Chapter 5

Ethical Leadership and Corporate governance

Corporate governance
Corporate governance refers to the system of rules, practices, and processes by which a company
is directed, controlled, and operated. It involves the relationships between a company's
management, its shareholders, and other stakeholders. Corporate governance means the way a
company is managed and controlled. It includes the rules and practices that guide how decisions
are made and how power is shared among the people in charge. The goal of corporate governance
is to make sure the company is run fairly, honestly, and in the best interests of its owners and other
important people involved. It involves things like having a responsible board of directors, being
open and transparent about the company's activities, and making sure the people in charge are held
accountable for their actions. Good corporate governance helps the company gain trust from
investors and keeps it on the right track for long-term success.

Principles of corporate governance

1. Transparency: Companies should be transparent in their operations and provide clear and
accurate information to shareholders and stakeholders. This includes disclosing financial
performance, risks, and decision-making processes.
2. Accountability: Corporate leaders and board members should be accountable for their actions
and decisions. They should act in the best interests of the company and its shareholders,
avoiding conflicts of interest.
3. Fairness: Companies should treat all shareholders and stakeholders fairly and ensure equal
opportunities for them. This involves protecting minority shareholders' rights and avoiding
discriminatory practices.
4. Responsibility: Company management should have a sense of responsibility towards
shareholders, employees, customers, and the wider community. They should consider the
social and environmental impacts of their decisions.
5. Independence: The board of directors should be independent and not influenced by undue
external pressures. Independent directors can provide unbiased guidance and oversight.
6. Shareholder Rights: Shareholders should have the right to participate in decision-making
processes and exercise their voting rights. They should also receive timely and accurate
information about the company.
7. Board Effectiveness: The board of directors should be composed of competent individuals
with diverse backgrounds and expertise. They should have the necessary skills to oversee and
guide the company's management.
8. Long-term Sustainability: Corporate governance should focus on the long-term
sustainability and success of the company, rather than short-term gains. This includes
considering environmental, social, and governance (ESG) factors in decision-making.

Need or Significance of Corporate Governance

1. Protection of Shareholders: Corporate governance ensures that the rights and interests of
shareholders are protected. It provides mechanisms for shareholders to have a say in decision-
making, access to accurate information, and the ability to hold management accountable for
their actions
2. Sustain Long-Term Economic Growth: Effective corporate governance practices
contribute to sustainable economic growth by promoting stability, transparency, and investor
confidence. When companies are well-governed, they are more likely to attract long-term
investments, make sound strategic decisions, and generate sustainable returns.
3. Maximum Productivity and Efficiency: Good corporate governance fosters efficient
decision-making processes, clear lines of authority, and accountability. This enables
companies to optimize their operations, allocate resources effectively, and improve
productivity. Transparent and accountable governance structures also help identify and
address inefficiencies, leading to improved performance.
4. Fight Effectively Corruption and Abuse of Power: Corporate governance acts as a
deterrent against corruption and abuse of power within organizations. By promoting
transparency, and enforcing ethical standards, corporate governance reduces the likelihood of
corrupt practices.
5. Attracting Investment: Strong corporate governance practices attract investors. Investors are
more likely to invest in companies that have transparent and accountable management
structures, as it reduces the risk of fraud, mismanagement, and unethical practices.
6. Establishing System of Managerial Competence and Accountability: Corporate
governance ensures that managers and executives are competent and accountable for their
actions. Boards of directors, independent directors, and performance evaluation systems help
establish a framework of accountability. This encourages responsible decision-making,
effective risk management, and strategic planning, thereby enhancing overall managerial
competence.
7. Reputation and Brand Image: Strong corporate governance enhances a company's
reputation and brand image. When a company is known for its ethical practices, responsible
management, and transparency, it can build trust and loyalty among customers, employees,
and the general public.

