispersing corporate governance objectives. Companies will need to be able to monitor all of
their dealings, interactions, and transactions effectively. One of the fundamental objectives
of corporate governance is for companies to develop more transparent business practices,
meaning a rigidly structured framework through which to trace all such activity efficiently.
5. Stakeholder Relations
Corporate governance encompasses a business's accountability to each of its stakeholder
groups. Traditionally, this role has largely centered on investor relations and communication
of company decisions. Investors can often find contact information for board members on
company websites. In the early 21st century, there is more emphasis on balancing investor
interests with concern for other stakeholders, such as customers, employees and business
partners. Governance web pages often indicate specific things companies do to meet
expectations of each.
6. Transparency
Managers sometimes keep their own counsel, limiting the information that filters down to
employees. But corporate transparency helps unify an organisation. When employees
understand management’s strategies and are allowed to monitor the company’s financial
performance, they understand their roles within the company. Transparency is also
important to the public, who tend not to trust secretive corporations.
7. Corporate Citizenship
Another major evolution in the early 21st century is increased focus on corporate citizenship.
Companies commonly include a corporate citizenship statement on corporate governance or
investor relationships web pages. Such statements communicate the business's intent to act
with social and environmental responsibility. Philanthropy and other charitable contributions
are among common things noted within corporate citizenship statements. In general,
governance includes an awareness that companies should balance profit-generating
activities with responsible policies and practices.
8. Self-Evaluation
Mistakes will be made, no matter how well you manage your company. The key is to perform
regular self-evaluations to identify and mitigate brewing problems. Employee and customer
surveys, for example, can supply vital feedback about the effectiveness of your current
policies. Hiring outside consultants to analyze your operations also can help identify ways to
improve your company’s efficiency and performance.
Corporate Governance Concepts
1. Fairness
The board of directors should treat all stakeholders fairly and equitably.
2. Independence
Each director should independent. There should be no conflict of interest. For example, it
would not be good for a director to get involved in the sale of an asset to another company, if
he/she was a director of that other company too.
3. Honesty
The directors must protect the shareholders interests in the organisation, and should give
confidence to the shareholders that thier interests are being protected.
4. Transparency
The directors should disclose material information in a timely and accurate manner.
5. Accountability
Those who control the business (i.e. directors) should be accountable to those who own the
business (i.e. shareholders)
6. Integrity
Moral and ethical issues should be considered when making decisions relevant to the
organisation.
7. Responsibility
The board of directors should ensure the organisation complies with the relevant laws where
it operates.
Corporate Governance Policies
 Implementation and reporting
This Policy was adopted by the Board on 3 September 2015 for and on behalf of the
Company and is, in all material respects based on the Code of Practice, to which the Board
has resolved that the Company shall adhere. The Board shall ensure that the Company at all
times has sound corporate governance. The Board shall provide an overall review of the
Company’s corporate governance in the Company’s annual report to the shareholders. The
review shall include each individual point of the Code of Practice. If the Company does not
fully comply with the Code, this shall be explained in the annual report of the Company.
 Business
In accordance with common practice for Norwegian incorporated companies, the Company’s
business activities are not precisely defined in the articles of incorporation. However, the
fundamental objectives and strategy of the Company is to achieve substantial total returns
for shareholders by (i) rapidly advance TG01 and ONCOS-102 into phase II clinical trials, (ii)
progress further targeted therapeutic cancer vaccines candidates to the product
development stage, (iii) explore the combination of the Group’s peptide therapeutic cancer
vaccines for RAS mutations together with its viral therapeutic cancer vaccines, (iv) evaluate
the combination of ONCOS-102 and check point inhibitors (CPIs) in non-responding check
point inhibitor (CPI) patients, (v) optimise the Group’s manufacturing capabilities to ensure
later stage clinical trials and commercial supply (vi) expand its intellectual property profile
and (vii) selectively pursue partnerships and collaborations. The Company’s primary
objectives and strategies shall be stated in the Company’s annual report.
 Equity and dividends
The Company shall have an equity capital that is suitable for its objectives, strategy and risk
profile. The Company’s long-term objectives include making distributions of net income in
the form of dividends. The payment and level of any dividends will depend on a number of
factors, including market outlook, cash flow, capital expenditure plans and funding
requirements. These factors will be measured against the Company’s need to maintain
adequate financial flexibility, relevant restrictions on the payment of dividends under the laws
of Norway and such other factors the Board may consider relevant.
The Board shall establish a clear and predictable dividend policy. The dividend policy shall
be disclosed in the Company’s annual report. The background to any proposal for the Board
to be given a mandate to approve the distribution of dividends should be explained.
Mandates granted to the Board to increase the Company’s share capital shall be restricted
to defined purposes. If the general meeting is to consider mandates to the Board for the
issue of shares for different purposes, each mandate shall be considered separately by the
meeting. Mandates granted to the Board shall be limited in time to no later than the date of
the next annual general meeting. This shall also apply to mandates granted to the Board for
the Company to purchase its own shares.

