CORPORATE GOVERNANCE Assignment 01

NAME: MUHAMMAD ARAAJ YOUSUF

ROLL NO: 12991
ASSIGNMENT NO. 01
SUBJECT: CORPORATE GOVERNANCE
SUBMITION DATE: APRIL 17, 2020
SUBMITTED TO : ABID MERAJ SIDDIQUI

1. Examine how sound corporate governance can make it more difficult

for companies to fail, clearly explaining what 'corporate governance'
means in your answer. 

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CORPORATE GOVERNANCE Assignment 01

Martin Mung believes that Oland should become a rules-based jurisdiction

because the current 'comply or explain ‘approach is ineffective as a means
of controlling corporate governance.

Ans.

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.

In the light of the above definition a sound corporate governance leads to strong
financial outcomes. Investors maintains their and the company raise their capital
efficiently and effectively. It also helps to lower the capital cost so that the price of
their products are also stable in the market. Moreover, sound corporate
governance minimizes the risk factor, chances of corruption and
mismanagement. It provides proper inducement to the owners as well as
managers to achieve objectives that are in interests of the shareholders and the
organization.

According to the case study Martin Mung is strongly in favor of rule-based

approach because in his past experience, comply or explain approach is fail to
build a solid corporate governance which results in company failure. This
approach (comply or explain) totally depend on the market decision whether a
set of standards is appropriate for companies or not. It has been criticized
because it is not clear about whether a rule should implemented or not.

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CORPORATE GOVERNANCE Assignment 01

1. Explain the difference between rules-based and principles-based

approaches to corporate governance regulation and argue against Martin
Mung's belief that 'comply or explain' is ineffective

Ans.

RULE 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. For those companies to which they apply, the rules must be
obeyed. Companies do not have the choice of ignoring the rules and all
companies are required to meet the same minimum standards of corporate
governance. Investor confidence in the stock market might be improved if all the
stock market companies are required to comply with recognized corporate
governance rules.

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.
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. The way in which the principles are applied in practice
might differ for some companies. 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.

According to the case study Martin Mung is against the “comply or explain”
approach because this is not in company’s favor and totally depend on market
decision. The responsibility for effective governance is also lies with the
companies and their boards only.

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CORPORATE GOVERNANCE Assignment 01

2. Explain what 'accountability' means and discuss how the proposed

new provisions for shorter re-election periods and biographical details
might result in 'greater accountability' as the code suggests. 
Ans.
Accountability clarify governance roles and responsibilities, and ensure that
managerial and shareholder interests are aligned and monitored by the board of
directors.

Boards of directors are accountable to the shareholders of the company. This

means they are answerable to them they can be called to give an account for
their behavior and actions as agents of shareholders. In the context of the code,
it is recognized that boards do not always fully reflect the wishes and needs of
shareholders and this can represent a failure of accounting from the board to the
shareholders. The measures proposed aim to close the gap and make it less
likely that unqualified people will be appointed to, or remain on, the board.

Corporate governance codes have provisions for the retirement of directors by

rotation for some time. When a fixed period of time is set for directorships, after
which the default position is that the director retires or leaves the service of the
company without actively re-elected by the shareholder. The code also required
that when seeking re-election, there should be 'sufficient biographical details on
each director to enable shareholders to take an informed decision'. Enhancing
accountability to shareholders is a key objective of any corporate governance
code. The shortening of service contracts from three years to one year may
result in greater accountability the reason is that, It will enable shareholders to
remove underperforming directors much more quickly and impose their will upon
a board with less delay than previously. Rather than paying for underperforming
directors to remain in post, with possible damage to the company as a result, or
by paying compensation costs, they can simply decide not to re-elect them at the
end of the one-year service contract.

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