GOVERNANCE AND ETHICS
Learning Unit 1: Introduction to Corporate Governance and Ethics
Theme 1: The concept of Corporate Governance
LO1: Explain what the no2on of corporate governance entails.
LO2: Describe how corporate governance regulates the exercise of power within an
organisa2on.
LO3: Cri2cally analyse how company culture is oBen connected to corporate governance
failure.
1.2 WHAT IS CORPORATE GOVERNANCE
Corporate governance – become an issue of global importance, but exactly what cons>tutes
corporate governance and precisely where its boundaries lie are s>ll subjects to debate
More narrow defini,on
- The prac>ce by which companies are managed and controlled
- Encompass elements of
Ø managing long-term risk,
Ø overseeing ethical performance
Ø sustainable business prac>ces and
Ø taking accountability for the company’s rela>onships with mul>ple stakeholders
paid, professional managers.
Corporate Governance regulates
- Exercise of power within a company
- To ensure purposes are achieved
- To create sustainable shareholder value
It encompasses
- Ongoing checks and balances to ensure balanced exercise of power within the
company
- Implementa>on of a system to ensure compliance by the company with its legal and
regulatory obliga>ons
- Implementa>on of a process whereby risks to the sustainability of the company’s
business are iden>fied and managed within acceptable parameters
- Development of prac>ces so company is accountable to stakeholders
1
,The structures, processes, and prac>ces that the board uses to direct and manage the
opera>ons of a company determine how authority is exercised, how decisions are taken,
how stakeholders have their say and how decision-makers are held to account.
Who is responsible for what
- Who sets the direc>on (company’s strategy) and the limits within which the direc>on
is to be pursued
- Who makes the decisions about what (the respec>ve authority levels of the board
and management), and who sets performance targets, monitors progress, and
evaluates results
- Who is accountable to whom for what (for example the board to shareholders and
CEO to the board)
MEL GILL – Corporate Governance consists of structures, tradi>ons and processes of
leadership and stewardship that:
1. Assign power
2. Defines roles, responsibili>es, and leadership
3. Govern communica>on with stakeholders
4. Ensure accountability (from which legi>macy is derived)
Company culture and corporate governance failure
- No>on that nega>ves company culture and company’s failures is influence by the
wring tone at the top.
- Chinese proverb – The fish rots from the head – problems in a company can be
traced back to leadership at the top
- Company culture is everything – defines what is acceptable or not – transparency
- E.g corrup>on enters a company through leadership
LO4: Explain how ownership of a company is most oBen separated from actual control of a
company.
1.3 THE SEPARATION OF OWNERSHIP AND CONTROL
In theory, as shareholders are responsible for choosing the board of directors which in turn
appoints management, it follows that management works for shareholders and should work
in best interests by maximising value of the company
2
, Challenges of an effec>ve system of corporate governance are:
1. Ensure there are sufficient checks and balances in place to keep directors and
management accountable to shareholders
2. Ensure that the poten>ally conflic>ng interests of managers and shareholders are not
allowed to prevail over those of a company, and to minimise the agency costs –
strong board with independent directors plays a key role in monitoring management
and ensuring that the interests of the company as a whole.
3. Allow the needed delega>on of authority within the company whilst limi>ng the
poten>al for the abuse of that authority by, guarding against power being
concentrated in the hands of any one individual
4. Ensure that the right ques>ons get asked of the right people and that managers are
held accountable for the exercises of delegated authority and for the company’s
performance
5. Ensure that the polices and structures in place are flexible and agile enough to allow
company to achieve its purpose and to enable the company to an>cipate and
respond appropriately to risk
- Shareholders nominate and appoint directors
- Directors appoint managers to run the companies
- Therefore, separa>on of powers as managers manages the day to day running of the
company and work for the shareholders and in their best interests i.e increased profit
- Ensure that managers and directors are accountable to shareholders
- Ensure independent directors – avoid poten>al conflict of interests and interests as a
whole and not personal interests take preference
- Set out the necessary delega>on of authority while limi>ng it to ensure no abuse of
power- e.g CEO and CFO
- Management accountable for company performance
- Ensure policies and structures in place for CO to reach its purpose
3
Learning Unit 1: Introduction to Corporate Governance and Ethics
Theme 1: The concept of Corporate Governance
LO1: Explain what the no2on of corporate governance entails.
