ACC704
TOPIC 7:
DEFINING
CORPORATE
GOVERNANCE
AND
CORPORATE
GOVERNANCE
FAILURE
What is corporate governance?
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Relatively new as a discipline. First emerged in
Broad view – relationship not restricted only
to company and its shareholders but also
company and many other stakeholders
Stakeholder theory – employees, customers,
suppliers, bondholders, government etc
Stakeholder theory attracting greater
attention
Stakeholder theory justified mainly on ethical
grounds
In real world – businessmen and investors not
interested unless there are financial returns
from doing so
1992 in UK.
No single accepted definition of corporate
governance – (See Solomon, p.13)
Existing definitions range from “narrow” view
to “broad” view
Narrow view – governance restricted to
relationship between a company and its
shareholders
Traditional finance paradigm expressed in
“agency theory”
What is corporate governance?
• Broad view – relationship not
restricted only to company and
its shareholders but also
company and many other
stakeholders
• Stakeholder theory – employees,
customers, suppliers,
bondholders, government etc
• Stakeholder theory attracting
greater attention
• Stakeholder theory justified
mainly on ethical grounds
• In real world – businessmen and
investors not interested unless
there are financial returns from
doing so
Main Sources of Codes of Practice of Corporate Governance
• UK – Cadbury Report
(1992), Greenbury
(19995), Hampel
Report (1998),
Turnbull Report
(1999), Higgs Report
(2003) and Smith
Report (2003)
• US – Sarbanes Oxley
Act (2002)
Definitions of corporate governance: Most to least acceptable to
institutional investors
• The process of supervision
and control intended to
ensure that the company’s
management acts in
accordance with the interests
of shareholders (Solomon, p.
13).
• Giving overall direction,
overseeing and controlling
executive actions of managers,
satisfying accountability and
regulation beyond the
corporate boundary.
• Governance by legislation,
ownership and control.
Definitions of corporate governance: Most to least acceptable to
institutional investors
Relationship between
shareholders and their
companies and the way in which
shareholders act to encourage
“best practice” – i.e.
shareholder activism e.g. voting
at AGMs, meetings with senior
management
Structures, processes cultures
and systems that engender
successful operation of
organizations
System by which companies
are directed and controlled
(Solomon, p.13)
Theoretical Frameworks of Corporate Governance
• Different disciplines view corporate governance
from different perspectives
•Agency Theory
•Jensen and Meckling (1976) defined managers
of companies as “agents” and shareholders as
“principals”.
•Agency theory paradigm arises from the fields
of finance and economics. Separation of
ownership and control has led to “agency
problems” arising from the view that goals of
principals and agents conflict. In finance theory,
a basic assumption is that the primary objective
for companies is shareholder wealth
maximization. In practice managers often
maximize their own self-interest at the expense
of the shareholders. Managers tend to focus on
short-term profits. Institutional investors are
interested in quick profits.
•Managers are likely to prefer to pursue their
own personal objectives, such as aiming to gain
the highest bonuses possible.
Theoretical Frameworks of Corporate Governance
SHAREHOLDERS
COMPANY
AGENT
Theoretical Frameworks of Corporate Governance
Desire for Quick Gains
Managers (agents) are interested in shortterm profitability of the firm. Shareholders
who are traders, particularly institutional
investors are also interested in short-term
quick profits.
As trustees of other people’s money they
want to show to them the rate of return on
their investments which is normally the
criteria used to assess their performance.
Neither managers nor shareholders are
interested in the long-term survival of the
company.
EXAMPLE: Dr. Anco – QE Drive (Walu
Bay)
Shareholders’ Rights in Corporate Governance
They can influence through
voting at AGMs which is
known as “shareholder
activism”. They can also
pass resolutions. But do they
really exercise this right? Or
they scream only when they
lose money?
Role of Institutional Investors in Corporate Governance
Institutional investors can have
meetings with company
managers
Private disclosure can develop
to supplement public disclosure
Institutional investors can
make a united stand on any issue
Problem
Can lead to “insider dealing”
which is against the law.
