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. Rule of Law
Good governance requires fair legal frameworks that are enforced by an impartial regulatory
body, for the full protection of stakeholders.

2. Transparency
Transparency means that information should be provided in easily understandable forms and
media; that it should be freely available and directly accessible to those who will be affected
by governance policies and practices, as well as the outcomes resulting therefrom; and that
any decisions taken and their enforcement are in compliance with established rules and
regulations.

3. Responsiveness
Good governance requires that organizations and their processes are designed to serve the
best interests of stakeholders within a reasonable timeframe.

4. Consensus Oriented
Good governance requires consultation to understand the different interests of stakeholders in
order to reach a broad consensus of what is in the best interest of the entire stakeholder group
and how this can be achieved in a sustainable and prudent manner.

5. Equity and Inclusiveness

The organization that provides the opportunity for its stakeholders to maintain, enhance, or
generally improve their well-being provides the most compelling message regarding its
reason for existence and value to society.

6. Effectiveness and Efficiency

Good governance means that the processes implemented by the organization to produce
favorable results meet the needs of its stakeholders, while making the best use of resources –
human, technological, financial, natural and environmental – at its disposal.

7. Accountability
Accountability is a key tenet of good governance. Who is accountable for what should be
documented in policy statements. In general, an organization is accountable to those who will
be affected by its decisions or actions as well as the applicable rules of law.
8. Participation
Participation by both men and women, either directly or through legitimate representatives, is
a key cornerstone of good governance. Participation needs to be informed and organized,
including freedom of expression and assiduous concern for the best interests of the
organization and society in general.

What is Corporate Governance?

Corporate governance is the system of rules and structures by which a corporation is run. It is
typically a concern for publicly held companies rather than private ones.

A typical governance structure involves a board of directors and executive officers, with
responsibility split between enterprise-level and operational functions respectively. Modern
corporate governance is built to ensure that the organization meets its fiduciary and legal
duties to all stakeholders, including shareholders and government regulators. This typically
means splitting up lines of authority from oversight, and managing conflicts of interest.

Corporate governance is a relatively new field. As Harvard's Guhan Subramanian writes, "the

field as we now know it emerged only in the 1970s. Achieving best practices has been
hindered by a patchwork system of regulation, a mix of public and private policy makers, and
the lack of an accepted metric for determining what constitutes successful corporate
governance."

What Are the Elements of Corporate Governance?

While best practices are still emerging, corporate governance has a few key elements.

1. Shareholders
Shareholders don't play a direct role in corporate governance but they have a vested interest
in its outcome.

The indirect role that shareholders play is that of gatekeepers. In most organizations they vote
for members of the board of directors and, when necessary, they appoint corporate auditors.

Further, their interests guide much of corporate governance in practice. A corporation has
what is known as a fiduciary duty to its shareholders. The full details of fiduciary duty fill
volumes and are the subject of frequent debate, but at its core the fiduciary duty means that a
board of directors can't lie, cheat or enrich itself at the expense of shareholders.

2. Board of Directors
The board of directors, as noted above, makes corporation-wide decisions. This includes
choosing executives and setting their compensation, major strategic initiatives and changing
ownership structures.
The details of a board's role can change depending on both the organization and
circumstances. While a board of directors may not get involved in social media strategy, for
example, it might meet in response to a perceived crisis of the brand.

A typical board of directors is assembled from a combination of shareholders, corporate

executives and high-status third parties unrelated to the corporation. This is intended to give a
diversity of interests and opinions, however, one of the weaknesses to this model is that most
(if not all) members of most boards end up shareholders and can therefore enrich themselves
based on how they choose to dispose of the company.

3. Executives
Officers of the corporation are responsible for daily operation and ensuring that the decisions
of the board are faithfully executed. Typical executive roles include the Chief Executive
Officer, Chief Financial Officer, President, Vice President and other similarly situated
personnel. Not every firm will have every common executive position and others will
combine some into one. (It's common, for example, for the same person to hold both the
position of President and CEO.)

Note that executives are distinct from management. As the terms are commonly used,
management refers to individuals who oversee the activity of individual employees. They are
responsible for specific projects, departments and deliverables.

Executives have an enterprise-wide perspective. While an executive may have a specific role,
such as technology (as with a CTO) or finance (as with a CFO), they oversee that role
corporation-wide.

