BBA VI Semester Business and Society

1. BBA VI Semester Business and Society POST RAJ POKHAREL M.Phil. (TU) 01/2010), Ph.D. in Progress

2. 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.

3. 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

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

5. 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 stability.

6. 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.

7. 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 )

9. 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.

11. 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

12. 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

13. Governance of corporate entities • Classroom Discussion

14. 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

15. 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