Definition Of The Term Corporate Governance

Published Date: 02 Nov 2017

Corporate governance is a central and dynamic aspect of business. There are many ways of defining corporate governance, ranging from narrow definitions that focus on companies and their shareholders, to broader definitions that incorporate the accountability of companies to many other group of people, or "stakeholder".

The importance of corporate governance for corporate success as well as for social welfare cannot be overstated. Recent examples of massive corporate collapses resulting from weak systems of corporate governance have led many shareholders to lose their wealth and thus their faith and trust in corporations.

There is no single, accepted definition of corporate governance. There are substantial differences in definition according to which country we are considering about. Generally speaking, existing definitions of corporate governance fall on to a spectrum, with "narrow" views at one end and more inclusive, "broad" views placed at the other.

In the perspective of the "narrow" view, it perceives corporate governance as restricted to the relationship between a company and its shareholders which is the traditional finance paradigm, expressed in "agency theory".

In the perspective of the "broad" view, corporate governance may be seen as a web of relationships, not only between a company and the shareholders but also between a company and a broad range of other "stakeholders" such as employees, customers, suppliers, bondholders. This perspective is also expressed as the "stakeholder theory". This is a more comprehensive and larger way of treating the subject of corporate governance and one which is gradually attracting greater attention as issues of accountability and corporate social responsibility are brought to the forefront of policy and practice in the UK as well as in other countries.

The term corporate governance could also be defined as the system by which companies are directed and controlled (Cadbury Report, 1992). The Cadbury Report was a major UK inquiry into corporate governance.

In another view, corporate governance can also be defined as involving a set of relationships between a company’s management, its board, its shareholders and other stakeholders and provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined (The Organization for Economic Cooperation & Development, 2004).

Corporate governance is also defined as the relationship among various participants in determining the direction and performance of corporations, the primary participants are the shareholders, the management led by the chief executive officer and the board of directors whilst the other participants include the employees, customers, suppliers creditors and the community (Monks and Minor, 2001).

Next, corporate governance can also be looked at as the system of checks and balances, bother internally and externally to companies in which this ensures that the companies discharge their accountability to all their stakeholders and act in a socially responsible way in all areas of their business activities (Soloman and Soloman, 2004).

Lastly, according to Professor Bob Tricker, there is a difference between govering and managing in companies as far as corporate governance is concerned. Whilst management processes have been widely explored, relatively little attention has been paid to the processes by which companies are governed. If management is about running businesses, governance is about seeing that it is run properly. All companies need governing as well as managing. (Professor Bob Tricker, 1984)

Hence, from all the above mentioned, it is clear that the existence of corporate governance is to ensure a few factors takes place when it comes to businesses. They are such as aligning the board’s interest with that of the shareholders, it is to ease the raise of finance when the company need funds and also to attract investments to take place. Although a company exists as a legal person, in reality it is the organized collective effort of many different individuals that form the groupings empowered to making decisions. An essential body of decision makers which comprise the board of directors are the ones who make decision on behalf of the shareholders, in this case, the owners.

It is evident to us that corporate governance is a matter of much greater importance for large public companies, where the separation of ownership from management is much wider than for small private companies. In small private companies, the directors are also shareholders most likely. Public companies raise capital on the stock markets and institutional investors hold vast portfolios of shares and other investments. Investors need to know that their money is reasonably safe. In another words, transparency is the key element here in providing a safe environment for investors to invest in.

Corporate Governance

2. Scope and principles of Corporate Governance as per other companies in the market.

The other companies with their scope and principles of corporate governance in question are such as Malayan Banking Berhad, Public Bank Berhad and Maxis Berhad.

For Malayan Banking Berhad, the scope and principles of corporate governance are in accordance with a view to continuously enhancing stakeholder value, increasing investor confidence, establishing customer trust and building a competitive organisation whiles at the same time not losing sight of its international stakeholders by establishing and overseeing requisite cross-border governance policies and processes.

The Maybank Group’s corporate governance model adopts the Malaysian Code on Corporate Governance 2012 (referred to herein as "the code" or MCCG 2012). They are also in compliance with Bank Negara Malaysia’s revised guidelines on corporate governance for licensed institutions, Bursa Malaysia Securities Berhad’s Main Market Listing Requirements, Green Book on Enhancing Board Effectiveness by athe Putrajaya Committee on Government Linked Companies High Performance, Corporate Governance Guide by Bursa Malaysia and Minority Shareholders Watchdog Group’s Corporate Governance Guidelines.

The Board of Maybank Group aims to achieve the highest standards of business integrity, ethics and professionalism across all of the Group’s activities. The fundamental approach adopted is to ensure that the right executive leadership, strategy and internal controls for risk management are well in place. Nonetheless, the Board also continuously reviews its governance model to ensure its relevance; effectiveness and ability to meet the challenges of the future remain sustainable.

