HELD ON WEDNESDAY, MAY 25, 2016 AT THE BABCOCK UNIVERSITY HIGH SCHOOL BOARD ROOM BY

1. CORPORATE GOVERNANCE PRACTICES IN THE ORGANISATIONALECTURE DELIVEREDAT THE MEETING OF WEST NIGERIA UNION CONFERENCE (WNUC) ASSOCIATION OF ADVENTIST SECONDARY SCHOOL PRINCIPALS HELD ON WEDNESDAY, MAY 25, 2016 AT THE BABCOCK UNIVERSITY HIGH SCHOOL BOARD ROOM   BY Prof. Owolabi Sunday A.(PhD) Professor of Accounting/Deputy Vice Chancellor, Management Services Babcock University Ilishan-Remo, Ogun State

2. Introduction The industrial revolution that moderated entrepreneurial behavior in the mid-nineteenth century translated to the establishment of the first corporate body in England in 1845. This transformation is the major reason for the dichotomization of ownership of corporations and their control.

3. The situation above translated to a contractual arrangement between the owners of resources and the managers of the resources. This arrangement is described as agency relationship. The owners of resources are described as the principal while the managers of these resources are described as the agents. There is always a gap in the process of synchronizing the objectives of the agents and principals; this gap is called agency cost.

4. Agency cost is sometimes described as the cost of resources owners’ absence in the management of their resources by the third party referred to as the agent. The financial management scholars postulate that, the major objective of establishing a firm is to maximize the shareholders wealth. This means the interest of other stakeholders would have been swallowed by the shareholders. The truth of the matter is that there are other stakeholders whose interest should be adequately taken care of if the shareholders interest will be maximized.

5. The management of resources and the leadership dynamisms of a corporate body are usually referred to as its governance structure. Therefore, corporate governance deals with the mechanism of control of resources (finance, human, machine, policies, and others) to achieve the objective of the organization. Pat Barret the Auditor General of Australia as cited by Ajogwu, 2007, opined that “corporate governance is largely about organizational management performance. Simply put, corporate governance is about how an organization is managed, its corporate and other structure, its culture, its policies, and the ways in which it deals with its various stakeholders. It is concerned with structures and processes for decision making and with the control and behavior that support effective accountability for performance outcomes/results.

6. Also, Berle and Means (1968) expressed their observations that corporations were becoming so large that ownership and control were separated, that is, the stock holders own the firm while the management controls the firm. The discussion and publication on corporate governance issues grew quietly, but the concept gained abundant momentum within the last two decades. The issue started featuring prominently in the academic world and business community since the well celebrated corporate failures of Adelphia, Enron, WorldCom, Global crossing, Tyco, and others that experienced high profile scandals. The US responded to the crises through the popular Sarbanes-Oxley Act of 2002. The governance structure, mechanisms and ethics attracted series of attention from all stakeholders in the business and academic world. The compatibility of corporate governance practices with the global standards has also become an important part of corporate success.

7. Corporate governance as a concept has been viewed and defined by various authorities giving it different meanings and connotations. Shleifer and Vishny (1997) stated that corporate governance deals with the ways in which suppliers of finance of corporations assure themselves of getting a return on their investment. This assertion however is consistent with the position of Garrey and Siran (1994) who argued that corporate governance determines how the firms’ top decision makers actually administer such contracts. Akinsulire (2010) submitted that corporate governance is a system by which companies are directed and managed in the best interest of the owners and investors.

8. In a more comprehensive manner, the Institute of Internal Auditors (US) IIA (as cited in Dana & Larry 2003) defined “governance as a process that deals with the procedures utilized by the representatives of the organization's stakeholders to provide oversight risk and control processes administered by management”. The monitoring of organisational risks, and the assurance that controls adequately mitigate those risks both contribute directly to the achievement of organisational goals and the preservation of organisational value. Those performing governance activities are accountable to the organisations’ stakeholders for effective stewardship. Also, Organisation of Economic Cooperation and Development (OECD, 1991) in the same vein sees corporate governance as a system

9. by which business corporations are directed and controlled. The corporate structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as: the board, managers, shareholders, and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company’s objectives are set, and the means of attaining those objectives and monitoring performance.

10. Corporate governance issues Self Interest Wealth maximization Principals • Agent Self interest THEORIES OF CORPORATE GOVERNANCE AGENCY THEORY Delegates’ authority to manage asset The Agency Model Performance Source: Owolabi, (2012) In summary, the focus of agency theory as it affects modern corporations is to harmonise the conflicting interest of the principal and the agent. One of the limitations of agency theory is its restriction of the principal to the owners and pursues just the owner’s interest. However, there are other stakeholders who have interest in the contract and this shortcoming led to the birth of stakeholders’ theory as discussed below.

11. Stakeholder Theory • It was Freeman in 1984 that popularized the principle of stakeholder theory and it was gradually dragged into management theory since the 80s. Freeman, (1984), argued that corporate bodies have a wide coverage of accountability than the parochial representation of agency theory. Whieler et al., (2002), support this argument by saying that stakeholder’s theory is a product of sociology and organizational disciplines that identify a good array of other stakeholders in an organization.