Governance Documents

The specific documents of corporate governance vary from firm to firm. Some corporations
may adopt environmental policies, whistleblower policies and codes of conduct, among other
possible documents. Any document formally adopted by the corporation as part of its
operating structure is a corporate governance document. However, a few documents are
standard:

1. Bylaws
Bylaws set the rules for corporate management. The typical corporate bylaws document
establishes the various executive positions, along with duties and responsibilities. It clarifies
the role of shareholders in running the corporation and their voting rights. Finally, unless
established in a separate document, the bylaws typically set the rights, role and
responsibilities for the Board of Directors.

2. Articles of Incorporation
Not technically a form of corporate governance, many firms will list articles of incorporation
among their corporate governance documents. Articles of incorporation are the papers that a
corporation files when incorporating as a business. They specify details such as state of
incorporation, share issuance, initial directors and officers, and registered agents. Some
 articles of incorporation may also include management instructions and details on how to
structure executive positions and the Board of Directors.

3. Corporate Governance Guidelines

Corporate governance guidelines may often mimic the corporate bylaws. In some cases the
firm may simply rename its bylaws as governance guidelines.

This document can expand well beyond the typical organizational structure of corporate
bylaws. Governance guidelines can include any instructions that the corporation adopts for its
management, values, operation or strategy. This could include, for example, provisions
on social responsibility, ethics, political concerns or environmental issues.

Corporate Governance Development

As Subramanian notes in the article cited above, corporate governance is a relatively new
field of management study. However, in a brief period of time it has become essential to
modern business practices.

State and federal laws have established several compliance requirements related to corporate
governance, typically built around transparency and conflicts of interest. The latter has
become an increasingly important issue in recent years, as regulators have taken an
increasingly close look at the practice of boards using leveraged buyouts to enrich themselves
at the expense of the corporation.

Corporate Governance and Agency Theory

Agency Theory in Corporate Governance

Corporate management should act in the best interest of a company's stakeholders,
especially the shareholders who own equity but have no direct voice. The agency theory of
corporate governance is quite simple, at least on the surface. It states that corporate
executives have a moral and financial duty to act in the best interests of the parties they
serve, specifically the shareholders. In practice, agency theory can sometimes be quite
challenging, especially when there are billions of dollars at stake.

Importance of Agency Theory

Agency theory provides clear parameters for corporate officers and board members making
strategic decisions. It comes in handy if decision makers have a tendency to be greedy and
profit at the expense of the company. It is also an invaluable guideline when a company's
long-term interests conflict with actions that may provide lesser but more immediate
benefits to stakeholders.

 Decision-making protocols. In theory, buying a share of company stock gives you

a vote in major company decisions. This right is diluted by the fact that some stockholders
may own a single share, giving them a single vote, while others own thousands of shares,
giving them thousands of votes. Executives and board members should represent all
 shareholders, but they might overrepresent those who own the most equity. Agency theory
is a step toward navigating these complex and sometimes conflicting obligations.

 Greedy executives. The people with the power to make high-level corporate

decisions are often directly in line to benefit from some of these decisions, especially with
regard to issues of corporate pay. In a perfect world, high pay and large bonuses for
executives would motivate and reward them for quality work that brings in extra income for
all shareholders. In the real world, high corporate pay can come at the expense of the
bottom line that is divided among the broader pool of shareholders.

 Long-term vs. short-term interests. It may be in the best interests of a company to

invest in the future, but these outlays often come at the expense of short-term rewards such
as shareholder dividends. Executives conscientiously practicing corporate agency theory
will use the knowledge and skills that landed them in management positions to make the
best calls possible for the organization as a whole.

Corporate management should act in the best interest of a company's stakeholders,

especially the shareholders who own equity but have no direct voice. The agency theory of
corporate governance is quite simple, at least on the surface. It states that corporate
executives have a moral and financial duty to act in the best interests of the parties they
serve, specifically the shareholders. In practice, agency theory can sometimes be quite
challenging, especially when there are billions of dollars at stake.

The agency theory of corporate governance addresses conflicts of interest for board
members by stating that executives must prioritize the interests of shareholders.

Importance of Agency Theory

Agency theory provides clear parameters for corporate officers and board members making
strategic decisions. It comes in handy if decision makers have a tendency to be greedy and
profit at the expense of the company. It is also an invaluable guideline when a company's
long-term interests conflict with actions that may provide lesser but more immediate
benefits to stakeholders.

 Decision-making protocols. In theory, buying a share of company stock gives you

a vote in major company decisions. This right is diluted by the fact that some stockholders
may own a single share, giving them a single vote, while others own thousands of shares,
giving them thousands of votes. Executives and board members should represent all
shareholders, but they might overrepresent those who own the most equity. Agency theory
is a step toward navigating these complex and sometimes conflicting obligations.

