Principles of Corporate governance & Theories of Corporate Governance (Management video 37)

Summary

This video script from marketing91.com delves into the principles of corporate governance, emphasizing fairness, accountability, responsibility, and transparency. It outlines the characteristics of good governance, such as being participatory, transparent, and efficient, and discusses the benefits for businesses, including improved corporate image and stakeholder satisfaction. The script also explores theories like agency, shareholder, stakeholder, and stewardship, highlighting their impact on corporate sustainability and decision-making.

Takeaways

• 😀 **Fairness**: Shareholders should receive equal consideration in proportion to their shareholdings, and all stakeholders should be treated fairly.
• 🔍 **Accountability**: The board is responsible for explaining the company's actions, employing prudent risk management, and communicating with stakeholders regularly.
• 👥 **Responsibility**: The board of directors has the authority to act on the company's behalf and should exercise this authority responsibly.
• 🔑 **Transparency**: Companies should openly disclose clear information about their performance and activities to shareholders and stakeholders in a timely manner.
• 📊 **Good Corporate Governance Characteristics**: Includes a participatory approach, consensus orientation, accountability, transparency, responsiveness, equity, inclusiveness, efficiency, and adherence to the rule of law.
• 👫 **The Four Ps of Corporate Sustainability**: People, Purpose, Process, and Performance are critical for corporate sustainability.
• 🏢 **Benefits to Business**: Good corporate governance creates transparency, a good corporate image, ethical business activities, and sustains corporate social responsibility.
• 🏛️ **Benefits to Organization**: Employees show commitment, the government may extend privileges, and the company's reputation and customer loyalty improve.
• 🤝 **Benefits to Stakeholders**: Shareholders are better informed, customers receive quality products at fair prices, and investors maximize returns.
• 🔍 **Issues in Corporate Governance**: Include oversight of internal controls, auditor independence, risk management, financial statement preparation, executive compensation, and dividend policy.
• 🧩 **Theories of Corporate Governance**: Agency theory, Shareholder theory, Stakeholder theory, and Stewardship theory each provide different perspectives on the relationships and responsibilities within a corporation.

Q & A

What does the term 'fairness' in corporate governance entail?

Fairness in corporate governance refers to equal treatment, ensuring that shareholders receive equal consideration in proportion to their shareholdings and that all stakeholders, including employees, communities, and public officials, are treated fairly.

How is corporate accountability defined in the context of governance?

Corporate accountability is the obligation and responsibility to explain the company's actions and conduct. It involves the board presenting a balanced and comprehensible assessment of the company's position and prospects, employing prudent risk management and internal control systems, and communicating with stakeholders regularly.

What responsibilities do the board of directors have in a company?

The board of directors is responsible for overseeing the management of the business, appointing the chief executive, and monitoring the company's performance. They have the authority to act on the company's behalf and should exercise this authority accordingly.

What is the significance of transparency in corporate governance?

Transparency refers to a company's openness to disclose clear information to shareholders and other stakeholders. It involves disclosing material matters concerning company performance and activities in a timely and accurate manner, ensuring that all investors have factual information that reflects the financial, social, and environmental position of the organization.

What are the characteristics of good corporate governance?

Characteristics of good corporate governance include a participatory approach, being consensus-oriented, accountable, transparent, responsive, equitable, inclusive, efficient, effective, and following the rule of law.

How do the 'Four Ps' contribute to corporate sustainability?

The 'Four Ps' critical for corporate sustainability are People, Purpose, Process, and Performance. They help clarify the people orientation of an organization's corporate governance scheme, ensure the organization's purpose is measurable and communicated well, comply with rules and regulations, and measure, analyze, and communicate performance to achieve growth.

What benefits does good corporate governance bring to a business?

Good corporate governance benefits a business by taking into account the needs of all stakeholders, creating transparency in activities, creating a good corporate image, ensuring ethical business activities, and fostering corporate social responsibility.

What are some issues in corporate governance that companies need to address?

Issues in corporate governance include internal controls, the independence and quality of external auditors, oversight of risk management, preparation of financial statements, review of executive compensation, resources available to directors, nomination for board positions, and dividend policy.

How does the agency theory explain the relationship between agents and principals in a business?

The agency theory is used to understand the relationship between agents and principals, where the agent represents the principal in a business transaction. It addresses the potential conflicts of interest that may arise when agents do not act in the principal's best interests, leading to inefficiencies and financial losses, known as the principal-agent problem.

What is the main focus of the shareholder theory in corporate governance?