12. Investors FIRM (Performance) Creditor Political System Government Customers Labour union Society Employees The Stakeholder Model Source: Owolabi, (2012)

13. Stewardship Theory Unlike agency theory, Agris (1973) argues that agency looks at employee or people as an economic being which surpasses an individual’s own aspiration, however, stewardship theory recognizes the importance of structures that empower the steward and offers maximum autonomy built on trust. Donaldso (1997) asserts that “a steward protects and maximizes shareholders’ wealth through firm performance, because by so doing, the steward’s utility functions are maximized.

14. More so, stewardship theory de-emphasises the duality role of Board chair and CEO, suggesting that the unified function empowers the steward to safeguard the interest of the shareholder. In view of the above, Daly et al (2003) stressed the fact that for the employees and executive to protect their reputation, they will take those decisions that will improve performance. This is consistent with the position of Owolabi (2011), who argued that stewards are expected to behave rationally because if they refuse to take decisions that will improve performance, then the shareholder operating in a free market system can switch to a performing firm and the stewards may lose their job. So in stewardship theory, it is assumed that stewards will act in the best interest of the shareholders. However, it has been empirically proved that the combination of these theories yield better results (Donaldso and Davis 1991).

15. (Performance) Shareholder Profit Shareholders Stewards Motivation The Stewardship Model Empower and Trust Protect and maximize Shareholders wealth Source: Owolabi, (2012)

16. OTHER THEORIES • Resource Dependency Theory • Transaction Cost Theory • Political Theory • Business Ethics Corporate Governance Theory • Virtue Ethics Theory • Feminist Ethics Theory • Discourse Ethics Theory

17. CONCEPTS IN CORPORATE GOVERNANCE • Openness, Honesty and Transparency • Independence • Accountability • Responsibility • Fairness • Reputation and Reputational risk • Ethical conduct

18. Openness, honesty and transparency In the context of corporate governance, it refers to outcomes that are reached or decisions that are made as a result of clear and visible procedures/processes. In the context of company reporting, it refers to information that makes clear the position and performance of the organisation, and the way in which the information has been derived.

19. Independence Free from the influence of another individual (or individuals) and free from conflicts of interest. • Accountability Individuals who make decisions in an organisation and take actions on its behalf on specific issues should be accountable for the decisions they make and the actions they take. Shareholders should be able to assess the actions of the board and the committees of the board, and have the opportunity to query them.

20. Responsibility A manager who is responsible for his or her decisions and actions should be subject to corrective measures. Mismanagement should be penalised. An issue in corporate governance is therefore whether directors should be liable for their performance to stakeholders, and their shareholders in particular. For example, should shareholders have the right to re-elect all the board directors each year? (current practice in the UK is for board directors of public organisations to stand for re-election every three years.)

21. Fairness Impartiality, a lack of bias. In the context of corporate governance, the quality of fairness refers to things that are done or decided in a reasonable manner, and with a sense of justice, and avoiding bias. • Reputation and reputational risk An organisation or business, like an individual, will be known widely by its reputation, defined as the character generally ascribed to that entity. A reputation may be good or bad and may be an asset or a hindrance

22. A good reputation needs to be built up over many years and encompasses many facets of business activity. It will reflect the way in which the organisation is perceived by the markets and in the wider community. Reputation cannot rely solely on a code of ethics, corporate social responsibility, fair treatment of staff, attitudes to customers, community involvement or willingness to obey the spirit as well as the letter of the law. It is, however, influenced by all of these.

23. Ethical conduct

24. THE VALUE OF CORPORATE GOVERNANCE • Good governance will eliminate the risk of misleading or false financial reporting and will prevent organisations from being dominated by self-seeking chief executives or chairmen. By reducing the risks of corporate scandals, investors will be better protected. This should add generally to confidence in the capital market and help to sustain share prices. • Organisations that comply with best practices in corporate governance are also most likely to achieve commercial success. Good governance and good leadership and management often go hand-in-hand.

25. Well-governed organisations will often develop a strong reputation and so will be less exposed to reputational risk than organisations that are not so well governed. • Good governance encourages investors to hold shares in organisations fro the long term, instead of treating shares as short-term investments to be sold for a quick profit. Organisations benefit from having shareholders who have an interest in their long-term prospects.

26. Perhaps the key issue is whether good corporate governance reduces investment risks to shareholders, or even improves company performance and share values. • The main arguments against having a strong corporate governance regime for listed organisations focus on costs, benefits and value

27. It is argued that, for many organistaions and institutional investors, compliance with a code of corporate governance is a box-ticking exercise. Companies adopt the required procedures and systems, without considering what the potential benefits might be. The only requirement is to comply with the rules and put a tick in a xxxxx when this is done. Corporate governance requirements therefore create a time and resource-consuming bureaucracy, and divert the attention of the board from more important matters.

28. Good corporate governance is likely to reduce the risk of scandals and unexpected corporate failures. However, the current regulations or best practice guidelines are far too extensive and burdensome • The connection between good corporate governance and good financials results (due to good leadership and management) has been claimed by some people, but denied by others.

29. Less regulation and fewer requirements for compliance would reduce the costs of corporate governance. At the moment, the costs far outweigh the benefits. To make matters worse, organisations that are obliged to comply with corporate governance regulations or best practices are at a competitive disadvantage to rival organisations from countries where corporate goverance regulation is much less.

30. Conclusion

31. THANK YOU