Good Governance,
Business Ethics,
Risk Management and
Internal Control
MODULE 1
Introduction to Corporate Governance
Introduction
This module aims to synthesize the con of corporate governance. It provides
an association of principles, purposes, and objectives in an effort to effectively govern
a corporation.
Learning Objectives
After studying this module, you should be able to:
1. Describe what governance involves.
2. Extrapolate the characteristics of good governance.
3. Interpret the meaning, purpose, and objectives of corporate governance.
4. Explain the principles of effective corporate governance.
5. Associate the principles of good governance as applied to business
scenarios.
Learning Content
What is Governance?
Generally, governance refers to a process whereby elements in society wield
power, authority anf influence and enact policies and decisions concerning public life
and social upliftment. It comprises all the processes of governing – whether undertaken
by the government of a country, by a market or by a network – over a social system and
whether through laws, norms, power or language of an organized society. Simply put,
governance is the process of decision-making and the process by which decisions are
implemented through the exercise of power or authority by leaders of a country and/or
organizations (Cabrera & Cabrera, 2020).
The word “governance” came from the Latin verb “gubernare,” or more originally
from the Greek word “kubernaein,” which means “to steer.” Basing on its etymology,
governance refers to the manner of steering or governing, or of directing and controlling,
a group of people or a state (Tamayo, 2020). Governance is concerned with the
intrinsic nature, purpose, integrity and identity of an organization with primary focus on
the entity’s relevance, continuity and fiduciary aspects. The majority of the member
states of the comity of nations today are founded on the principles of “Welfare State”
striving to achieve the common good and in the process affording optimum opportunity
and involvement of the individual so as to serve the societal interests.
This has led to emergence of the concept of “Good Governance” as opposed to
mere governance, as the umbrella concept encompassing within it a system of
governance that is able to unequivocally discover the basic value towards the society
where standards concern economic, political and socio- cultural issues including those
involving human rights and follow the same through an accountable and upright
administration.
Governance entails two processes: decision-making and implementation of the
decision. In broad terms, decision-making refers the process by which a person or
group of persons, guided by socio-political structures, arrive at a decision involving their
individual and communal needs and wants. Implementation is the process that logically
follows the decision; it entails the actualization or materialization of the plan or decision.
Governance is not just decision-making because decision without implementation is
self-defeating. Neither is it just implementation because there is nothing to implement
without a decision or plan. Thus, the two processes necessarily go hand-in-hand in, and
are constitutive of, governance (Tamayo, 2020).
Good Governance signifies the way an administration improves the standard of
living of the members of its society by creating and making available the basic amenities
of life, providing its people security and instill hope in their heart for a promising future,
providing an equitable basis, access to opportunities for personal growth, affording
participation and capacity to influence in the decision making in public affairs, sustaining
a responsive judicial system which dispenses justice on merits in a fair, unbiased and
meaningful manner and maintain accountability and honesty in each wing of the
government.
Characteristics of Good Governance
According to Sheng (n.d.) participation by both men and women is a key
cornerstone of good governance. Participation could be either direct or through
legitimate intermediate institutions or representatives. It is important to point out that
representative democracy does not necessarily mean that the concerns of the most
vulnerable in society would be taken into consideration in decision making. Participation
needs to be informed and organized. This means freedom of association and
expression on the one hand and an organized civil society on the other hand.
Under the rule of law, good governance requires fair legal frameworks that are
enforced impartially. It also requires full protection of human rights, particularly those of
minorities. Impartial enforcement of laws requires an independent judiciary and an
impartial and incorruptible police force.
While, transparency means that decisions taken and their enforcement are done
in a manner that follows rules and regulations. It also means that information is freely
available and directly accessible to those who will be affected by such decisions and
their enforcement. It also means that enough information is provided and that it is
provided in easily understandable forms and media. It is also noted that good
governance requires responsiveness, that institutions and processes try to serve all
stakeholders within a reasonable timeframe.
