HAWWASSA UNIVERSITY
College of Business and Economics
Department of Accounting and Finance
MSc in Accounting and Finance
Course: Corporate Finance-II
TITLE: Term Paper: Principles of corporate governance
Structure of corporate governance.
Name: ID:
1. Abdi-Shakour Ahmed GPACFNR/0002/17
Submitted to: Dr. Yonas S
Submitted Date: 20 -05-2025
Abstract:
This paper critically examine the fundamental principles of the corporate governance significant
promoting transparent, accountability, Equality, Reporting…and how its effects the company’s function
and improving the performance of the corporate governance. Paper calls the structure of the corporate
governance it is the crucial point for develop of the company if the business units keep the each ones
function caused the minimizing the conflict of the company.
Introduction:
Corporate governance is an idea and management framework to provide basic direction & prospective for
managing businesses component with the best interest. This paper will provide the principles of the
corporate governance with detail examined with responsibility of the units of the business that refers to
understand their concise with international community. The objective of this paper to explore fostering
good and prefect corporate government suitable core governance that explains fulfill and follow the
principles and examine structure of the corporate.
Literature review:
Key Definition: The Principles are planned to be concise, comprehensible and available to the
international community. On the basis of the Principles, it is the role of government, semi-government or
private sector initiatives to assess the quality of the corporate governance framework and develop more
detailed mandatory or voluntary provisions that can take into account country-specific economic, legal,
and cultural differences.
The Organization for Economic Co-operation and Development (OECD) Principles of Corporate
Governance are the global standard of corporate governance (OECD n.d.). They build upon and
consolidate prior research and development. Farrar (2003) defined corporate governance as the system by
which companies are controlled and accountability structures and processes are imposed onthose in
control of companies. Sheehy and Diaz-Granados (2022) categorized two definitions of corporate
governance, from narrow and broad scopes. A narrow scope is limited to the decision-making bodies of a
company (Coffee 1986; La Porta et al. 2000; Shleifer and Vishny 1997) while a broad scope includes
external stakeholders, such as policymakers, employees, and creditors (Hopt and Teubner 1984). In their
article, Sheehy et al. (2022) first described the history of corporate governance before turning into the
history of the principles. Founded in the 1976 Taming the Giant Corporation (Nader et al. 2005), the
concept of corporate governance subsequently developed in the 1990s in response to a series of business
scandals and financial crises (Sheehy 2004). Having learned from these bitter experiences, in 1999 the
OECD issued the first version of the OECD Principles of Corporate Governance (OECD 1999). It set the
international benchmark for best practices for corporate governance internationally, irrespective of their
membership in the OECD. The principles are, however, soft law and hence not legally binding (Bouchez
2007).
At present, a large amount of literature has studied the characteristics of the board of directors, but most
of them focus on their impact on corporate performance. For example, an (2021) empirically analyzed the
relationship between board characteristics, heterogeneity, and corporate performance based on cross-
sectional data of A-share listed companies. The results showed that the positive effect of board
characteristics on corporate performance has not been fully utilized. Bansal et al. (2016) found that board
size has a significant positive impact on firm performance
The academic consensus on the impact of board independence on corporate performance is inconsistent.
Abidin et al. (2009) found a positive correlation between board independence and corporate financial
performance, while Wu et al. (2009) pointed out a negative correlation between the two. To explain this
inconsistency, Li and Yang (2020) combined board capital to examine the interaction effect between
board independence and board
.Principles of Corporate Governance:
1. TRANSPERANCY- it may to be provide relevant information that helps company to take
right and best decision, to provide that information at timely needed the information, this
contains financial performance, management reports and ownership. For ensuring transparency
in corporate administration, a company should publish relevant information about corporate
affairs in leading newspapers, e.g., on a quarterly or half yearly or annual basis. Transparency is
the openness of organizations, companies and the government in providing information
regarding public resource management activities to parties who need information (Mardiasmo,
2004). Transparency is one of the aspects in realizing the good governance of organizations,
companies and government (Alloa & Thoma, 2018). Realizing good governance requires
openness, involvement and easy access for the whole community to the processes of organizing
organizations, companies and government. Openness and ease in accessing information will
contribute to the realization of various other indicators (Hari, S., 2007). Transparency indicators,
which are: Availability, Accessibility of documents, Clarity and Completeness of information,
Openness of processes and Regulatory frameworks that guarantee transparency (Kristianten,
2006)
2. ACCOUNTABILITY-Accountability is a liability to explain the results of one’s decisions
taken in the interest of others. In the context of corporate governance, accountability implies the
responsibility of the Chairman, the Board of Directors and the chief executive for the use of
company’s resources (over which they have authority) in the best interest of company and its
stakeholders. Accountability is an obligation for power holders and their officials to provide
accountability, present, report and disclose all kinds of activities that are the responsibility of the
party giving power (Ernawati et al., 2020). It is a principle that a company or government must
be able to account for its performance in a transparent and fair manner (Damanik,
2021).Therefore, the government must be managed properly and in accordance with existing
regulations. Accountability as a prerequisite that aims to achieve sustainable performance
(Setiana & Yuliani, 2017). The indicators of Accountability are: obligations, controllability,
responsiveness and transparency (Yunita & Citraningrum, 2018).