The shareholder theory posits that managers' primary duty is to maximize shareholders' interests within the bounds of law and social values. It suggests that by focusing on shareholder needs, businesses can generate wealth that benefits society.

How does the stakeholder theory differ from the shareholder theory?

The stakeholder theory differs from the shareholder theory by considering the interests and well-being of all stakeholders, not just shareholders. It emphasizes treating all stakeholders with fairness, honesty, and generosity, and suggests that managing stakeholder relationships effectively leads to longer-lasting and better-performing organizations.

What does the stewardship theory propose about the role of managers in an organization?

The stewardship theory proposes that managers are stewards who act in line with the aims of their principals. It argues that managers are motivated by a desire to deliver excellence, achieve satisfaction through challenging work, exercise responsibility, and be recognized. The theory also suggests that a unified leadership structure, such as when the CEO is also the chairman, can lead to better company performance.

Outlines

00:00

📈 Principles of Corporate Governance

This paragraph introduces the core principles of corporate governance, emphasizing fairness, accountability, responsibility, and transparency. Fairness ensures equal treatment for all stakeholders, including shareholders, employees, and communities. Accountability requires the board to explain the company's actions and conduct, employing prudent risk management and internal control systems. Responsibility lies with the board of directors to act on the company's behalf, overseeing management and appointing key executives. Transparency involves disclosing clear information about the company's financial, social, and environmental position to shareholders and stakeholders. The paragraph also outlines characteristics of good corporate governance, such as a participatory approach, consensus orientation, and efficiency. The 'Four Ps' of people, purpose, process, and performance are highlighted as critical for corporate sustainability. The benefits of good corporate governance for businesses, organizations, and various parties involved are also discussed, including creating transparency, improving corporate image, and ensuring ethical business activities.

05:02

🧐 Theories of Corporate Governance

The second paragraph delves into the theories that underpin corporate governance, including the agency theory, shareholder theory, stakeholder theory, and stewardship theory. The agency theory addresses the potential conflicts of interest between agents (managers) and principals (shareholders), suggesting that corporate governance can align the interests of both parties. The shareholder theory posits that managers should maximize shareholder interests within legal and ethical boundaries, focusing on generating wealth for society. The stakeholder theory broadens the scope to include all stakeholders, advocating for fair, honest, and generous treatment to achieve synergistic benefits. Lastly, the stewardship theory views managers as stewards of the company, motivated by a desire to achieve excellence and high performance. This theory suggests that a unified leadership structure, with the CEO also serving as the chairman, can lead to better company performance by harmonizing the interests of managers and owners.

Keywords

💡Fairness

Fairness in the context of corporate governance refers to the principle of equal treatment, ensuring that all shareholders receive equal consideration relative to their shareholdings. It also extends to treating all stakeholders, including employees, communities, and public officials, with fairness. In the video, fairness is highlighted as a foundational aspect of ethical business practices, promoting trust and equitable treatment across all levels of a company's operations.

💡Accountability

Accountability within a corporate setting denotes the obligation and responsibility of a company to explain its actions and conduct. The board of directors is tasked with providing a balanced and comprehensible assessment of the company's position and prospects, employing prudent risk management and internal control systems. This concept is crucial for maintaining transparency and building stakeholder trust, as it ensures that the company is held responsible for its decisions and actions.

💡Responsibility

The board of directors bears the responsibility for overseeing the management of the business, appointing the chief executive, and monitoring the company's performance. This keyword underscores the importance of the board's role in ensuring that the company operates within legal and ethical boundaries. It is a reminder that with authority comes the duty to act in the best interests of the company and its stakeholders.

💡Transparency

Transparency is characterized by a company's openness to disclose clear information to shareholders and other stakeholders. It involves the timely and accurate disclosure of material matters concerning company performance and activities. The video emphasizes that transparency is vital for maintaining investor confidence and ensuring that all parties have access to factual information that reflects the company's financial, social, and environmental status.

💡Participatory Approach

A participatory approach in corporate governance encourages active involvement and consensus among all stakeholders. This approach is highlighted in the video as a characteristic of good governance, suggesting that decisions are made through collaboration and consideration of diverse perspectives. It fosters an environment where all voices are heard, leading to more informed and democratic decision-making processes.

💡Purpose

The organization's purpose, as discussed in the video, should be measurable, actionable, and well-communicated to the stakeholders. It includes the mission and vision of the organization, which are based on shared values and lead to organizational commitment. A clear purpose is essential for guiding the company's actions and ensuring that they align with the broader goals of good corporate governance.

