TEST A ESTUDIANTES DE 8VO AÑO DE E B

Whilst there is no generally agreed definition of corporate governance, it is nevertheless clear that a broad spectrum of definitions exist in the literature, ranging from narrow, agency theory-based definitions to broader, stakeholder-based definitions. Within the same context Mavrommati (2008:22) argues that “[d]ifferent authors vary widely in where they draw the boundaries of the

subject. In its narrowest sense, the term may describe the formal system of accountability of senior management to the shareholders. At its most expansive, the term is stretched to include the entire network of formal and informal relations involving the corporate sector and their consequences for society in general”. Historically, the term governance is derived from the Latin word 'gubernare' which means to rule or to steer (Tricker, 1984:9; Maassen, 2002:13; Mavrommati, 2008:24). An example of the first strand of corporate governance definitions is that provided by Koh (1994:23) who claims it to be: “the process and structure used to direct and manage the business and affairs of the corporation with the objective of enhancing long-term value for shareholders and financial viability of the business”.

Examples of the second strand of corporate governance definitions are those provided by Dahya et al. (1996), and Maier (2005 cited in Khan, 2010:88). Dahya et al. (1996:71) define it as “the manner in which companies are controlled and in which those responsible for the direction of companies are accountable to the stakeholders of these companies”. In a similar vein, Maier (2005:5 quoted in Khan, 2010:88) argues that

“[c]orporate governance defines a set of relationships between a company’s management, its board, its shareholders and its stakeholders. It is the process by which directors and auditors manage their responsibilities towards shareholders and wider company stakeholders. For shareholders it can provide increased confidence of an equitable return on their investment. For company stakeholders it can provide an assurance that the company manages its impact on society and the environment in a responsible manner”.

There is a significant difference between these two schools of thought; the former seems to support the agency theory as it is based on the idea that companies are mainly accountable for protecting the interests of shareholders. The latter seems to be in favour of the stakeholder theory which requires companies to be accountable to a wider range of interested parties.

Finally, the most comprehensive definition of corporate governance is provided by the WB (1999 as cited in Maassen, 2002:13) which claims that

“[c]orporate governance refers to that blend of law, regulation and appropriate voluntary private sector practices which enable the corporation to attract financial and human capital, perform efficiently, and thereby perpetuate itself by generating long-term economic value for its shareholders, while respecting the interests of stakeholders and society as a whole. The principal characteristics of effective corporate governance are: transparency (disclosure of relevant financial and operational information and internal processes of management oversight and control); protection and enforceability of the rights and prerogatives of all shareholders; and, directors capable of independently

approving the corporation’s strategy and major business plans and decisions, and of independently hiring management, monitoring management's performance and integrity, and replacing management when necessary”.

The review of previous corporate governance studies and definitions reveals that accountability is an important concept that is highly correlated with corporate governance. Keasey and Wright (1993:291) refer to accountability as involving “the monitoring, evaluation and control of organisational agents to ensure that they behave in the interests of shareholders and other stakeholders”. Furthermore, understanding the concept of corporate governance requires complete recognition of the differences between the role of management and that of governance as both may seem at first glance to be homogeneous (Cochran & Wartick, 1988, cited in Haniffa, 1999:90; Mavrommati, 2008). Management is the process of planning, organising, influencing and controlling the operations of the business. Meanwhile as proposed by Tricker (1984), governance tackles four principal activities: formulating strategic direction for the future of the enterprise in the long run, managing the business and ensuring that appropriate operational planning, controlling, organising and leadership are fulfilled at the heart of the executive management function, monitoring and overseeing management performance and disclosure of information, and finally, responding to those making a legitimate demand for accountability. Based on these aforementioned activities the basic functions of the BOD are defined as strategic, governance and institutional functions (Pearce & Zahra, 1991; Treichler, 1995; Mavrommati, 2008).

With respect to corporate governance models, there are two main defined models; one- tier board model and two- tier board model (Haniffa, 1999; Maassen, 2002; Mavrommati, 2008). Maassen (2002) argues that these models are the outcome of the diversity of the role of corporate board in the governance of the corporation, the leadership structure, the organisation structure and the composition of boards. Also, Haniffa (1999) proposes that the model of corporate governance depends on the country’s cultural and corporate environments. The US and the UK models are considered as examples of pure one-tier board model while the German model is an example of pure two-tier board model (Haniffa, 1999; Maassen, 2002; Mavrommati, 2008). Under the one-tier board model the power to govern is derived from ownership and the board oversees the running of the firm and reports regularly to members on the stewardship of their investment; and independent auditors report on the fairness of presentation of the company financial statements (Macdonald & Beattie, 1993; Haniffa, 1999). However, under the two- tier board model there are two boards; supervisory and management and there is a clear distinction between governance and management. Under the two- tier board model the supervisory board does not take an active part in management (Haniffa, 1999).