 Greedy executives. The people with the power to make high-level corporate

decisions are often directly in line to benefit from some of these decisions, especially with
regard to issues of corporate pay. In a perfect world, high pay and large bonuses for
executives would motivate and reward them for quality work that brings in extra income for
all shareholders. In the real world, high corporate pay can come at the expense of the
bottom line that is divided among the broader pool of shareholders.

 Long-term vs. short-term interests. It may be in the best interests of a company to

invest in the future, but these outlays often come at the expense of short-term rewards such
as shareholder dividends. Executives conscientiously practicing corporate agency theory
will use the knowledge and skills that landed them in management positions to make the
best calls possible for the organization as a whole.

Purpose of Agency Theory

In order to explain agency theory, it's useful to think in terms of different perspectives on
risk assessment. Unless shareholders are unusually well informed about the inner workings
of a company, they're likely to want to invest company resources in ways that will bring the
most income in the short term. However, investments that bring about quick returns tend to
be riskier than strategies that unfold more slowly, allowing a company to adapt and adjust.

Shareholders purchase their shares and then enjoy returns over time if the business is
successful. Although the value of their shares may be at risk from speculation and
approaches geared toward reaping short-term benefits, the shareholders themselves aren't
taking on any additional risks from these ventures. In contrast, managers and board
members who are more actively involved in the company's day-to-day activities have a
more sober assessment of the risks associated with aggressive short-term strategies.

The Importance of Communication

By keeping shareholders well informed of company activities, executives and board

members who act in their interests as agents can mitigate some of the risk of distrust and
conflict of interest that is often characteristic of this relationship. Transparency helps to
reinforce the idea that the interests of shareholders and their management are ultimately
aligned, and agents are truly acting in the best interests of the parties they represent.

Theories of Corporate Governance: Agency, Stewardship etc

There are many theories of corporate governance which addressed the challenges of
governance of firms and companies from time to time. The Corporate Governance is the
process of decision making and the process by which decisions are implemented in large
businesses is known as Corporate Governance. There are various theories which describe the
relationship between various stakeholders of the business while carrying out the activity of
the business.

Theories of Corporate Governance

We will discuss the following theories of corporate governance:

 Agency Theory
 Stewardship Theory
 Resource Dependency Theory
 Stakeholder Theory
 Transaction Cost Theory
 Political Theory
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

Resource Dependency Theory

The Resource Dependency Theory focuses on the role of board directors in providing access
to resources needed by the firm. It states that directors play an important role in providing or
securing essential resources to an organization through their linkages to the external
environment. The provision of resources enhances organizational functioning, firm’s
performance and its survival. The directors bring resources to the firm, such as information,
skills, access to key constituents such as suppliers, buyers, public policy makers, social
groups as well as legitimacy. Directors can be classified into four categories of insiders,
business experts, support specialists and community influentials.

Transaction Cost Theory

Transaction cost theory states that a company has number of contracts within the company
itself or with market through which it creates value for the company. There is cost associated
with each contract with external party; such cost is called transaction cost. If transaction cost
of using the market is higher, the company would undertake that transaction itself.

Political Theory

Political theory brings the approach of developing voting support from shareholders, rather
by purchasing voting power. It highlights the allocation of corporate power, profits and
privileges are determined via the governments’ favor
What is Stewardship Theory?
Stewardship theory is a theory that states employees are intrinsically motivated to work for
others or for organizations to complete the tasks and responsibilities with which they have
been assigned. It also states that people are employees are collective minded and work
proactively toward the attainment of the organizational goals as gives them a sense of
satisfaction.

According to stewardship theory, company executives protect the preferences of

the shareholders or owners and make decisions on their behalf. Their main aim is to form and
maintain a successful organization to achieve the shareholders’ vision. As a result,
organizations which follow the Stewardship principle selects the right personality to lead the
organization; this requires to place the CEO and Chairman responsibilities under one
Executive.

Factors Influencing Individual Behavior

The way an individual addresses a situation single-handedly or say in a group is influenced
by many factors. The key factors influencing an individual’s attitude in personal as well as
social life are −

 Abilities
 Gender
 Race and culture
 Attribution
 Perception
 Attitude
Let’s take a quick look over these major elements that imprints a person’s behavior inside
and outside of the organization.