By being consensus oriented, good governance requires mediation of the
different interests in society to reach a broad consensus in society on what is in the best
interest of the whole community and how this can be achieved. It also requires a broad
and long-term perspective on what is needed for sustainable human development and
how to achieve the goals of such development. This can only result from an
understanding of the historical, cultural and social contexts of a given society or
community.
Also, there is equity and inclusiveness. This means that the society’s well-
being depends on ensuring that all its members feel that they have a stake in it and do
not feel excluded from the mainstream of society. This requires all groups, but
particularly the most vulnerable, have opportunities to improve or maintain their well-
being.
Good governance means that processes and institutions produce results that
meet the needs of society while making the best use of resources at their disposal
(effectiveness and efficiency). The concept of efficiency in the context of good
governance also covers the sustainable use of natural resources and the protection of
the environment.
Lastly, there is accountability, a key requirement of good governance. Not only
governmental institutions but also the private sector and civil society organizations must
be accountable to the public and to their institutional stakeholders. Who is accountable
to whom varies depending on whether decisions or actions taken are internal or external
to an organization or institution. In general, an organization or an institution is
accountable to those who will be affected by its decisions or actions. Accountability
cannot be enforced without transparency and the rule of law.
Overview of Corporate Governance
Corporate governance is the system of rules, practices, and processes by which
a firm is directed and controlled. Corporate governance essentially involves balancing
the interests of a company's many stakeholders, such as shareholders, senior
management executives, customers, suppliers, financiers, the government, and the
community. Since corporate governance also provides the framework for attaining a
company's objectives, it encompasses practically every sphere of management, from
action plans and internal controls to performance measurement and corporate
disclosure (Chen, 2020). In other words, corporate governance is the acceptance by
management of the inalienable rights of shareholders as the true owners of the
corporation and of their own role as trustees on behalf of the shareholders. It deals with
conducting the affairs of a company such that there is fairness to all stakeholders and
that its actions benefit the greatest number of stakeholders. In this regard, the
management needs to prevent asymmetry of benefits between various sections of
shareholders, especially between the owner-managers and the rest of the shareholders.
The purpose of corporate governance is to facilitate effective, entrepreneurial
and prudent management that can deliver long-term success of the company. In simple
terms, the fundamental aim of corporate governance is to enhance shareholders’ value
and protect the interest of stakeholders by improving the corporate performance and
accountability. It is also what the board of directors of a company does, how it sets the
values of the business firm.
Objectives of Corporate Governance
Fair and Equitable Treatment of Shareholders
A corporate governance structure ensures equitable and fair treatment of
shareholders of the company. In some organizations, a group of high net-worth
individual and institutions who have a substantial proportion of their portfolios invested
in the company, remain active through occupation of top-level positions that enable
them to guard their interest. However, all shareholders deserve equitable treatment and
this equity is safeguarded by a good governance structure in any organization.
Self-Assessment
Corporate governance enables firms to assess their behavior and actions before
they are scrutinized by the regulatory agencies. Business establishments with a strong
corporate governance system are better able to limit exposure to regulatory risks and
fines. An active and independent board can successfully point out deficiencies or
loopholes in the company operations and help solve issues internally on a timely basis.
Increase Shareholder’ Wealth
Another corporate governance’s main objective is to protect the long-term
interests of the shareholders. Firms with strong corporate governance structure are
seen to have higher valuation attached to their shares by businessmen. This only
reflects the positive perception that good corporate governance induces potential
investors to decide to invest in a company.
Transparency and Full Disclosure
Good corporate governance aims at ensuring a higher degree transparency in an
organization by encouraging full disclosure of transactions in the company accounts.
Basic Principles of Effective Corporate Governance
Good corporate governance is all about controlling one’s business and so is
relevant, and indeed vital, for all organizations, whatever size or structure (Cabrera &
Cabrera, 2020). In other words, 'good corporate governance' is simply 'good business'.
It ensures:
Adequate disclosures and effective decision making to achieve corporate
objectives;
Transparency in business transactions;
Statutory and legal compliances;
Protection of shareholder interests; and
Commitment to values and ethical conduct of business.