Corporate governance code

A corporate governance code is a set of guidelines or principles that provide recommendations and
best practices for companies to follow in order to achieve effective corporate governance. These
codes are typically developed by industry associations, government bodies, or regulatory
authorities to promote transparency, accountability, and ethical behavior in corporate management.
While the specific content of a corporate governance code may vary across jurisdictions, here are
some common elements typically covered:
1. Board Composition and Structure: The code may recommend guidelines for the
composition and structure of the board of directors, including the number of independent
directors, their qualifications, and the separation of the roles of CEO and board chairperson.
2. Director Responsibilities: The code may outline the roles, responsibilities, and fiduciary
duties of directors. It may also provide guidance on their independence, expertise, and ethical
conduct.
3. Board Committees: The code may recommend the establishment of specific board
committees, such as audit, remuneration, and nomination committees, and define their roles
and responsibilities.
4. Shareholder Rights and Engagement: The code may address the rights of shareholders,
including their voting rights, information access, and mechanisms for engagement with the
company.
5. Transparency and Disclosure: The code may emphasize the importance of timely and
accurate disclosure of financial and non-financial information to shareholders and
stakeholders. It may also cover guidelines for the disclosure of conflicts of interest and
related-party transactions.
6. Risk Management and Internal Controls: The code may stress the need for effective risk
management systems, internal controls, and compliance mechanisms within the company.
7. Remuneration Policies: The code may provide recommendations for executive and director
remuneration, including guidelines for setting remuneration levels, performance-based
incentives, and transparency in disclosure.
8. Stakeholder Engagement: The code may highlight the importance of engaging with
stakeholders and considering their interests in decision-making processes.
9. Ethics and Corporate Social Responsibility: The code may emphasize the need for ethical
conduct, responsible business practices, and consideration of social and environmental
impacts.
10. Enforcement and Compliance: The code may address mechanisms for monitoring and
enforcing compliance with corporate governance principles and recommend consequences for
non-compliance.

Role of Auditors
1. Financial Statement Audit: Auditors conduct a detailed examination of an organization's
financial statements, including the balance sheet, income statement, and cash flow statement.
They verify the accuracy and completeness of the financial information presented in these
statements.
2. Compliance Audit: Auditors review an organization's financial operations to ensure
compliance with applicable laws, regulations, and industry standards. They assess whether
the organization has followed accounting principles and reporting requirements.
3. Internal Control Evaluation: Auditors assess an organization's internal control systems,
including its policies, procedures, and safeguards. They identify weaknesses or deficiencies
that could expose the organization to risks such as fraud, errors, or mismanagement.
4. Risk Assessment: Auditors analyze an organization's financial risks and evaluate the
effectiveness of risk management strategies. They identify potential risks and provide
recommendations for mitigating them.
5. Assurance Services: In addition to financial audits, auditors may provide assurance services,
such as reviews and compilations of financial statements, to enhance the credibility and
reliability of financial information.
6. Audit Opinion: Based on their examination, auditors provide an audit opinion or report,
which states their findings and conclusions regarding the accuracy and fairness of the financial
statements. The audit opinion can be unqualified (no issues identified), qualified (some issues
identified but not significant), adverse (significant issues identified), or a disclaimer (auditor
unable to express an opinion).
7. Independent and Objective Perspective: Auditors maintain independence from the
organizations they audit to ensure impartiality and objectivity. This independence helps
maintain public trust in the financial reporting process.
8. Communication and Reporting: Auditors communicate their findings and
recommendations to management, shareholders, and other stakeholders. They may issue audit
reports, management letters, or other formal documents outlining their observations and
suggestions for improvement.
9. Continuous Professional Development: Auditors must stay updated with evolving
accounting standards, regulations, and industry best practices. They engage in ongoing
training and professional development activities to enhance their skills and knowledge.

Role of Board of Directors

1. Setting the direction: The BoD decides on the organization's goals and plans for the future.
They work with the management team to determine the organization's mission and values.
2. Watching over the organization: The BoD makes sure that the organization follows laws
and regulations. They establish rules for how the organization should be run and ensure that
it acts ethically.
3. Hiring and supervising management: The BoD chooses and evaluates the CEO and other
top executives. They decide on their pay and make sure they are doing their jobs well. The
BoD also holds them responsible for achieving the organization's goals.
4. Managing finances: The BoD reviews and approves the organization's financial statements,
budget, and financial policies. They ensure that the organization has proper financial controls
and that financial reporting is accurate. They also keep an eye on the organization's financial
performance and take action if there are any risks.
5. Managing risks: The BoD identifies and assesses the risks that the organization faces. These
risks can be related to operations, finances, reputation, or other areas. They work with the
management team to develop strategies to handle these risks and monitor their progress.
6. Representing stakeholders: The BoD looks out for the interests of the organization's
shareholders or stakeholders. They communicate with them and make sure their concerns are
heard.