Abilities

Abilities are the traits a person learns from the environment around as well as the traits a
person is gifted with by birth. These traits are broadly classified as −

 Intellectual abilities
 Physical abilities
 Self-awareness abilities
In order to understand how these affect a person’s behavior, we need to know what these
abilities are.
 Intellectual abilities − It personifies a person’s intelligence, verbal and analytical
reasoning abilities, memory as well as verbal comprehension.
 Physical abilities − It personifies a person’s physical strength, stamina, body
coordination as well as motor skills.
 Self-awareness abilities − It symbolizes how a person feels about the task, while a
manager’s perception of his abilities decides the kind of work that needs to be
allotted to an individual.
Thus the psychological, physical, self-assurance traits owned by a person defines the
behavior of a person in social and personal life. For ex: Ram has a high IQ level, whereas
Rahul can lift a bike and is a strong guy.

Gender

Research proves that men and women both stand equal in terms of job performance and
mental abilities; however, society still emphasizes differences between the two genders.
Absenteeism is one area in an organization where differences are found as women are
considered to be the primary caregiver for children. A factor that might influence work
allocation and evaluation in an organization is the manager’s perception and personal values.
For example − An organization encourages both genders to work efficiently towards the
company’s goal and no special promotion or demotion is given or tolerated for any specific
gender.

Race & Culture

Race is a group of people sharing similar physical features. It is used to define types of
persons according to perceived traits. For example − Indian, African. On the other hand,
culture can be defined as the traits, ideas, customs and traditions one follows either as a
person or in a group. For example − Celebrating a festival.
Race & culture have always exerted an important influence both at the workplace as well as
in the society. The common mistakes such as attributing behavior and stereotyping
according to individual’s race & culture basically influences an individual’s behavior.
In today’s diverse work culture, the management as well as staff should learn and accept
different cultures, values, and common protocols to create more comfortable corporate
culture.
For example − A company invites candidates for a job post and hires one on the basis of
eligibility criteria and not on the basis of the country a person belongs to or the customs one
follows.

Perception

Perception is an intellectual process of transforming sensory stimuli into meaningful

information. It is the process of interpreting something that we see or hear in our mind and
use it later to judge and give a verdict on a situation, person, group, etc.
It can be divided into six types namely −
 Of sound − The ability to receive sound by identifying vibrations.
 Of speech − The competence of interpreting and understanding the sounds of
language heard.
 Touch − Identifying objects through patterns of its surface by touching it.
 Taste − The ability to detect flavor of substances by tasting it through sensory organs
known as taste buds.
  Other senses − Other senses include balance, acceleration, pain, time, sensation felt
in throat and lungs etc.
 Of the social world − It permits people to understand other individuals and groups of
their social world.
For example − Priya goes to a restaurant and likes their customer service, so she will
perceive that it is a good place to hang out and will recommend it to her friends, who may or
may not like it. However, Priya’s perception about the restaurant remains good.

Attribution

Attribution is the course of observing behavior followed by determining its cause based on
individual’s personality or situation.
Attribution framework uses the following three criteria −
 Consensus − The extent to which people in the same situation might react similarly.
 Distinctiveness − The extent to which a person’s behavior can be associated to
situations or personality.
 Consistency − The frequency measurement of the observed behavior, that is, how
often does this behavior occur.
The framework mentioned says it is all about how an individual behaves in different
situations.
For example − Rohit invites Anisha and two more friends for a movie and they agree to
bunk and watch the movie, this is consensus. Bunking of class says that they are not
interested in their lectures, this is distinctiveness. A little change in the situation, like if
Rohit frequently starts bunking the class then his friends may or may not support him. The
frequency of their support and their rejection decides consistency.

Attitude

Attitude is the abstract learnt reaction or say response of a person’s entire cognitive process
over a time span.
For example − A person who has worked with different companies might develop an
attitude of indifference towards organizational citizenship.
Now we have a clear idea about what are the factors responsible for the way we behave. We
never think about these elements and how they affect our daily life but we can’t ignore the
fact that they are responsible for the way we walk, talk, eat, socialize, etc.
5 COMMON ISSUES THAT ARISE IN CORPORATE GOVERNANCE
Corporate governance is the term used to describe the balance among participants in the
corporate structure who have an interest in the way in which the corporation is run, such as
executive staff, shareholders and members of the community. Corporate governance directly
impacts the profits and reputation of the company, and having poor policies can expose the
company to lawsuits, fines, reputational damage, and loss of capital investment. Here are five
common pitfalls your corporate governance policies should avoid.
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.