💡Process

Process in the context of corporate governance involves process management, compliance, and innovation. The video stresses the importance of adhering to rules and regulations and having mechanisms in place to prevent violations. A robust process ensures that the company operates efficiently and ethically, which is a key component of maintaining good corporate governance.

💡Performance

Performance in corporate governance is about measuring, analyzing, and communicating the company's growth and development. It is a way to assess how well the company is achieving its objectives and to promote efficiency. The video mentions that good performance is a sign of good governance, as it demonstrates the company's ability to use resources effectively and generate value for its stakeholders.

💡Stakeholder Theory

Stakeholder theory, as presented in the video, views the organization as having relationships with various entities both internally and externally. It emphasizes that managing for stakeholders involves catering to their interests and well-being. The theory suggests that treating all stakeholders fairly can lead to synergistic benefits and that organizations that manage these relationships effectively tend to perform better and last longer.

💡Agency Theory

Agency theory is used to understand the relationship between agents (such as managers) and principals (such as shareholders). It addresses the potential conflict of interest that arises when agents may not act in the best interests of the principals. The video explains that corporate governance can be used to align the interests of agents with those of the principals, thus mitigating the principal-agent problem and ensuring that the company operates in the best interests of all stakeholders.

💡Stewardship Theory

Stewardship theory posits that managers are stewards who act in alignment with the aims of their principals. This theory suggests a different motivation for managers, focusing on loyalty to the company and a desire to achieve high performance. The video mentions that an organizational structure that harmonizes the interests of managers and owners can lead to better company performance, especially when the CEO also serves as the chairman of the board.

Highlights

Fairness in corporate governance means equal treatment for all stakeholders, including shareholders, employees, and communities.

Corporate accountability involves the responsibility to explain a company's actions and conduct.

The board should use prudent risk management and internal control systems to ensure accountability.

Responsibility of the board of directors includes acting on the company's behalf and overseeing management.

Transparency is about a company's openness to disclose clear information to shareholders and stakeholders.

Good corporate governance should be participatory, consensus-oriented, and follow the rule of law.

The 'Four Ps' of corporate sustainability are People, Purpose, Process, and Performance.

Good corporate governance benefits businesses by creating transparency and a good corporate image.

Employees show commitment and deliver better results in organizations with good governance.

Good governance can lead to increased repeat business from customers and decreased conflicts and frauds.

Shareholders benefit from good corporate governance through better information about management decisions.

Good governance ensures companies follow fair employment policies and procedures.

Investors see a maximized return on investment in companies with strong corporate governance.

Society benefits from the social and environmental activities of organizations with good governance.

Issues in corporate governance include internal controls, auditor independence, and risk management oversight.

The agency theory explains the relationship between agents and principals in a business transaction.

The shareholder theory posits that managers' primary duty is to maximize shareholder interests.

The stakeholder theory emphasizes managing for the interests and well-being of all stakeholders.

Stewardship theory views managers as stewards who are loyal to the company and motivated to achieve high performance.