New answer

1) The directors shall manage all transaction, exercise of powers and perform duties of
the company through the board of directors collectively.
2) Except in accordance with a decision of the general meeting no director of a public
company shall do anything yielding personal benefit to him/her through the company.

3) Except as otherwise provided in this Act , the memorandum of association and articles
of association or the consensus agreements, the case of a private company, the board of
directors may appoint any director from amongst themselves or any employee of the
company as its representative and so delegate to him/her any or all of its powers, inter
alia, to do any act or thing, make correspondences or sign bills of exchange or cheques
etc. On behalf of the company that such powers are to be exercised individually or jointly.
In so delegating the powers, at least one director and their company secretary, if any,
shall certify such delegation, pursuant to a decision of the board of directors.

4) A company may recover damages from a person acting in the capacity of director or
representative of the company for any loss or damage caused to the company from any
act or action done by such person beyond his jurisdiction.

5) If any person enters into any transaction with the director or with a representative as
referred to in Sub-section (3) despite the knowledge or having reason to believe that such
director or representative is dealing with any transaction for his/her personal interest or
for causing loss or damage to the company, such person shall not be entitled to make
any claim against the company in respect of such transaction.

6) Notwithstanding anything contained in Sub-section (3), the board of directors shall not
delegate the following powers conferred to the company and shall exercise such powers
only by means of resolutions passed at meetings of the board of directors :
(a) The power to make calls on shareholders in respect of amount unpaid on their shares;

(b) The power to issue debentures;

(c) The power to borrow loans or amount otherwise than on debentures;

(d) The power to invest the funds of the company;

(e) The power to make loans.

7) The provision of Clause(e) of Sub-section(6) shall not apply to loans to be let and
deposits to be received in the ordinary course of business transaction by the companies
carrying on banking and financial business.

8) If the board of directors considers necessary to form a subcommittee for the discharge
of any specific business, it may form one or more than one sub-committee as required
and get such business discharged.

Roles of Shareholders
1. Ownership and Investment: Shareholders buy shares in a company, becoming owners and
investors.
2. Voting: Shareholders can vote on important matters like electing the Board of Directors or
approving major company decisions.
3. Corporate Governance: Shareholders help shape the company's direction by electing board
members and discussing strategies with management.
4. Access to Information: Shareholders have the right to receive important company
information, such as financial statements.
5. Legal Rights: Shareholders have legal protections and can take legal action if their rights are
violated.
6. Proxy Voting: Shareholders can appoint someone to vote on their behalf if they can't attend
meetings.
7. Monitoring: Shareholders monitor the company's performance and hold management
accountable.
8. Engaging with Management: Shareholders can communicate with the company's
management, ask questions, and provide feedback.

A global issues of governance

Accounting and Regulatory Framework

Corporate scams
Corporate scams refer to fraudulent activities or misconduct carried out within corporations or by
individuals associated with them, resulting in financial losses, reputational damage, and legal
consequences. These scams often involve deceit, manipulation, or misrepresentation to gain
personal or organizational benefits at the expense of stakeholders, including shareholders,
employees, customers, and the general public. Here are some notable examples of corporate scams:
1. Enron Scandal (2001): Enron Corporation, once considered one of the largest energy
companies in the world, collapsed due to widespread accounting fraud and unethical practices.
Enron manipulated its financial statements, concealed debt, and inflated profits, leading to
significant losses for investors and the bankruptcy of the company.
2. WorldCom Scandal (2002): WorldCom, a telecommunications company, engaged in
accounting fraud to inflate its earnings and hide expenses. The fraud involved misclassifying
expenses as capital investments, leading to an overstatement of assets and understatement of
costs. WorldCom filed for bankruptcy in one of the largest corporate fraud cases in U.S.
history.
3. Bernie Madoff Ponzi Scheme (2008): Bernie Madoff, a prominent Wall Street financier,
orchestrated one of the largest Ponzi schemes in history. He defrauded investors, including
individuals, charities, and institutional investors, by promising high returns while using new
investments to pay off existing clients. The scheme eventually collapsed, resulting in massive
financial losses for investors.
4. Volkswagen Emissions Scandal (2015): Volkswagen, a leading automobile manufacturer,
was involved in a scandal related to the manipulation of emission tests. The company installed
software in diesel vehicles to cheat emissions tests, misrepresenting the environmental impact
 of their cars. The scandal led to significant financial penalties, legal actions, and a tarnished
reputation for the company.
5. Theranos Scandal (2016): Theranos, a health technology company, claimed to have developed
a revolutionary blood testing technology. However, it was later revealed that the company
misled investors and regulators about the capabilities and accuracy of its technology. The
scandal led to the downfall of the company and legal repercussions for its founder, Elizabeth
Holmes.