3. EQUALITY- When we speak of good management practices, we refer to operational
strategies that benefit, equally, all partners and investors of the company. For this reason, one of
the fundamental principles of corporate governance is equity among shareholders. If it is not
properly performed, the business’ image may be tarnished, which jeopardizes its relationship
with partners, investors, financial Institutions, and even with customers. In addition, bad
practices in this area can lead to lawsuits, which would further undermine the company’s
reputation.
4. SOCIAL RESPONSBILITY-There are a growing number of managers who understand the
importance of their company regarding social issues and are adopting policies aligned with them.
It is important to emphasize that this process should begin internally, creating an environment
that is appropriate for the company’s employees to perform their duties.
5. SECURITY-An increasingly important aspect of corporate governance is security.
Shareholders and customers/clients need to feel confident that their personal information is not
being leaked or accessed by unauthorized users. It’s equally important to ensure that the
company’s proprietary processes and trade secrets are secure. A data breach is not just very
expensive. It also weakens public trust in the company, which can have a drastically negative
effect on its stock price. Losing investor trust means losing access to capital that is necessary for
corporate growth.
6. INDEPENDENCE-For ethical reasons, corporate governance seems to be independent,
strong and non-participatory body where all decision-making is based on business and not
personal biases. Independency is an attitude in which a person is not easily influenced, neutral
because the auditor carries out his work in the public interest (Rahayu, Suhayanti., 2013).
Independents a neutral or impartial attitude towards one, has its own power, they are not
controlled by other parties such as independent institutions. Independence is the way we behave
to be freeform the influence of any party, not controlled or controlled by other parties and not
dependent on other people. Independent also means that there is honesty in a person in
considering facts and there are objective considerations in expressing his opinion (Sukmawati &
Nurfitriani, 2019)
7. REPORTING-Good corporate governance involves adequate reporting to shareholders and
other stakeholders, for example, a company should publish quarterly, half yearly and yearly
performance and operating results in newspapers. It should also report functioning of various
committees set by the board of directors for efficient administration. It is important on ethical
grounds of the society.
8. Fairness is a situation where every human being is treated equally, according to their
respective rights and obligations (Frans M, S., 2001). Fairness is an act that is said to be fair if it
is based on an agreement that has been agreed upon (Thomas, H., 2015). Fairness is an ideal and
right condition in terms of morals, be it a person or thing. Justice is a form of equality
unfulfilling workers' rights arising from agreements and applicable laws and regulations.
Fairness is a situation where an individual feels treated equally by the company or organization
where they work. Justice indicators are: equality, feasibility, contribution and performance
(Robbins& Judge., 2015).
Structure of the corporate Governance:
1. Board of Directors: Board of Directors takes crucial decisions to attain long-term business
objectives. They are also referred to as "Those Charged with Governance" (TCWG)
2. Management: The management is a subset of the BOD led by the Chief Executive Officer
(CEO) of the company. The CEO is responsible for business operations, formulation of
strategies, and evaluation of associated risks.
2. Shareholders: The stockholders are investors who put their hard-earned money into the
company anticipating positive returns. They cannot track corporate affairs on a daily basis, and
therefore, rely on the directors. Further, shareholders appoint auditors to dig into the business's
financial affairs—provide the audit report.
Methodology:
1. Literature review the paper used for the different research material articles, Books the
websites used as justification that the researchers are detailed explore the principles of the
corporate governance how it implies or effect the policy and performance of the company. Such
as categorized two definitions of corporate governance, from narrow and broad scopes. A narrow
scope is limited to the decision-making bodies of a company (Coffee 1986; La Porta et al. 2000;
Shleifer and Vishny 1997). The paper offers the existing researches that discuss this topic.
2. Narrative Review: the paper used literature for specific point, the paper offers how the transparency
and the accountability reflect the good corporate governance. The study takes these two assumption
principle specific to examine how it effect the corporate governance at the structure of the corporate the
paper examine specific point at the literature view is Broad director.
Conclusion:
The prefect corporate governance it will cause to ensure sustainable environment for the businesses
activity at the to promote the principles like to ensure transparency , accountability and the to keep
hierarchy and the functions of each structure corporate governance all this issues will helps to enhance the
corporate governance. The future reaches will focus the digital transformation of the corporate
governance.
References:
1. Corporate Governance: Concept, Principles and Best Practices lawbhoomi December 30, 2020.
2. OECD Principle of corporate governance (Chapter), author Luther Lie, Harvard University (Research
Gate).
3. The Impact of Board Structure Characteristics on Corporate Risk (Article), authors Jincheng Guo
Wenting Hou.