The aim of good corporate governance is to ensure commitment of the board in
managing the company in a transparent manner for maximizing long-term value of the
company for its shareholders and all other partners. It integrates all the participants
involved in a process, which is economic, and at the same time social. The fundamental
objective of corporate governance is to enhance shareholders' value and protect the
interests of other stakeholders by improving the corporate performance and
accountability. Hence it harmonizes the need for a company to strike a balance at all
times between the need to enhance shareholders' wealth whilst not in any way being
detrimental to the interests of the other stakeholders in the company. Further, its
objective is to generate an environment of trust and confidence amongst those having
competing and conflicting interests. It is integral to the very existence of a company and
strengthens investor's confidence by ensuring company's commitment to higher growth
and profits.
Additional Reading:
[Link]
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Learning Activity
Activity 1.
List your five key takeaways from the above lesson.
1. _____________________________________________________________
2. _____________________________________________________________
3. _____________________________________________________________
4. _____________________________________________________________
5. _____________________________________________________________
Activity 2.
Interview an accounting professional and ask about the status of corporate
governance in their organization. From the description he/she cited, make your
personal description of good corporate governance.
Description of corporate governance by the Accounting Professional:
___________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Your description of good corporate governance:
___________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
Learning Assessment
Make a 150-word essay on the topic “Corporate Responsiveness as driver of
corporate effectiveness and efficiency”.
Rubric:
Essay Rubric
Criteria Excellent Good Fair Poor Score
Focus and There is one There is one clear, There is one topic, The topic and
specific, well- well- focused topic. but main ideas are main ideas are
Details focused topic. Main Main ideas are clear not especially clear. not clear.
ideas are clear and but are not supported
are well supported by detail led
information or facts.
Organization The The introduction states The introduction There is no clear
introduction is the main topic and states the main topic. introduction, structure,
inviting, states provides an overview A conclusion is or conclusion.
the of the paper. A included, but is not
conclusion is included, especially
main topic, and but does not relevant/supportive.
provides an strengthen the
overview of the argument/position.
argument.
Voice The author’s purpose The author’s purpose of The author’s purpose The author’s purpose of
of writing is very writing is somewhat clear, of writing is
clear, and there is and there is some somewhat clear, and writing is unclear.
strong evidence of evidence of attention to there is evidence of
attention to audience. audience. The author’s attention to audience.
The author’s knowledge of and/or The author’s
knowledge of and/or experience with the topic knowledge of the
experience with the is evident. topic seems limited.
Word Choice topic is evident.
The author uses The author uses The author uses The writer uses a
vivid words and vivid words and words that limited vocabulary.
phrases. The phrases. The choice communicate clearly, Jargon or clichés are not
choice and and placement of but the writing lacks used properly and
placement of words is inaccurate variety and seems detract from the
words seems at times and/or inappropriate to the meaning.
accurate, natural seems overdone or subject matter.
and appropriate. inappropriate for the
Sentence All sentences are Most sentences are Most sentences are well Sentences sound
well- constructed well constructed and constructed, but they awkward, are
Structure, and have varied have varied structure have a similar structure distractingly
Grammar, structure and length. and length. The author and/or length. The repetitive, or are
Mechanics, The author makes makes a few errors in author makes several difficult to
very few errors in grammar, mechanics, errors in grammar, understand. The
&Spelling grammar, and/or spelling, but mechanics, and/or author makes
mechanics, and/or these mistakes do not spelling that interfere numerous errors in
spelling. interfere with with understanding. grammar,
understanding. mechanics, and/or
spelling that
Scoring 4 3 2 interfere with
1
Learning References
AXS Corporate Goverance Council (2003). Principles of good governance and best
practice recommendations. Retrieved September 1, 2020
[Link]
[Link]
Cabrera, E. & Cabrea, G. (2020). Corporate governance, business ethics, risk
management and internal control (2019-2020 ed.). Philippines: GIC Enterprises
& Co., Inc.
Chen, J. (2020). Corporate Governance Definition. Retrieved September 1, 2020
from [Link]
Sheng, Y. (2020). What is good governance? Retrieved September 1, 2020
[Link]
Tamayo, M (2020). What is governance? Retrieved September 1, 2020
[Link]
