1. Chapter 5
Corporate Governance

2. Learning Outcomes Explain the term corporate governance
Understand the responsibilities of the board of directors and the major governance committees
Explain the significance of the “King I” and “King II” reports

3. Learning Outcomes (continued)
Explain the differences between the following two governance methodologies: “comply or explain” and “comply or else”
Identify an appropriate corporate governance model for an organization

4. Corporate Governance
System by which business corporations are directed and controlled
Good corporate governance - Plays a vital role in underpinning the integrity and efficiency of financial markets
Poor corporate governance - Weakens a company’s potential and can lead to financial difficulties and fraud

5. What Does Corporate Governance Look Like?
Owners - Supply equity or risk capital to the company by purchasing shares in the corporation
Board of directors: Group of individuals who oversee governance of an organization
Elected by vote of the shareholders at the annual general meeting (AGM)

6. Audit and Compensation Committees
Operating committees staffed by members of the board of directors plus independent or outside directors
Audit committees are responsible for monitoring the financial policies and procedures of the organization
Compensation committees are responsible for setting the compensation for the CEO and other senior executives

7. Corporate Governance Committee
Monitors the ethical performance of the corporation
Oversees compliance with the company’s internal code of ethics as well as any federal and state regulations on corporate conduct

8. Figure 5.1 - Governance of the Modern Corporation
Source: Adapted from Fred R. Kaen, A Blueprint for Corporate Governance (New York: AMACOM, 2003).

9. In Pursuit of Corporate Governance
King I report was recognized as advocating the highest standards of corporate governance
Took a more integrated approach to the topic of corporate governance
By recognizing the involvement of all the corporation’s stakeholders in the efficient and appropriate operation of the organization

10. King II Report Formally recognized the need to:
Move the stakeholder model forward
Consider a triple bottom line as opposed to the traditional single bottom line of profitability
Triple bottom line recognizes the economic, environmental, and social aspects of a company’s activities
Successful governance in the world in the 21st century requires companies to adopt an inclusive and not exclusive approach

11. King II Report (continued)
Company must be open to institutional activism and should emphasize the sustainable or non-financial aspects of its performance
Boards must apply the tests of fairness, accountability, responsibility, and transparency to all acts and be accountable to the company and its stakeholders
Correct balance between conformance with governance principles and performance in an entrepreneurial market economy must be found

12. Two Governance Methodologies
Comply or explain 
Set of guidelines that require companies to abide by a set of operating standards or explain why they choose not to
Comply or else
Set of guidelines that require companies to abide by a set of operating standards or face stiff financial penalties

13. The Chairman and the CEO
Disregarding the corporate governance model involves merging the roles of chief executive officer (CEO) and chairman of the board into one individual
Oversight provided by the board of directors is lost
Operational focus changes from long term to short term
Merging the two roles may lead to higher efficiency

14. The Chairman and the CEO (continued)
Advantages of merging
Disadvantages of merging
Potential for conflict is minimized
Board is given the benefit of leadership from someone who is in touch with the inner workings of the organization rather than an outsider
Governance of the corporation is with one person, which eliminates the checks and balances process that the board was created for in the first place
Independence of the board is compromised, and the power of the stockholders is minimized

15. Effective Corporate Governance
European business school INSEAD emphasizes corporate governance as an organizational culture issue through CRAFTED principles
Consistency, responsibility, accountability, fairness, transparency, and effectiveness that is deployed throughout the organization

16. Effective Corporate Governance (continued 1)
To serve the purpose in setting the operational tone for the organization, the board should be:
Comprised of members who represent professional conduct
Granted proper authority to fulfill their responsibilities of oversight, guidance, and approval
Willing to work with the executive leadership to provide feedback and guidance in a detailed and timely manner

17. Effective Corporate Governance (continued 2)
Electing to take strategic projects under advisement for extended periods of time may serve to reinforce the power of the board of directors

18. Dangers of a Corporate Governance Checklist
Effective corporate governance is more than just maintaining a checklist of items to be monitored on a regular basis
Having mechanisms in place will not guarantee good governance

19. A Fiduciary Responsibility
Corporate governance is about managers fulfilling a fiduciary responsibility to the owners of their companies
Based on trust, which is a difficult trait to test when hiring a manager or enforcing it later
Enforcement is only an option when trust is broken

20. Key Safeguards for Corporate Governance
Properly constituted boards
Separation of the functions of chairperson and CEO
Audit committees
Vigilant shareholders
Financial reporting and auditing systems that provide full and timely disclosure