Good Governance: Mel Sy, MBA

GOOD GOVERNANCE
Mel Sy, MBA

Lesson 4
Theories of Corporate
Good Governance
GOOD GOVERNANCE AND SOCIAL

RESPONSIBILITY
SUMMARY
Lesson 4: Theories of Corporate Good Governance
Sub Topics: 1. Scope of Good Governance

2. Theories of Good Corporate Governance
3. Challenges
4. Impact on Business, Society and Economy
Corporate Governance
Refers to the process by which a company is controlled, or

governed to the goals for which it is being governed.
Corporate governance is concerned with the relative roles, rights,

and accountability of such stakeholder groups as owners, boards of
directors, managers, employees, and others who assert they are
stakeholders.
4
Scope and Significance of Corporate Governance
Set of relationships between a company’s management, its boards,

its shareholders and other stake holders (OECD Principles)
5
Scope of Corporate Governance
Accountability: of BOD and their constituent responsibilities to the

ultimate owners-the shareholders.
Transparency i.e. right to information, timeliness and integrity of

the information provided.
Clarity in responsibility to enhance accountability.
6
Scope of Corporate Governance
Quality and Competence of directors and their track record
Checks and Balances: in the process of governance, adherence to

rules, law and spirit of codes
7
LETS PLAY A GAME
Identify which of the Scope is exemplified in

the given statements.
Significance of Corporate Governance
❑ Business system stability is important for economic growth,

❑ Good corporate governance (CG) is required to achieve good CG
in the firms.
❑ Corporate houses have wider stakeholders-business relations.
❑ Promotes market confidence, helps to attract additional
capital, and fosters market discipline through good disclosure
and transparency.
9
❑ Helps ensure that company takes into account the interest of

not only of a group of people but also of the communities
within which they operate.
❑ Good corporate governance practices can strongly contribute to
economic development and financial stability.
❑ Good corporate governance ensures corporate success and
economic growth.
❑ Strong corporate governance maintains investors' confidence, as
a result of which, company can raise capital efficiently and
effectively.
10
❑ It lowers the capital cost.

❑ There is a positive impact on the share price.
❑ Good corporate governance also minimizes wastages,
corruption, risks and mismanagement.
❑ It ensures organization in managed in a manner that fits the
best interests of all.
11
Theories governing Corporate Governance
Agency Theory:
The economic relationship that arises between two individuals
• Principal
• Agent
Three conditions to operate relationship
• The agent has the freedom to choose between various course of
actions
• Actions of agent influence their own growth as well as the principals
• Difficult for the principal to observe the actions of the agent as
information is not enough
13
• The supplier of finance need return on their investment

• Principal needs assurance that agent does not steal the investment
• Principal needs to control the agent
• Control is dispersed and less effective
14
Problems with agency theory

• Utility maximizer (agent will not act in the best interest of the principal
• Unequal sharing of information
• Element of risk (judge performance based on annual reports )
15
Stewardship Theory
Stewardship theory holds that ownership doesn’t really own a company; it’s
merely holding it in trust. This shows itself in the way it does business.
Assumes that managers are basically trustworthy and attach significant
value to their own personal reputations.
• Built on premise that directors will fulfill their duties towards the
shareholders
• Assumes that human are good and directors are trustworthy
• Directors are stewards ( person who manage another's property) whose
motives are aligned with the objectives of the principles
Eg: Stewardship models may include environmental concerns, where a company believes it should operate with as
little impact as possible on the earth.
Effects On Clients: Customers also like to feel like they’re part of something,
and may stay with a stewardship-driven business even if its price for goods or
services is higher.
Effects On Employees: A solid sense of stewardship improves company
morale when the workers feel they’re part of something bigger.
Transaction Theory
• This theory attempts to view the firm as an organization comprising people
with different views and objectives.
• Assumption is that firms have become so large they in effect substitute for
the market in determining the allocation of resources. In other words, the
organization and structure of a firm can determine price and production.
• Therefore, the combination of people with transaction suggests that

transaction theory managers are opportunists and arrange firms’
transactions to their interests (Williamson, 1996).
• Selfishly driven to undertake transaction that benefits them personally
• Make transaction without study as the money invested is not their own
• Strengths / weaknesses
• Shareholders are residual receivers , concern about safety of investment
The sociological theory

• Composition of the board, transparency of the financial reporting,
disclosure and auditing are considered central to realizing the socio-
economic objectives
• Strengths / weaknesses
• Based on fair distribution of wealth in society
• The challenge is that the board should not have absolute powers
• Government control, interference may increase leading to
constraints
Challenges for Good Corporate Governance
•Lack of institutional capacity for enforcement of laws, regulations

•Enforcement authorities themselves lack good governance.
•Lack of accountability of employees of regulating bodies (need to have internal rules)
•Lack of resources within regulator
•Transparent and scientific licensing policy
•Lack of political and leadership will
•Court have frequently intervened in regulatory enforcement
22
Challenges for Good Corporate Governance
Board members are inclined to authenticate the minutes after finishing the
vested interest
The company enjoying the practice of CEO and Chairperson by the same
gentle man are ahead in noncompliance activities
23
Impact of governance on business, society and
the economy.
• Stakeholders theory is integral to corporate governance in addition to
shareholders value
• General acceptance that government cannot mange all needs of
society and companies have to involve themselves for the welfare of
stakeholders
24
Impact of governance on business, society and
the economy.
• Corporations have the following responsibility
• Economic
• Legal
• Ethical
• Honor trust
• Be culture sensitive to provide the right services
• Discretionary
• Undertake voluntary activities and expenses, keeping the
greater good of society in mind
25
END OF PRESENTATION

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GOOD GOVERNANCE

Mel Sy, MBA

GOOD GOVERNANCE AND SOCIAL

Lesson 4: Theories of Corporate Good Governance

Sub Topics: 1. Scope of Good Governance

Refers to the process by which a company is controlled, or

Corporate governance is concerned with the relative roles, rights,

Set of relationships between a company’s management, its boards,

Accountability: of BOD and their constituent responsibilities to the

Transparency i.e. right to information, timeliness and integrity of

Clarity in responsibility to enhance accountability.

Quality and Competence of directors and their track record

Checks and Balances: in the process of governance, adherence to

Identify which of the Scope is exemplified in

❑ Business system stability is important for economic growth,

❑ Helps ensure that company takes into account the interest of

❑ It lowers the capital cost.

• The supplier of finance need return on their investment

Problems with agency theory

• Therefore, the combination of people with transaction suggests that

The sociological theory

•Lack of institutional capacity for enforcement of laws, regulations

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