Bappy Mahmud

AIS 18-19
Chapter 3

Areas of Corporate Governance

Areas of governance refer to the various domains or aspects of government
responsibility and authority where decisions, policies, and actions are made and
implemented to manage and regulate the affairs of a society or a political entity. These
areas can vary from one country to another, but they typically encompass the following
key domains:
1. Political Governance: This involves the systems and processes by which a
country's government is structured and operates. It includes the constitution,
political parties, elections, and the functioning of government institutions.
2. Economic Governance: Economic governance encompasses policies and
regulations related to the management of a nation's economy. This includes fiscal
policies, monetary policies, trade regulations, taxation, and economic
development strategies.
3. Social Governance: Social governance involves policies and actions that impact
the well-being of a country's citizens, including healthcare, education, social
services, and welfare programs.
4. Environmental Governance: This area deals with regulations and policies
related to environmental protection and sustainable development. It includes
areas like environmental regulations, natural resource management, and climate
change mitigation.
5. Security and Defense Governance: This includes the establishment and
oversight of national defense, law enforcement, and public safety. It covers the
military, police, intelligence agencies, and border security.
6. Education Governance: This area focuses on educational policies, including
curriculum development, school funding, and standards for schools and
universities.
Six key areas of corporate governance
1. Director independence and performance
The Board of Directors plays a key role in company oversight, including:
• driving long-term strategic vision, and
• appointing and overseeing the Chief Executive Officer.
2. A focus on diversity
Studies have shown that companies with more diversified boards are more risk
averse, have less volatile stock returns, and are more likely to pay dividends. So,
it can be argued that diversity by gender, age, and minority representation should
be a key goal for the composition of every company’s board and senior
management ranks.
3. Regular compensation review and management
 Another essential element of corporate governance is the review and
management of compensation at both the board and executive management
levels.
4. Auditor independence and transparency
A review of audit practices and company accounting can also signal problems to
come. Accounting issues should be handled in a transparent manner, with
complete, detailed information and reports always available to the board and
measures put in place to prevent recurrence of any questionable findings.
5. Shareholder rights and takeover provisions
Investors should consider shareholder rights as a key element of good
governance as well.
For example:
• Do all shareholders hold equal voting rights or is one share class
advantaged over the other?
• Do shareholders have access to place proposals on proxy ballots or
nominate directors?
6. Proxy voting and shareholder influence
Increasingly, investors are using proxy voting as a means to influence a board’s
corporate oversight as well as its commitment to improving its governance on
issues such as climate change, income inequality, and shareholder proxy access.
Rights of shareholder
“Shareholder rights” means the bundle of rights which a shareholder possesses by
virtue of part or total ownership of shares. Such rights can vary according to types of
owners, types of shares, and also other contractual rights, which may attach to shares
or may stem from a separate contractual right.
1. Voting power on major issues: Voting power includes electing directors and
proposals for fundamental changes affecting the company such as mergers or
liquidation.
2. Ownership in a portion of the company: When a business thrives, common
shareholders own a piece of something that has value. Usually, the better a
company performs and the brighter its outlook, the higher its valuation rises and
the price that each share of ownership fetches.
3. The right to transfer ownership: The right to transfer ownership means
shareholders are allowed to trade their stock on an exchange. The right to
transfer ownership might seem mundane, but the liquidity provided by stock
exchanges is important.
4. Entitlement to dividends: Capital appreciation isn't the only way common
shareholders make money. They also may receive periodic cash payments from
the company they're invested in.
 5. Opportunity to inspect corporate books and records: Shareholders have the
right to examine basic documents such as company bylaws and minutes of board
meetings.
6. The right to sue for wrongful acts: Suing a company typically takes the form of
a shareholder class-action lawsuit.
Why shareholders right important?
Shareholders' rights are important in the context of corporate governance and the
operation of publicly traded companies for several reasons:
1. Shareholders are the owners of a company, and their rights provide them with a
say in the company's operations and decision-making.
2. Shareholders' rights help ensure transparency and accountability within a
company.
3. Shareholders have a financial interest in the company's success. Protecting their
rights means safeguarding their investments.