LO2: Describe how corporate governance regulates the exercise of power within an
organisa2on.
LO3: Cri2cally analyse how company culture is oBen connected to corporate governance
failure.
1.2 WHAT IS CORPORATE GOVERNANCE
Corporate governance – become an issue of global importance, but exactly what cons>tutes
corporate governance and precisely where its boundaries lie are s>ll subjects to debate
More narrow defini,on
- The prac>ce by which companies are managed and controlled
- Encompass elements of
Ø managing long-term risk,
Ø overseeing ethical performance
Ø sustainable business prac>ces and
Ø taking accountability for the company’s rela>onships with mul>ple stakeholders
paid, professional managers.
Corporate Governance regulates
- Exercise of power within a company
- To ensure purposes are achieved
- To create sustainable shareholder value
It encompasses
- Ongoing checks and balances to ensure balanced exercise of power within the
company
- Implementa>on of a system to ensure compliance by the company with its legal and
regulatory obliga>ons
- Implementa>on of a process whereby risks to the sustainability of the company’s
business are iden>fied and managed within acceptable parameters
- Development of prac>ces so company is accountable to stakeholders
1
,The structures, processes, and prac>ces that the board uses to direct and manage the
opera>ons of a company determine how authority is exercised, how decisions are taken,
how stakeholders have their say and how decision-makers are held to account.
Who is responsible for what
- Who sets the direc>on (company’s strategy) and the limits within which the direc>on
is to be pursued
- Who makes the decisions about what (the respec>ve authority levels of the board
and management), and who sets performance targets, monitors progress, and
evaluates results
- Who is accountable to whom for what (for example the board to shareholders and
CEO to the board)
MEL GILL – Corporate Governance consists of structures, tradi>ons and processes of
leadership and stewardship that:
1. Assign power
2. Defines roles, responsibili>es, and leadership
3. Govern communica>on with stakeholders
4. Ensure accountability (from which legi>macy is derived)
Company culture and corporate governance failure
- No>on that nega>ves company culture and company’s failures is influence by the
wring tone at the top.
- Chinese proverb – The fish rots from the head – problems in a company can be
traced back to leadership at the top
- Company culture is everything – defines what is acceptable or not – transparency
- E.g corrup>on enters a company through leadership
LO4: Explain how ownership of a company is most oBen separated from actual control of a
company.
1.3 THE SEPARATION OF OWNERSHIP AND CONTROL
In theory, as shareholders are responsible for choosing the board of directors which in turn
appoints management, it follows that management works for shareholders and should work
in best interests by maximising value of the company
2
, Challenges of an effec>ve system of corporate governance are:
1. Ensure there are sufficient checks and balances in place to keep directors and
management accountable to shareholders
2. Ensure that the poten>ally conflic>ng interests of managers and shareholders are not
allowed to prevail over those of a company, and to minimise the agency costs –
strong board with independent directors plays a key role in monitoring management
and ensuring that the interests of the company as a whole.
3. Allow the needed delega>on of authority within the company whilst limi>ng the
poten>al for the abuse of that authority by, guarding against power being
concentrated in the hands of any one individual
4. Ensure that the right ques>ons get asked of the right people and that managers are
held accountable for the exercises of delegated authority and for the company’s
performance
5. Ensure that the polices and structures in place are flexible and agile enough to allow
company to achieve its purpose and to enable the company to an>cipate and
respond appropriately to risk
- Shareholders nominate and appoint directors
- Directors appoint managers to run the companies
- Therefore, separa>on of powers as managers manages the day to day running of the
company and work for the shareholders and in their best interests i.e increased profit
- Ensure that managers and directors are accountable to shareholders
- Ensure independent directors – avoid poten>al conflict of interests and interests as a
whole and not personal interests take preference
- Set out the necessary delega>on of authority while limi>ng it to ensure no abuse of
power- e.g CEO and CFO
- Management accountable for company performance
- Ensure policies and structures in place for CO to reach its purpose
3