Importance and Practices of Good Governance

Through seeing how corporate governance works, you can tell why it is important. It helps
streamline the process and gives people accountability. The point of corporate governance
is to help the decision making process. As mentioned above in the principles of corporate
governance, one of the main goals is to clearly explain to the board, the stakeholders, and
the shareholders what their duties and responsibilities are within the company.
With knowing those roles and responsibilities, the people within the corporation can
understand what they are held accountable for. For example, the board has the
responsibility of properly evaluating the management in the company. If the company has
poor management, then it is the fault of the board for not properly evaluating the manager. In
this regard, the blame cannot be placed on other members of the corporation. This prevents
situations in which there is no way to know who is accountable for what action.
Accountability is what helps people within the company make decisions, whether it is finding
out what person should be terminated from their position due to the mistakes that they’ve
made or who should be acknowledged for their good work due to doing something
exceptional in their
field. With good corporate governance, it’s pretty simple to know what the key members of
the business are supposed to do.
 Lowering Risk
Another important aspect of corporate governance is mitigating or reducing the amount of
risk that is involved. Through corporate governance, scandals, fraud, and criminal liability of
the company can be prevented or avoided altogether.
Since the people involved in the organization know what they are accountable for, the
actions of one person doesn’t mean the downfall of the entire corporation. Properly
identifying what the roles in the corporation are allows decisions to be made that won’t have
a negative effect on the overall corporation, and it means that the offender can be much
more quickly identified and punished instead.
Corporate governance is also great because it is a form of self-policing. Before outside
forces are able to do anything to a corporation, it’s possible for the corporation to handle
matters itself. With corporate governance, everyone is held to a specific standard and
communication is made easier due to their being an established hierarchy and role that
everyone involved in the corporation plays. This level of handling business on its own
instead of being forced into making decisions outside of the company helps keep the
corporation sustaining itself.
 Public Acceptance
In terms of business, a company with corporate governance is widely accepted by the public.
This is mostly due to the idea of disclosure and transparency that comes with corporate
governance. With full disclosure and the ability for people who work in the business to get
information, as well as the general public, there is a higher level of trust. There’s also the fact
that due to the way that corporate governance is setup, there is a lower chance of fraud and
company-wide criminal activity, which helps gain the trust of the public as well.
 Public Image
Today many corporations hold a high level of corporate governance. This is because a
corporation has a public image to maintain. With corporate governance, the corporation
takes more responsibility for its actions, and also allows it to keep tabs on what is going on
as well as helps those in charge remain more aware of the public image of the corporation.
With the way that businesses are run today, it can be difficult for a corporation to become
successful just by having a high level of profit. Due to the fact that a corporation is also
evaluated based on its image, corporate governance is established to help ensure that
image remains clean. Making sure there is a high level of awareness, ethical behavior, and
understanding of what the public wants is all encompassed in corporate governance.
It would be hard to develop strategies for your business to grow, something you can learn
more about in this Udemy blog post, if you didn’t fully utilize corporate governance to keep
things in check
 Having a Successful Business
Corporate governance is an aspect of business that’s become incredibly important in recent
years, but it isn’t the only part of business a person has to understand. If you’ve been
holding on to a business idea, but you haven’t gotten it up off the ground then you will need
to learn quite a bit.

