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

Marketing91
26 Nov 202009:27

Summary

TLDRThis 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.

Mindmap

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

play00:00

hello and welcome to marketing91.com

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principles of corporate governance are

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fairness

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fairness refers to equal treatment for

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example shareholders should receive

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equal consideration in proportion to

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their respective shareholdings moreover

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all stakeholders including employees

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communities and public officials should

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be treated fairly

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accountability

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corporate accountability refers to the

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obligation and responsibility to explain

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the company's actions and conduct

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the board should present a balanced and

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comprehensible assessment of the

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company's position and prospects and it

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should employ prudent risk management

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and internal control systems

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it should communicate with stakeholders

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at regular intervals a fair balanced and

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comprehensible assessment of the

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company's sections towards achieving its

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business objectives

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responsibility the board of directors

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have authority to act on the company's

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behalf hence they should resume complete

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responsibility and exercise the

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authority accordingly

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the board of directors is responsible

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for overseeing management of the

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business company affairs appointing the

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chief executive and monitoring the

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company's

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performance transparency

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transparency refers to a company's

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openness and willingness to disclose

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clear information to shareholders and

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other stakeholders

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material matters concerning company

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performance and activities should be

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disclosed in a timely and accurate

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manner to make sure that all investors

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are given clear factual information that

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precisely reflects the financial social

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and environmental position of the

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organization

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transparency helps ensure that

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stakeholders have confidence in the

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decision making and management processes

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of a company

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characteristics of good corporate

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governance

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participatory approach

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consensus oriented

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accountable transparent

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responsive

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equitable and inclusive

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efficient and effective

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and follows the rule of law

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the four ps are critical for corporate

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sustainability they are people

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people associated with the organization

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include investors shareholders employees

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society government etc can help clarify

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the people orientation of an

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organization's corporate governance

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scheme

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purpose the organization's purpose

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should be measurable actionable and

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communicated well to the organization

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stakeholders

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this includes mission and vision which

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should be based on shared organizational

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values leading to organizational

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commitment ensuring good corporate

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governance in turn

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process this includes process management

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process compliance and process

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innovation

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to ensure good corporate governance the

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organization must comply with all rules

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and regulations prescribed by the

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government and other relevant

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authorities and have a proper mechanism

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for avoiding violations of norms and

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lastly performance performance should be

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measured analyzed and communicated to

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achieve growth through efficiency

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development and promotes good corporate

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governance

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benefits of good corporate governance

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to business

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takes into account the need of all

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stakeholders creates transparency in all

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activities

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creates a good corporate image

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creates and sustains corporate social

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responsibility within the organization

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and ensures business activities are

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ethical

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to organization

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employees show commitment to work and

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deliver better results

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government extends exemptions and

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privileges

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companies reputation in society improves

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repeat business from customers increases

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and conflicts and frauds decrease

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to various parties involved shareholders

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are better informed about all important

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management decisions

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company follows fair employment policies

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and procedures

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customers get high quality products at

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fair prices

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investors return on investment is

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maximized and society benefits owing to

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the social and environmental activities

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of the organization

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issues in corporate governance

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issues involving corporate governance

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principles include

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internal controls and internal auditors

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independence of the entities external

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auditors and quality of their auditors

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oversight and management of risk

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oversight of the preparation of company

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financial statements

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review of chief executive officers

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compensation arrangements

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review of senior executives compensation

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arrangements

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resources available to directors to

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perform out their duties

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way in which individuals are nominated

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for board positions and lastly dividend

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policy

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theories of corporate governance agency

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theory the agency theory is used to

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understand relationships between agents

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and principles the agent represents the

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principle in a particular business

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transaction and is expected to represent

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the best interest of the principle

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without regard for self-interest

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diverging interests of principles and

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agents may lead to conflict because a

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few agents may not act in the

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principal's best interests

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such conflicts of interest may lead to

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inefficiencies and financial losses this

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results in the principal agent problem

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corporate governance can be used to

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change the rules under which an agent

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operates in order to restore the

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principal's interests

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the principal must overcome lack of

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information about the agent's

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performance of tasks

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agents must be incentivized to act in

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favor of the principal's interests

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the agency theory may be used to design

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these incentives appropriately by

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considering the interests that motivate

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the agent to act

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shareholder theory according to the

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shareholder theory one of the primary

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duties of managers is to maximize

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shareholders interests in ways that are

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permitted by law or social values as

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such the actions or ethical choices of

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those empowered to run the business are

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limited to employing business resources

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to meet stockholders interests or are

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aligned with stockholders interests

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as per the theory management is

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obligated to advance the business

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objectives and raise the worth of the

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business to stockholders benefit by

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using any means except deception or

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fraud

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the theory states that by working

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towards shareholder needs businesses

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generate wealth that benefits society

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the challenge with the shareholder

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theory is that it is based on the idea

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of true capitalism a real free market

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economy

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stakeholder theory the stakeholder

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theory looks at the relationships

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between an organization and entities its

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internal and external environment in

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addition it considers the effects of

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these connections on the manner in which

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a business conducts its activities the

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theory puts forth that managing for

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stakeholders involves catering to the

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interests as well as well-being of said

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stakeholders at the minimum

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the theory espouses treating all

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stakeholders with fairness honesty and

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even generosity

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according to the stakeholder theory

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treating all stakeholders well leads to

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synergistic benefits

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the manner in which a firm treats its

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customers influences the attitudes and

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behaviors of the firm's employees and

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the manner in which a firm behaves

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towards the communities in which it

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operates and influences the attitudes

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and behaviors of its suppliers and

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customers

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the crux of the stakeholder theory is

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that organizations which manage their

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stakeholder relationships effectively

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last longer and perform better than

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those that do not

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stewardship theory according to the

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stewardship theory managers are stewards

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whose behaviors are in line with the

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aims of their principles the theory

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argues for and draws a different form of

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motivation for managers from

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organizational theory

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managers are viewed as being loyal to

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the company and as being interested in

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achieving high performance

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the dominant motive that drives managers

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to achieve their goals is their inherent

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desire to deliver excellence

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managers are thought to be motivated by

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the needs to achieve gain intrinsic

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satisfaction by performing inherently

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challenging work exercise responsibility

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and authority and be recognized

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additionally the theory argues that an

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organization requires a structure that

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allows for achieving harmonization

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between managers and owners most

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effectively

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in the context of a firm's leadership

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this situation can be realized more

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easily if the ceo is also the chairman

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of the board

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such a leadership structure will assist

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companies to perform better given the

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ceo exercises complete authority over

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the corporation

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in this situation

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power and authority are vested with a

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single person hence expectations about

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corporate leadership are clearer and

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more consistent both for subordinate

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managers and the other board members

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the organization will reap the fruits of

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a unified direction and strong command

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and control

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thank you

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you

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Related Tags
Corporate GovernanceFairnessAccountabilityResponsibilityTransparencyStakeholder TheoryShareholder ValueEthical BusinessRisk ManagementSustainability