Transcripts

hello and welcome to marketing91.com

principles of corporate governance are

fairness

fairness refers to equal treatment for

example shareholders should receive

equal consideration in proportion to

their respective shareholdings moreover

all stakeholders including employees

communities and public officials should

be treated fairly

accountability

corporate accountability refers to the

obligation and responsibility to explain

the company's actions and conduct

the board should present a balanced and

comprehensible assessment of the

company's position and prospects and it

should employ prudent risk management

and internal control systems

it should communicate with stakeholders

at regular intervals a fair balanced and

comprehensible assessment of the

company's sections towards achieving its

business objectives

responsibility the board of directors

have authority to act on the company's

behalf hence they should resume complete

responsibility and exercise the

authority accordingly

the board of directors is responsible

for overseeing management of the

business company affairs appointing the

chief executive and monitoring the

company's

performance transparency

transparency refers to a company's

openness and willingness to disclose

clear information to shareholders and

other stakeholders

material matters concerning company

performance and activities should be

disclosed in a timely and accurate

manner to make sure that all investors

are given clear factual information that

precisely reflects the financial social

and environmental position of the

organization

transparency helps ensure that

stakeholders have confidence in the

decision making and management processes

of a company

characteristics of good corporate

governance

participatory approach

consensus oriented

accountable transparent

responsive

equitable and inclusive

efficient and effective

and follows the rule of law

the four ps are critical for corporate

sustainability they are people

people associated with the organization

include investors shareholders employees

society government etc can help clarify

the people orientation of an

organization's corporate governance

scheme

purpose the organization's purpose

should be measurable actionable and

communicated well to the organization

stakeholders

this includes mission and vision which

should be based on shared organizational

values leading to organizational

commitment ensuring good corporate

governance in turn

process this includes process management

process compliance and process

innovation

to ensure good corporate governance the

organization must comply with all rules

and regulations prescribed by the

government and other relevant

authorities and have a proper mechanism

for avoiding violations of norms and

lastly performance performance should be

measured analyzed and communicated to

achieve growth through efficiency

development and promotes good corporate

governance

benefits of good corporate governance

to business

takes into account the need of all

stakeholders creates transparency in all

activities

creates a good corporate image

creates and sustains corporate social

responsibility within the organization

and ensures business activities are

ethical

to organization

employees show commitment to work and

deliver better results

government extends exemptions and

privileges

companies reputation in society improves

repeat business from customers increases

and conflicts and frauds decrease

to various parties involved shareholders

are better informed about all important

management decisions

company follows fair employment policies

and procedures

customers get high quality products at

fair prices

investors return on investment is

maximized and society benefits owing to

the social and environmental activities

of the organization

issues in corporate governance

issues involving corporate governance

principles include

internal controls and internal auditors

independence of the entities external

auditors and quality of their auditors

oversight and management of risk

oversight of the preparation of company

financial statements

review of chief executive officers

compensation arrangements

review of senior executives compensation

arrangements

resources available to directors to

perform out their duties

way in which individuals are nominated

for board positions and lastly dividend

policy

theories of corporate governance agency

theory the agency theory is used to

understand relationships between agents

and principles the agent represents the

principle in a particular business

transaction and is expected to represent

the best interest of the principle

without regard for self-interest

diverging interests of principles and

agents may lead to conflict because a

few agents may not act in the

principal's best interests

such conflicts of interest may lead to

inefficiencies and financial losses this

results in the principal agent problem

corporate governance can be used to

change the rules under which an agent

operates in order to restore the

principal's interests

the principal must overcome lack of

information about the agent's

performance of tasks

agents must be incentivized to act in

favor of the principal's interests

the agency theory may be used to design

these incentives appropriately by

considering the interests that motivate

the agent to act

shareholder theory according to the

shareholder theory one of the primary

duties of managers is to maximize

shareholders interests in ways that are

permitted by law or social values as

such the actions or ethical choices of

those empowered to run the business are

limited to employing business resources

to meet stockholders interests or are

aligned with stockholders interests

as per the theory management is

obligated to advance the business

objectives and raise the worth of the

business to stockholders benefit by

using any means except deception or

fraud

the theory states that by working

towards shareholder needs businesses

generate wealth that benefits society

the challenge with the shareholder

theory is that it is based on the idea

of true capitalism a real free market

economy

stakeholder theory the stakeholder

theory looks at the relationships

between an organization and entities its

internal and external environment in

addition it considers the effects of

these connections on the manner in which

a business conducts its activities the

theory puts forth that managing for

stakeholders involves catering to the

interests as well as well-being of said

stakeholders at the minimum

the theory espouses treating all

stakeholders with fairness honesty and

even generosity

according to the stakeholder theory

treating all stakeholders well leads to

synergistic benefits

the manner in which a firm treats its

customers influences the attitudes and

behaviors of the firm's employees and

the manner in which a firm behaves

towards the communities in which it

operates and influences the attitudes

and behaviors of its suppliers and

customers

the crux of the stakeholder theory is

that organizations which manage their

stakeholder relationships effectively

last longer and perform better than

those that do not

stewardship theory according to the

stewardship theory managers are stewards

whose behaviors are in line with the

aims of their principles the theory

argues for and draws a different form of

motivation for managers from

organizational theory

managers are viewed as being loyal to

the company and as being interested in

achieving high performance

the dominant motive that drives managers

to achieve their goals is their inherent

desire to deliver excellence

managers are thought to be motivated by

the needs to achieve gain intrinsic

satisfaction by performing inherently

challenging work exercise responsibility

and authority and be recognized

additionally the theory argues that an

organization requires a structure that

allows for achieving harmonization

between managers and owners most

effectively

in the context of a firm's leadership

this situation can be realized more

easily if the ceo is also the chairman

of the board

such a leadership structure will assist

companies to perform better given the

ceo exercises complete authority over

the corporation

in this situation

power and authority are vested with a

single person hence expectations about

corporate leadership are clearer and

more consistent both for subordinate

managers and the other board members

the organization will reap the fruits of

a unified direction and strong command

and control

thank you

you