BBA VI Semester

Business and Society

POST RAJ POKHAREL

M.Phil. (TU) 01/2010), Ph.D. in Progress

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 Unit V: Corporate Governance 7 hours

Concept, scope and significance of corporate

governance; Theories governing corporate
governance - Agency theory, transaction cost
economics, stewardship theory; Governance of
corporate entities; Challenges for good corporate
governance; Impact of governance on business,
society and the 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.

Board of directors
An elected group of individuals who have a legal duty
to establish corporate objectives, develop broad
policies, and select top-level personnel to carry out
these objectives and policies
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 scope and significance of
corporate governance
Set of relationships between a company’s management, its
boards, its shareholders and other stake holders (OECD
Principles)

Scope:
1. Accountability: of BoD and their constituent responsibilities to
the ultimate owners-the shareholders.
2. Transparency i.e. right to information, timeliness and integrity
of the information provided.
3. Clarity in responsibility to enhance accountability.
4. Quality and competence of directors and their track record
5. Checks and balances: in the process of governance
6. Adherence to rules, law and spirit of codes

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 Significance of Corporate Governance
Significance:
•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.
•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 5
 Significance of Corporate Governance
•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.
• 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.

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 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
• 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
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 ) 7
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
Governance of corporate entities

• Classroom Discussion

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 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
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

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 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
• 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
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