A contingent perspective of corporate governance

Corporate governance in Nepal
Ethical leadership

Ethical leadership is the art of influencing people and guiding them to make good decisions rooted
in ethical values like fairness, morals, ethics, trust, honesty, accountability, equality, mutual
respect, and honesty. It is a way for leaders to teach people the difference between right and wrong.
Ethical leadership is a form of leadership in which individuals demonstrate conduct for the
common good that is acceptable and appropriate in every area of their life. It is composed of the
following three major ethical traits: leading by example, being accountable and responsible for
actions and decisions, and treating others with respect.

A manager’s ability to develop trust, commitment, and effort

The responsibility of managers.
Managers have a wide range of responsibilities that are crucial for the success of their teams and
organizations. Some key responsibilities of managers include:
1. Setting Clear Goals and Objectives: Managers are responsible for defining clear goals and
objectives for their teams. These goals should align with the organization's overall strategic
objectives and provide a clear direction for the team to follow.
2. Planning and Organizing: Managers are responsible for planning and organizing the work of
their team members. This involves creating work schedules, allocating resources, and
coordinating tasks to ensure that work is completed efficiently and effectively.
3. Decision Making: Managers are responsible for making important decisions that affect their
teams and the organization. This includes analyzing information, evaluating options, and
 choosing the best course of action. Managers should involve team members when appropriate
to foster engagement and gather diverse perspectives.
4. Leading and Motivating: Managers are responsible for leading and motivating their team
members. This involves providing guidance, support, and coaching to help individuals
perform their best. Managers should inspire and motivate their team members to achieve their
goals and maintain high levels of engagement and morale.
5. Communication: Effective communication is a critical responsibility of managers. They need
to communicate clearly and consistently with their team members, ensuring that important
information is shared, instructions are understood, and feedback is provided. Managers should
also foster open and transparent communication channels to encourage dialogue and
collaboration.
6. Performance Management: Managers are responsible for managing the performance of their
team members. This includes setting performance expectations, providing feedback and
coaching, conducting performance evaluations, and recognizing and rewarding achievements.
Managers should also address performance issues promptly and constructively.
7. Developing and Coaching: Managers are responsible for the development and growth of their
team members. This involves identifying individual development needs, providing training
opportunities, and offering guidance and coaching to help employees enhance their skills and
reach their full potential.
8. Building and Maintaining Relationships: Managers are responsible for building positive
relationships with their team members, peers, and stakeholders. This includes fostering a
supportive and inclusive work environment, promoting teamwork and collaboration, and
managing conflicts or challenges that may arise.
9. Monitoring and Accountability: Managers are responsible for monitoring the progress of
work, tracking performance metrics, and ensuring that goals are met. They should hold their
team members accountable for their responsibilities and take appropriate actions to address
any issues or deviations from expectations.
10. Continuous Improvement: Managers are responsible for fostering a culture of continuous
improvement within their teams. This involves encouraging innovation, soliciting ideas and
suggestions, and implementing changes or process improvements to enhance efficiency,
quality, and outcomes.
Overall, managers play a vital role in guiding, supporting, and developing their teams. By
effectively fulfilling their responsibilities, managers contribute to the success and growth of their
organizations and create an environment where employees can thrive and achieve their best results.