4. Strong shareholder rights can foster confidence in the financial markets.
5. Shareholders often have a long-term interest in the company's performance and
sustainability. Protecting their rights can encourage a focus on the long-term
health of the company.
6. A company with strong shareholder rights may be more open to diverse
perspectives and innovative ideas.
7. Shareholders' rights allow them to influence capital allocation decisions, including
the distribution of profits, reinvestment in the business, or the pursuit of new
opportunities.
What is the main goal of shareholder?
The main goal of a shareholder can vary depending on their individual objectives and
investment strategy, but the primary goals are commonly associated with shareholders:
1. Increase Stock Price: Many shareholders aim to see the price of their shares in
a company increase over time. This capital appreciation can result in capital
gains when they sell their shares at a higher price than what they paid for them.
2. Expand into New Markets: Some shareholders may support a company's
efforts to expand into new markets, as this can potentially lead to increased
revenue and profitability.
3. Increase Profitability: Shareholders typically have an interest in the profitability
of the company they've invested in. Higher profitability can potentially lead to
increased stock prices and the ability to pay higher dividends.
4. Make the Business Attractive to More Investment: Shareholders may aim to
attract more investors to the company, which can lead to increased demand for
its shares.
 5. Long-Term Wealth Accumulation: Many shareholders have a long-term
perspective and aim to accumulate wealth over time by holding onto their shares
for an extended period.
Role of shareholder in corporate governance
Stakeholders play a crucial role in corporate governance, which is the system of rules,
practices, and processes by which companies are directed and controlled. Their roles in
corporate governance are as follows:
1. Board of Directors: The board of directors, while elected by shareholders, also
has a responsibility to represent the interests of all stakeholders. They set the
company's strategic goals, appoint executives, and oversee corporate
performance.
2. Management: Company executives, led by the CEO, are responsible for day-to-
day operations.
3. Employees: Employees are a significant stakeholder group with a direct interest
in the company's success.
4. Customers: Customers are essential stakeholders, as their satisfaction and
loyalty are crucial for the company's long-term success.
5. Suppliers: Suppliers provide the resources and materials needed for a
company's operations.
6. Creditors and Lenders: Creditors and lenders have a financial interest in the
company's stability and ability to meet its financial obligations.
7. Investors and Analysts: Institutional investors and financial analysts closely
monitor a company's performance and adherence to good governance practices.
Define disclosure and transparence of corporate governance
Disclosure: Disclosure in corporate governance refers to the practice of providing
information, data, and details about a company's operations, financial performance, and
decision-making processes to its stakeholders. This information can be disclosed to the
public, shareholders, regulators, and other interested parties.
Transparency: Transparency in corporate governance is the broader principle of
making all relevant information, decisions, and processes of a company accessible and
understandable to stakeholders. It involves a commitment to openness, honesty, and
ethical behavior.
Key principles of transparency
1. Disclosure of Information: Transparency involves the proactive disclosure of
relevant information, data, and decisions. This includes making information
accessible to stakeholders, the public, or those affected by an organization's
actions.
2. Open Access: Transparency entails making information available to the public
and relevant stakeholders in a format that is easy to access and understand.
 3. Accountability: Transparency is closely tied to accountability. Organizations and
institutions must take responsibility for their actions, decisions, and performance.
4. Fair and Honest Communication: Transparent communication is honest,
accurate, and fair. It avoids misleading or manipulating information.
5. Stakeholder Involvement: Transparency often involves involving stakeholders
in decision-making processes.
6. Ethical and Responsible Conduct: Transparent entities adhere to ethical and
responsible conduct.
Four types of disclosure
➢ Financial Disclosure:
Financial disclosure in corporate governance refers to the disclosure of a
company's financial statements, including its income statements, balance sheets,
and cash flow statements. These financial disclosures provide a comprehensive
overview of the company's financial performance, position, and cash flows.
➢ Non-Financial (or ESG) Disclosure:
Non-financial disclosure focuses on environmental, social, and governance
(ESG) factors that are not directly financial in nature but have a significant impact
on a company's long-term sustainability and reputation.
➢ Corporate Governance Disclosure:
Corporate governance disclosure involves providing information about a
company's governance structure, practices, and policies. This may include
details about the composition of the board of directors, their qualifications, the
company's code of ethics, executive compensation, and shareholder voting
rights.