Role of Stock Markets in Corporate Governance
Companies listed on the
stock exchange have to
comply with listing rules.
Failure to comply results in
suspension or delisting.
Takeover as a mechanism of
corporate governance. The
threat of a takeover acts as a
means of disciplining
company managers. In a
takeover, managers of the
target company normally lose
their jobs.
Role of Government in Corporate Governance
Government intervention is
necessary because markets
are not perfectly competitive.
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Everyone is not equally
informed.
Governments are producing
policy documents and
corporate governance best
practice at an amazing rate.
Stakeholder Theory
Developed gradually since
the 1970s.
Basic premise – Companies
are so large and their impact
on society so pervasive that
they should discharge an
accountability to many more
sectors of the society than
solely their shareholders.
Stakeholder versus Agency Theory
Stakeholder theory describes
the composition of organizations
as a collection of various
individual groups with different
interests
Agency theory describes the
problems that occur when one
party represents another in
business but holds different
views on key business issues or
different interests from the
principal.
Stakeholder versus Agency Theory
Problems may be a result of
genuine misinformation or may
actually be caused by clashing
business interests. These theories
are often used to outline the
interests of shareholders,
employees, customers, the public
and vendors.
challenges that manifest within
the business world as a result of
incomplete information,
miscommunication and conflict may
be explained using these two
theories
Corporate Governance Failures in Fiji
 requires good communication and
coordination of processes within
the company but also a solid
relationship based on trust
between the involved
stakeholders.
 corporate governance – dealing
with the interaction of business’s
management and its board of
directors, its shareholders and
lenders and its other stakeholders
such as employees, customers,
suppliers, and the community of
which it is a part.
 It is all about balancing
individual and societal goals, as
well as economic and social goal
Corporate Governance Failures in Fiji
 Management involves
the activities of
directing a part of the
business
 governance means
studying the conditions
within which others can
manage effectively.
 governance is equal to
owners controlling the
use of their assets
through the CEO and
CEO using the owner’s
assets to create value
Corporate Governance Failures in Fiji
Corporate Governance Failures in Fiji
 Corporate governance
encourages a trustworthy
moral, as well as ethical
environment.
 point of view governance,
takes into account the
transparency of the internal and
external audit, the sincerity of
the managers regarding the
company’s financial results and
financial statements, the
manager actions towards the
small stakeholders and many
more.
Corporate Governance Failures in Fiji
Corporate Governance Failures in Fiji
NATIONAL BANK OF FIJI
 The highlighted loss is approx.
$220M
 CG issues in lending & security
held against lending
 2003 recovered about $143m
(Hansard, 2013)
 Net Loss may be around $77 - $80
m
 1996 NBF split to personal and
asset management bank
Corporate Governance Failures in Fiji
REWA DAIRY
 $1 million unsuccessful equipment
purchase
 Attorney-General and Minister for
Industry and Trade, Aiyaz SayedKhaiyum, revealed that in 1999, Rewa
Dairy purchased equipment in excess of
$1 million to make powdered milk,
which turned out to be a major failure.
 no feasibility study done and they went
ahead and bought the equipment

ended up selling the heater component
for $130,000.
 The equipment included a heater and
evaporator.
 The evaporator is still sitting at Fiji
Dairy,” he said.
Corporate Governance Failures in Fiji
REWA DAIRY
Milk package – expiry date
to close when milk packed
and for sale….milk expire
very quickly
Other services
Omega watch for CEO
cost $5,700
Accountant cashing
personal cheques and paid
over $758,000
Corporate Governance Failures in Fiji
AGRICULTURE
Farming equipment
distributed to farmers
Equipment bought above
market price
Suncourt Hardware and
PS Agriculture charged
and jailed.
Corporate Governance Failures in Fiji
POST FIJI
Clock face for post office
bought from Motibhai
Cost of clock $75,000
Board Chairman and
CEO jailed for poor
corporate governance
END OF TOPIC 7