The Maybank Board is responsible for the periodic review and approval of the overall strategies, business, organisation and significant policies of the Bank and the Group. The Board also sets the Group’s core values, adopts proper standards to ensure that the Bank operates with integrity and complies with the relevant rules and regulations. The board is also responsible for reviewing and approving the strategies and business plans for the Bank and Group, identifying and managing principal risks affecting the Group, reviewing the adequacy and integrity of the Group’s internal control system, overseeing the conduct and the performance, reviewing succession planning and talent management plans, approving new policies pertaining to boardroom diversity, approving changes to the corporate organisation structure, approving the appointment of Directors and Directors’, approving policies relating to corporate branding and reviewing the Group’s strategies on promotion of sustainability focusing on environmental, social and governance aspects.

For Public Bank Berhad, its scope and principles are in such that the Board of Directors are fully committed to maintaining the highest standards in corporate governance, professionalism and integrity in driving Public Bank to create and deliver long-term sustainable shareholder value. Public Bank in 2012 is also in compliance with the principles and recommendations of the Malaysian Code on Corporate Governance 2012 (MCCG 2012) as well as licensed under the above mentioned in Maybank Berhad.

In Public Bank, the Board delegates the day-to-day management of Public Bank’s business to the Board Executive Committee but reserves for its consideration significant matters such as the approval of financial results, declaration of dividends, risk appetite setting, short-term and medium-term business plans, annual budget, governance structure for implementation of internal capital adequacy assessment process (ICAAP) and Public Bank Groups ICAAP Framework, capital management plan, credit policy and appointment of key responsible persons.

The principle responsibilities of the Board are such as formulating the Bank’s annual business plans and the medium-term and long-term strategic plans, approving the Bank’s annual budget and carrying out periodic review of the achievements by the various operating divisions against their respective business targets, prescribing the minimum standards and establishing policies on the management of credit risks and other key areas of the Bank’s operations, overseeing of the Bank’s business operations and financial performance, ensuring that the operating infrastructure, systems of control, systems for risk identification and management, financial and operational controls are in place and properly implemented and lastly to undertake various functions and responsibilities as specified in the guidelines and directives issued by BNM from time to time.

In view of Maxis Berhad, the Board has formally adopted a Board Charter that clearly sets out the role, functions, composition, operation and processes of the Board. The Board Charter was published on Maxis’ Corporate website as soon as it was finalised and approved by the Board. It seeks to ensure that all Board members are aware of their duties and responsibilities as Board members. It also acts as a source of reference and primary induction literature for prospective Board members and Senior Management. It is also intended to assist the Board in assessing its collective performance and that of each individual Director.

The Board charter assumes its duties and responsibilities in reviewing, adopting and monitoring the implementation of a strategic business plan for the Group, overseeing the conduct of the Group’s business to evaluate whether the business is being properly managed. This includes ensuring that there are measures in place against which management’s performance can be assessed, identifying principal risks and ensuring the implementation of appropriate systems to manage these risks, succession planning, including appointing, training, fixing the compensation of and where appropriate, replacing key management, developing and implementing an investor relations programme or shareholder communications policy for the Group and encouraging the use of information technology for effective dissemination of information, reviewing the adequacy and integrity of the Group’s systems of internal control and of management information, including ensuring that a sound risk management framework, reporting framework and systems for compliance with applicable laws, regulations, rules, directives and guidelines are in place and reviewing, adopting and implementing appropriate corporate disclosure policies and procedures.

Corporate Governance

3. An analysis of whether it would be beneficial for the company to implement Corporate Governance including its relevance to Financial Reporting and other considerations that may be necessary for the Board of Directors to make an informed decision.

Yes, it is definitely beneficial for the company to implement corporate governance in order for the Board of Directors to make an informed decision. Firstly, implementing corporate governance will improve the relationship between the company and its shareholders and other stakeholders. It will also uphold the reputation of the company with customers and the public in general. By being able to implement corporate governance, it will also mean that the company will be inclined to indulge in demonstrating openness, honesty, transparency, independency, accountability, responsibility and fairness over their business which in return shows evidence of good management and a well-run company. This will also attract potential investors to invest in the company. Hence, it is very beneficial to implement corporate governance as far as its relevance to its financial reporting is concerned.

Other considerations that are necessary for the Board of Directors to make informed decisions are such as the need to rotate the directors from time to time to ensure that the directors in charge are fresh and up to date to the latest happenings of the company. Any conflicts of interest should also be in full disclosure to the company and the shareholders to ensure that the goals and objective of the company are propelling in the correct direction. Also, the Board of Directors must also consider the effect of their decisions during decision making sessions in view of the stakeholders and not only in the perspective of the shareholders. It is understandable that the duty of the Board of Directors is to maximise shareholders value but the Board must consider this in order to have a fair treatment to every individual involved. Any decisions made by the members of the Board must be "bona fide" to the company as a whole. The decisions that are made must not be made on personal gains or interests but in good faith and in the best interests to the company and its shareholders. The last consideration would be that the Board of Directors must exercise their duties in due care with prudence concept in mind. In other words, all decisions made by the Board must be sound and of a business minded person.