5 Major Best Practices of Corporate Governance

1. Form a strong team of board of directors that are qualified and measure its
performance.
The board should be made of directors with the necessary expertise and knowledge for the
business who also have good integrity and ethics. How to form and maintain this kind of
board?
Identify lapses in the complement of the present directors as well as the ideal characteristics
and qualities. Always maintain a list of qualified candidates to fill vacancies of the board

Most of the directors should not be dependent

Build an interactive board
Educate your board on vital areas
2. Responsibilities and roles should be well spelled out.
Maintain an unambiguous line of accountability among the management, Executive Officers,
Chair and Board.
Formulate written directives for the board while stating the accountabilities and duties of
each committee. Delegate specific duties to a sub-team of directors in the form of
committees
Create a written description for various positions
3. Lay emphasis on ethical dealing and integrity.
A general norm of integrity in the business with directors avoiding conflict of interest must be
in place. Put in place a good policy on conflict of interest Address negligence
4. Measure performance and establish principled remuneration decisions.
The team or board should:
Fix an attractive fee for directors
Establish ways of measuring target achievement
5. Implement a risk management policy that is effective.
Point out the risk they encounter and assess them in a regular basis
Regular review of system adequacy should be carried out by the board.

The Agency Theory

Purpose of Agency Theory

 Agency theory defines the relationship between the principals (such as shareholders
of company) and agents (such as directors of company). According to this theory, the
principals of the company hire the agents to perform work. The principals delegate
the work of running the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make decisions in the
best interest of principal. On the contrary, it is not necessary that agent make
 decisions in the best interests of the principals. The agent may be succumbed to self-
interest, opportunistic behavior and fall short of expectations of the principal. The key
feature of agency theory is separation of ownership and control. The theory
prescribes that people or employees are held accountable in their tasks and
responsibilities. Rewards and Punishments can be used to correct the priorities of
agents.

Stewardship Theory
 The steward theory states that a steward protects and maximises shareholders
wealth through firm Performance. Stewards are company executives and managers
working for the shareholders, protects and make profits for the shareholders. The
stewards are satisfied and motivated when organizational success is attained. It
stresses on the position of employees or executives to act more autonomously so
that the shareholders’ returns are maximized. The employees take ownership of their
jobs and work at them diligently.

Stakeholder Theory
 Stakeholder theory incorporated the accountability of management to a broad range
of stakeholders. It states that managers in organizations have a network of
relationships to serve – this includes the suppliers, employees and business
partners. The theory focuses on managerial decision making and interests of all
stakeholders have intrinsic value, and no sets of interests is assumed to dominate
the others.

Potential Problems in Corporate Governance

1) CONFLICTS OF INTEREST
Avoiding conflicts of interest is vital. A conflict of interest within the framework of corporate
governance occurs when an officer or other controlling member of a corporation has other
financial interests that directly conflict with the objectives of the corporation. For example, a
board member of a solar company who owns a significant amount of stock in an oil company
has a conflict of interest because, while the board he or she serves on represents the
development of clean energy, they have a personal financial stake in the success of the oil
industry. When conflicts of interest are present, they deteriorate the trust of shareholders
and the public while making the corporation vulnerable to litigation.