➢ Risk Disclosure:
Companies are often required to disclose information about various risks they
face, including financial risks, operational risks, legal and regulatory risks, and
market risks.
Difference between Board responsibilities and Management responsibilities
Board Responsibilities Management responsibilities
Set the organization's strategic direction. Implement the strategy defined by the
board.
Make major decisions affecting the Handle day-to-day operations and tactical
company's future. decision-making.
Represent the interests of shareholders. Execute plans to achieve organizational
goals.
Oversee executive performance and Manage resources and personnel
leadership. efficiently.
Ensure legal and ethical compliance. Ensure operational adherence to policies
and procedures.
 Chapter 4
Who is the executive director
An executive director is a director involved in the company’s internal affairs. Executive
directors are responsible for making decisions for the company and its future direction.
They are entrusted with the responsibility of managing and running the company’s
business, including development plans.
What is the board structure of a company
The board structure of a company typically consists of various types of directors with
distinct roles. The common components of a board structure include:
1. Executive Directors: These directors are usually part of the company's
management team and hold both executive and board roles. They are involved in
day-to-day operations.
2. Non-Executive Directors:
• Non-Executive Chairman: Leads board meetings and ensures effective
communication.
• Independent Directors: Bring objectivity and may not have a significant
stake in the company, providing impartial advice.
3. Advisory Directors: Some companies may have advisory directors who provide
specialized expertise but don't have voting rights.
4. Committees:
• Audit Committee: Oversees financial reporting and audit processes.
• Nomination Committee: Recommends board appointments.
• Compensation Committee: Deals with executive compensation matters.
• Governance Committee: Focuses on corporate governance issues.
What is compensation of the board?
Board composition refers to the people in an organization’s board of directors and what
they bring to the board table, such as their management background and skills. Board
composition varies widely depending upon an organization’s goals and industry.
Diversity in terms of members’ experience, skills, and backgrounds can improve board
performance. It offers deep insights, a wealth of experience, and the multiple
perspectives necessary for an organization to tackle challenging industry issues.
Minimum number of executive directors, How many board of directors are in a
company?
The law requires that every company must have at least 3 directors in case of public
limited companies, minimum 2 directors in case of private limited companies and 1
director in case of one person company.
The number of executives in a company can vary widely based on the company's size,
industry, and organizational structure. In a typical corporate setting, executives may
include roles such as:
1. Chief Executive Officer (CEO): The top executive responsible for overall
company leadership.
2. Chief Financial Officer (CFO): Manages financial matters and strategy.
3. Chief Operating Officer (COO): Oversees day-to-day operations.
4. Chief Marketing Officer (CMO): Heads the marketing and advertising functions.
5. Chief Technology Officer (CTO): Manages technology-related strategies and
operations.
Who appoints Board of directors?
The board of directors is the governing body of a corporation. Public companies are
required to have a board of directors by law.
The board of directors is usually elected by the shareholders of the corporation. The
shareholders will vote for the candidates that they believe will best represent their
interests and help the company grow and succeed. Sometimes, the board of directors is
appointed by the government or another regulatory body. This is usually the case with
banks and other financial institutions.
What is the role of the board?
The board of directors plays a crucial role in the governance and strategic direction of a
company. Some key roles of a board include:
1. Strategic Direction: Setting the overall strategic direction and long-term goals of
the company.
2. Oversight: Monitoring the company's performance, financial health, and
management decisions to ensure they align with the company's objectives.
3. Risk Management: Identifying and mitigating risks that could impact the
company's success.
4. Executive Oversight: Appointing, evaluating, and providing guidance to the
executive team, including the CEO.
5. Financial Oversight: Reviewing financial statements, budgets, and major
financial decisions to ensure fiscal responsibility.
6. Legal and Ethical Compliance: Ensuring the company operates within the legal
and ethical framework, and addressing any compliance issues.
7. Shareholder Representation: Representing the interests of shareholders and
ensuring accountability to them.
Four main functions of the board
1. Establish vision, mission and values
• Determine the company’s vision and mission to guide and set the pace for
its current operations and future development.
• Determine and review company goals.
