L3 - Scope of Corporate Governance

14/2/2016
DefiningCorporategovernance
Another definition of corporate governance
states that
CG is the process of supervision

and control intended to monitor
the activities of the management
to see if they are pursuing the best
interest of the shareholders (in
line with the stakeholder theory
ByKendhoo
MNUBusinessSchool/ACC235/2016S1/Kendhoo
Corporategovernanceconcepts(FAIIRRJHT)
Fairness
Accountability
Independence
Integrity
Responsibility
Reputation
Honesty
Judgment
Transparency
DefiningCorporategovernance
Corporate governance can be defined as
the system by which companies are

directed and controlled
It is about the relationship between the directors and
the stakeholders of the organization
It also stet out structure by which organizations can set
performance targets, strategies to achieve them and
evaluation of the performance
14/2/2016
Corporategovernanceconcepts(FAIIRRJHT)
Fairness: all shareholders are equal
Accountability: shareholders have right to receive information and ask
questions
Independence: free from bias (especially NED and external auditors)
Integrity: act in the best interest of the organization not ones self
Responsibility: risk, controls and strategy are responsibilities of the board
Reputation: avoiding damage to corporate image and not involving in
scandals
Honesty: acting upright
Judgment: capability to make reasonable decisions
Transparency: full, accurate, relevant and timely disclosure of information
Institutionalinvestorsroleindetail
Due to the large amount of shares held by institutional investors
there is more weight to their votes. Normally an individual
shareholder could dispose off his shares when he is not satisfied
with the organization. However an institutional investor (II) is
not in a position to sell the shares without incurring a loss. They
also have a fiduciary duty to manage the funds so that maximum
return is given to its participants
This makes them more motivated and gives them more power to
get involved in the running of the organization
It should be noted that researchers have not been able to link company
performance and corporate governance. Mainly due to the many variables

that has to be tested. However there is enough evidence to prove that
shareholders are ready to pay a premium to invest in shares where corporate
governance is strong
Thus, all codes of corporate governance, including the Singapore

Code and the UK code and all the reports dealing with CG,
emphasizes the importance of institutional investors to proper
CG
TheareasoforganizationaffectedbyCG
Institutionalinvestors(II)andtheirinfluence:
IIsnormallyfocusonissuesrelatingtotheboardsuchas
remunerationandcomposition
Board
Balance of the board in age, experience, independence and executive
Composition of the board
Size of the board
Executive pay and board committees
Generally Exit and Voice framework. Exit may not be

viable to most IIs so they have to stick to voicing.
(VOTING)
Auditing and accountability

New standards on the effectiveness of the board (and duties of
directors)
Focuses grouping where by organizations are monitored

by their IIs against a common index for performance.
When a company under performs, it is under the
unwanted focus of the II. One such example was that of
Xerox where it was under the focus of IIs and some
changes were made
Responsibility of the board to minimize and monitor risk

Increase in shareholder (especially institutional investor)
involvement
Corporate
Social Responsibility
stakeholder theory)
(agency
theory
to
the
6
14/2/2016
Generally II would try to sort out their concerns on the

sidelines in private. However when the management is
irresponsive they may not vote or even vote against
particular issues. If they are to vote against a particular
issue, they would inform of the intention to the
management (DISCUSSION)
There have been recent developments of CG rating
systems that can be applied to industries, countries or
across borders. (RATING)S&P has a country rating
system.
9
However, due to pressure from government and

institutional investor, companies are now making voting
easier by allowing voting without the physical presence,
common business language (accounting) and so on
11
Checking disclosures in detail and confronting when

there is disagreement. Not box ticking
AnyQuestion?
Even though in theory institutional investors can be of
great importance, there have not been that much activity
from them in the past. The reasons for this are numerous,
like:
Cross border barriers like language, meeting notice time
and voting processes
The cumbersome, paper work related to voting in general
The problem of physically attending the meetings
10
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14/2/2016

CG is the process of supervision

the system by which companies are

performance and corporate governance. Mainly due to the many variables

Thus, all codes of corporate governance, including the Singapore

Generally Exit and Voice framework. Exit may not be

Auditing and accountability

Focuses grouping where by organizations are monitored

Responsibility of the board to minimize and monitor risk

Generally II would try to sort out their concerns on the

However, due to pressure from government and

Checking disclosures in detail and confronting when

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