2) OVERSIGHT ISSUES
Effective corporate governance requires the board of directors to have substantial oversight
of the company’s procedures and practices. Oversight is a broad term that encompasses the
executive staff reporting to the board and the board’s awareness of the daily operations of
the company and the way in which its objectives are being achieved. The board protects the
interests of the shareholders, acting as a check and balance against the executive staff.
Without this oversight, corporate staff might violate state or federal law, facing substantial
fines from regulatory agencies, and suffering reputational damage with the public.
3) ACCOUNTABILITY ISSUES
Accountability is necessary for effective corporate governance. From the top-level
executives to lower-tier employees, each level and division of the corporation should report
and be accountable to another as a system of checks and balances. Above all else, the
actions of each level of the corporation is accountable to the shareholders and the public.
Without accountability, one division of the corporation might endanger the success of the
entire company or cause stockholders to lose the desire to continue their investment.
4) TRANSPARENCY
To be transparent, a corporation must accurately report their profits and losses and make
those figures available to those who invest in their company. Overinflating profits or
minimizing losses can seriously damage the company’s relationship with stockholders in that
they are enticed to invest under false pretenses. A lack of transparency can also expose the
company to fines from regulatory agencies.
5) ETHICS VIOLATIONS
Members of the executive board have an ethical duty to make decisions based on the best
interests of the stockholders. Further, a corporation has an ethical duty to protect the social
welfare of others, including the greater community in which they operate. Minimizing
pollution and eschewing manufacturing in countries that don’t adhere to similar labor
standards as the U.S. are both examples of a way in which corporate governance, ethics,
and social welfare intertwine.

APPROACHES TO CORPORATE GOVERNANCE

 Rule-Based Approach
 Principle-Based Approach

CHARACTERISTICS

Rules-Based Approach to Corporate Governance

A rules-based approach to corporate governance is based on the view that companies must
be required by law (or by some other form of compulsory regulation) to comply with
established principles of good corporate governance. The rules might apply only to some
types of company, such as major stock market companies. However, for the companies to
which they apply, the rules must be obeyed and few (if any) exceptions to the rules are
allowed.
 Advantages
i. Companies do not have the choice of ignoring the rules.
ii. All companies are required to meet the same minimum standards of corporate
governance.
iii. Investor confidence in the stock market might be improved if all the stock market
companies are required to comply with recognised corporate governance rules.
 Disadvantages
i. The same rules might not be suitable for every company, because the circumstances of
each company are different. A system of corporate governance is too rigid if the same rules
are applied to all companies.
ii. There are some aspects of corporate governance that cannot be regulated easily, such as
negotiating the remuneration of directors, deciding the most suitable range of skills and
experience for the board of directors, and assessing the performance of the board and its
directors.
Principles-Based Approach to Corporate Governance
A principles-based approach to corporate governance is an alternative to a rules-based
approach.
It is based on the view that a single set of rules is inappropriate for every company.
Circumstances and situations differ between companies. The circumstances of the same
company
can change over time. This means that:
- the most suitable corporate governance practices can differ between companies, and
- the best corporate governance practices for a company might change over time, as its
circumstances change.
It is therefore argued that a corporate governance code should be applied to all major
companies,
but this code should consist of principles, not rules.
- The principles should be applied by all companies.
- Guidelines or provisions should be issued with the code, to suggest how the principles
should be applied in practice.
- As a general rule, companies should be expected to comply with the guidelines or
provisions.
- However, the way in which the principles are applied in practice might differ for some
companies, at least for some of the time. Companies should be allowed to ignore the
guidelines if this is appropriate for their situation and circumstances.
- When a company does not comply with the guidelines or provisions of a code, it should
report this fact to the shareholders, and explain its reasons for non-compliance.

CORPORATE GOVERNANCE AND CORPORATE SOCIAL RESPONSIBILITY

Corporate Governance vs. Corporate Social Responsibility

 Corporate Governance is related to profit maximization and protection who
have provided capital to firm
 CSR apparently in contrast of profit maximization because it suggest a set of
actions beneficial for external stakeholder and may not be good for
shareholders
 Managers hired focused to maximize the value of the firm, would behave
unethically by being socially responsible
 They may raise external stakeholder value at the expense of shareholders
wealth maximization

