S1 2016

MKT3002 Business strategy

in a Global Environment
Lecture 2 Corporate governance
(Grant, Butler, Orr & Murray 2014 Chapter 2)

Dr Peng Zhou (Joe)

School of Management & Enterprise

Learning objectives

Understand the meaning and boundaries of

corporate governance
Appreciate the significance of stakeholder
management in the context of corporate
governance
Acknowledge the implications of the
separation of ownership and management
in the modern organisation
Analyse the internal and external
governance structure of organisations

2016 by Dr Peng Zhou

Learning objectives (cont.)

Comprehend the structure and major roles of

governing boards
Recognise the relationship between managers and
governing boards, and assess how this relationship
is related to corporate performance
Discuss current trends in corporate governance
from global perspective
Appreciate the value and importance of corporate
governance in the public sector and the
international arena
Evaluate how corporate governance is related to
the sustainability of modern organisations

2016 by Dr Peng Zhou

Introduction

How organisations are led and controlled by

their leaders has emerged as one of the
most important strategic management
issues, which include:

Disclosure statements issued to the Stock

Exchange
Liability of all directors
Duty of care to shareholders and other stakeholders

These matter are becoming important

throughout the Asia-Pacific region

2016 by Dr Peng Zhou

The concept of corporate governance

Corporate governance: the process of how

important strategic decisions are made and
controlled in organisations

Corporate governance is concerned with

identifying ways to ensure that strategic
decisions are made more effectively

It is used to establish order between the

companys owners and its top-level
managers, whose interests may sometimes
be in conflict

2016 by Dr Peng Zhou

Governance & sustainability

Sustainability of organisations and corporate

governance are closely linked

Appropriate corporate governance can

promote the interest of all stakeholders of
the organisation

Olympus corporation of Japan is a notable

example of poor governance and
organisational sustainability

2016 by Dr Peng Zhou

Boundaries & relationships of

corporate governance

2016 by Dr Peng Zhou

Corporate governance:
social responsibilities & stakeholders

Corporate social responsibility (CSR) refers to

the continuing commitment by business to
behave ethically and contribute to economic
development while improving the quality of
life of the workforce and their families as well
as of the local community and society at large

Research suggests that investors now look

beyond good financial indicator for ethical
and socially responsible behaviour for
organisations

2016 by Dr Peng Zhou

Five goals of corporate governance

Five basic goals of corporate governance to
enhance CSR are:

Recognition of ethical behaviour

A proactive stance towards the environment
Protection of the community
Enhancement of social responsibility in
employment practices
Fairly sharing wealth creation with different
stakeholders

2016 by Dr Peng Zhou

Corporate governance
& social responsibility

2016 by Dr Peng Zhou

Management of stakeholders

Who are stakeholders?

Stakeholders are organisations and individuals
to whom the organisation has a commitment
and who have expectations of what the
organisation does

What is stakeholder management?

Stakeholder management is the process of
managing the expectations of people, groups
or organisations that have an interest in a
company and will be affected by its activities

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10

Stakeholder analysis

What is stakeholder analysis?

Stakeholder analysis is the process of
systematically gathering and analysing
qualitative information to determine whose
interests should be taken into account when
developing and implementing a policy or
program
It is a technique that can be used to identify and
assess the importance of key people, groups of
people, or institutions that may significantly
influence the success of a companys activities

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Separation of ownership & management

The separation of ownership and management
an unavoidable phenomenon of modern
organisations, can cause few problems for
corporate governance

Shareholder (principals or owners) of

organisations want to see their residual income
maximised

Professional managers (agents) who are

appointed to manage the organisations do not
always see this as a top priority

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Separation of ownership &

management
(cont.)
Two particular problems emerge:

Managerial opportunism - the use of corporate

resources, whether they are tangible or
intangible, for a managers benefit at the
expense of the companys investors

Moral hazard is the situation in which

managers do not need to take up the full
consequences and responsibilities of their
decisions

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13

Corporate governance mechanism

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Institutional control

Institutional control refers to the control of

corporate governance through laws, regulations,
social pressures and political factors

It includes regulatory frameworks, social pressure,

and political impact

Social pressure is the combination of external

influences that surround an organisation

Political impact comes primarily from the

government, including the regulation and
deregulation of business activities

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Corporate market control

Corporate market control is the process by

which ownership and control of companies is
transferred from one group of investors and
managers to another

It is about the influence of the possible changes

in ownership that may affect corporate
governance practices

Share price of a public listed company is seen

as good indicator of the quality of its
governance

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Internal governance
mechanisms
Internal governance mechanisms are the devices
of the processes within an organisation that
oversee managerial activities and performance.
They include:

ownership concentration
executive compensation
audit committees
decentralised multidivisional structure
governing board

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Internal structure of a governing board

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Roles & responsibilities of governing

boards

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Interaction between management &

the governing board

It is critical to have proactive interaction

between management and the governing
board of an organisation

Two specific issues insufficiently explored in

the literature are:
What is the role of managers in an organisation
an agent or a steward?
Should the position of chairperson of a
governing board be occupied by the CEO of the
organisation?

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Corporate governance & performance

Good corporate governance can strengthen
business investment, corporate performance and
economic growth. In particular, effective
corporate governance will enable companies to:
More easily access capital markets, lowering
the cost of capital
Strengthen corporate reputation and raise the
trust and confidence of investors and customers
Increase the efficiency of operational activities
and minimise risks
Enhance long-term sustainability and growth
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Current trends in
corporate governance

Public sector governance is concerned with a

desire for greater economy, efficiency and
effectiveness in the use of public resources

Good public sector governance requires that

the government be held accountable to the
stakeholders for the proper use and
stewardship of public resources, and that
there are effective checks and balances for
monitoring the governments performance

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International corporate governance

Actual practices of corporate governance

differ among countries

The governance mechanism of each country

is shaped by its political, economic and social
environment, as well as by its legal framework

Despite the differences in shareholder

philosophies across countries, good governance
mechanisms need to be encouraged among
all private and public organisations

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CACGs corporate governance

principles
The Commonwealth Association of Corporate
Governance (CACG) has established four
generic corporate governance principles:

The responsibility of directors

The accountability of the board to shareholders
The transparency of clear financial and operational
information
The fairness that all shareholders are treated
equally and have the opportunity for redress for
violation of their rights

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OECD principles of corporate

governance

Ensuring the basis for an effective corporate

governance framework

The rights of shareholders and key ownership

functions

The equitable treatment of shareholders

The role of stakeholders in corporate governance

Disclosure and transparency

The responsibilities of the board

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Convergence of practices of
corporate governance

The available evidence suggest that the process

of convergence in corporate governance is
gathering momentum

International investors and creditors are more

comfortable in dealing with jurisdictions that
adopt transparent and globally acceptable
accounting and governance standards

Companies that comply with high governance

standards invariably develop a better reputation
in the global capital market

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Classroom exercises
Read Case Study 3: Fortescue Metals Group
Limited on pages 433 to 439 of the textbook.

Discuss the following question with either your

classmates with your fellow students in the
Lecture 2 online discussion forum.

How is the Fortescue board of directors

structured? What is Fortuescues reputation
regarding corporate governance practice?

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Summary

Corporate governance is important for strategic

decision making

These decisions should be made with reference to

all stakeholders, including shareholders

The primary cause of problems of corporate

governance is the separation of ownership and
management

The current trends suggest a convergence of

practices of private, public and international
organisations

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