• Determine company policies.
2. Set strategy and structure
Review and evaluate present and future opportunities, threats and risks in the
external environment; and current and future strengths, weaknesses and risks
relating to the company.
3. Delegate to management
Delegate authority to management, and monitor and evaluate the implementation
of policies, strategies and business plans.
4. Exercise accountability to shareholders and be responsible to relevant
stakeholders
• Ensure that communications both to and from shareholders and relevant
stakeholders are effective.
• Understand and take into account the interests of shareholders and
relevant stakeholders.
How to Write a Disclosure Statement.
➢ Do not exclude any information: Be honest. Include all the details of the
transaction (especially financial ones) If you’re a seller and the property you sell
have a few issues and problems to be considered, include them in your
disclosure statement objective.
➢ Write clearly: Use simple words in writing your income statement for disclosure.
You need to make it understandable to your reader, so avoid using difficult words
and vague phrases.
➢ Attach necessary documents to your disclosure statement: Depending on
the transaction, you need to attach necessary documents to support your
disclosure statement.
➢ Review and revise: Before sending your disclosure statement, you need to
review every information you included. Look for possible errors, and revise them.
Supervision in financial statement
Financial supervision means the monitoring by competent authorities of financial firms'
compliance with the provisions of the regulatory framework. Such monitoring is carried
out on a preventative basis and is also widely known as 'micro-prudential supervision.
Role of financial supervision
1. Compliance Assurance: Ensure that financial activities adhere to laws,
regulations, and internal policies.
2. Risk Management: Identify, assess, and manage financial risks that could
impact the organization's stability and success.
3. Budgetary Control: Monitor budgetary allocations and expenditures to ensure
alignment with financial plans and organizational goals.
4. Internal Control Implementation: Establish and maintain internal controls to
safeguard assets, prevent fraud, and ensure the accuracy of financial records.
5. Strategic Financial Planning: Contribute to the development of financial
strategies that support the organization's overall goals and objectives.
6. Cash Flow Management: Supervise cash flow to maintain liquidity for day-to-
day operations and strategic initiatives.
Corporate action life cycle
The Corporate Action Life Cycle encompasses the complete journey of a corporate
action managed by the processing team. It includes various stages, from the event's
initial announcement to crediting the entitlements to the shareholders' accounts.
Five Conflict Resolution
1. Avoiding: Avoiding is when people just ignore or withdraw from the conflict. They
choose this method when the discomfort of confrontation exceeds the potential
reward of resolution of the conflict.
2. Competing: Competing is used by people who go into a conflict planning to win.
They’re assertive and not cooperative. This method is characterized by the
assumption that one side wins and everyone else loses.
3. Accommodating: Accommodating is a strategy where one party gives in to the
wishes or demands of another. They’re being cooperative but not assertive.
4. Collaborating: Collaborating is the method used when people are both assertive
and cooperative. A group may learn to allow each participant to make a
contribution with the possibility of co-creating a shared solution that everyone can
support.
5. Compromising: Another strategy is compromising, where participants are
partially assertive and cooperative. The concept is that everyone gives up a little
bit of what they want, and no one gets everything they want.
Seven steps in conflict resolution
1. Define the Issue: Clearly identify the specific issue or issues causing the
conflict. Ensure a shared understanding among all parties involved.
2. Understand Each Other's Perspectives: Encourage open and honest
communication to gain a deeper understanding of each party's perspective,
concerns, and interests.
3. Seek Common Ground: Identify areas of agreement or shared interests that
can serve as a foundation for resolution. Focus on common goals to build
rapport.
4. Generate Options: Brainstorm and explore various possible solutions
collaboratively. Encourage creativity and consider compromise to find mutually
acceptable outcomes.
5. Evaluate Options: Assess the pros and cons of each proposed solution.
Consider the potential impact on all parties involved and the organization as a
whole.
6. Agreement and Commitment: Reach a consensus on the most viable solution.
Ensure that all parties involved commit to the resolution and understand their
roles in its implementation.
7. Follow-Up and Review: Monitor the agreed-upon resolution over time. Assess
its effectiveness and make adjustments if necessary. Encourage ongoing
communication to prevent the recurrence of conflicts.