Shareholder vs. Stakeholder

When it comes to investing in a corporation, there are shareholders and stakeholders. While
they have similar sounding names, their investment in a company is quite different.
Shareholders are always stakeholders in a corporation, but stakeholders are not always
shareholders. A shareholder owns part of a public company through shares of stock, while a
stakeholder has an interest in the performance of a company for reasons other than stock
performance or appreciation. These reasons often mean that the stakeholder has a greater
need for the company to succeed over a longer term.
 Shareholder
 A shareholder can be an individual, company, or institution that owns at least one
share of a company and therefore has a financial interest in its profitability. For
example, a shareholder might be an individual investor who is hoping the stock price
will increase because it is part of their retirement portfolio. Shareholders have the
right to exercise a vote and to affect the management of a company. Shareholders
are owners of the company, but they are not liable for the company’s debts. For
private companies, sole proprietorships, and partnerships, the owners are liable for
the company's debts. A sole proprietorship is an unincorporated business with a
single owner who pays personal income tax on profits earned from the business.
 Stakeholder
Stakeholders can be:
a.) owners and shareholders
b.) employees of the company
c.) bondholders who own company-issued debt
d.) customers who may rely on the company to provide a particular good or
service suppliers and vendors who may rely on the company to provide a consistent
revenue stream
Although shareholders may be the largest type of stakeholders, because shareholders
are affected directly by a company's performance, it has become more commonplace for
additional groups to also be considered stakeholders.
Key Differences
A shareholder can sell their stock and buy different stock; they do not have a long-term
need for the company. Stakeholders, however, are bound to the company for a longer
term and for reasons of greater need.
For example, if a company is performing poorly financially, the vendors in that company's
supply chain might suffer if the company no longer uses their services. Similarly,
employees of the company, who are stakeholders and rely on it for income, might lose
their jobs.

CSR and DISCLOSURE

Abstract
Purpose
Corporate social responsibility (CSR) disclosure is receiving increased attention from the
mainstream accounting research community. In general, this recently published research
has failed to engage significantly with prior CSR-themed studies. The purpose of this
paper is threefold. First, it examines whether more recent CSR reporting differs from that
of the 1970s. Second, it investigates whether one of the major findings of prior CSR
research – that disclosure appears to be largely a function of exposure to legitimacy
factors – continues to hold in more recent reporting. Third, it examines whether, as
argued within the more recent CSR-themed studies, disclosure is valued by market
participants.
Design/methodology/approach
Using Fortune 500 data from the late 1970s (from Ernst & Ernst, 1978) and a more
recent sample (2010), the authors identify differences in CSR disclosure by computing
adequate measures in terms of disclosure breadth and comparing them for any potential
changes in the influence of legitimacy factors between 1977 and 2010. In the second
stage of the analysis, the authors use a standard valuation model to compare the
association between CSR and firm value between the two time periods.
Findings
The authors first find that the breadth of CSR disclosure increased significantly, with
respect to both environmental and social information provision. Second, the authors find
that the relationship among legitimacy factors and CSR disclosure does not differ across
the two time periods. However, the analysis focusing on environmental disclosure
provides evidence that industry membership is less powerfully related to differences in
reporting, but only for the weighted disclosure score. Finally, the results indicate that
CSR disclosure, in apparent contrast to the arguments of the more recent mainstream
investigations, is not positively valued by investors.
Research limitations/implications
The authors explore changes in CSR disclosure only for industrial firms and as such the
authors cannot generalize findings to companies in other industries. Similarly, the
authors focus only on companies in the USA while different relationships may hold in
other countries. Further, the disclosure metrics are limited by the availability of firm-
specific information provided by Ernst & Ernst. Limitations aside, however, the findings
appear to suggest that the failure of the new wave of CSR research in the mainstream
accounting community to acknowledge and consider prior research into social and
environmental accounting is potentially troublesome. Specifically, recent CSR disclosure
research published in mainstream journals often lends credence to voluntary disclosure
arguments that ignore previous contradictory findings and well-established alternative
explanations for observed empirical relationships.
Practical implications
This paper provides supporting evidence that the unquestioned acceptance by the new
wave of CSR researchers that the disclosure is about informing investors as opposed to
being a tool of legitimation and image enhancement makes it less likely that such
disclosure will ever move meaningfully toward transparent accountability.

Originality/value
The study suggests that CSR disclosure, while used more extensively today than three
decades ago, may still largely be driven by concerns with corporate legitimacy, and still
fails to provide information that is relevant for assessing firm value. As such, the failure
of the mainstream accounting community to acknowledge this possibility can only hinder
the ultimate development of better accountability for all of the impacts of business.