Two theories of Corporate Governance?

1. Agency Theory

Overview: Agency Theory focuses on the relationship between principals (shareholders)

and agents (company executives or managers). The central concern is the potential
conflict of interest between the owners and those who manage the company.

Key Concepts:

• Principal-Agent Problem: The core issue where managers (agents) may not
always act in the best interest of shareholders (principals). Managers might pursue
personal goals or engage in actions that benefit themselves at the expense of
shareholders.

• Information Asymmetry: Agents typically have more information about the

company's operations than principals, leading to challenges in monitoring and
ensuring alignment of interests.

• Incentive Structures: To mitigate the principal-agent problem, companies

implement incentive schemes such as performance-based compensation, stock
options, and bonuses that align managers' interests with those of shareholders.

• Monitoring Mechanisms: Mechanisms like audits, board oversight, and reporting

requirements help ensure managers act in shareholders' best interests.

Implications:

• Emphasis on maximizing shareholder value.

• Focus on financial performance and returns to shareholders.

• Governance structures and policies are designed to minimize agency costs and
ensure accountability.

2. Stakeholder Theory

Overview: Stakeholder Theory expands the focus of corporate governance beyond

shareholders to include various stakeholders who are affected by the company's actions.
These stakeholders include employees, customers, suppliers, communities, and the
environment.

Key Concepts:

• Stakeholder Interests: Companies should consider the interests and well-being

of all stakeholders, not just shareholders. This approach promotes long-term
sustainability and ethical conduct.

• Corporate Social Responsibility (CSR): Emphasizes the company's

responsibilities to contribute positively to society and minimize negative impacts.
This includes environmental stewardship, fair labor practices, and ethical
business conduct.
 • Balancing Interests: Effective governance involves balancing the sometimes
conflicting interests of different stakeholder groups to achieve overall social and
economic benefits.

• Sustainability: Focuses on sustainable business practices that ensure the

company can thrive in the long term while contributing positively to society.

Implications:

• Broader focus on social, environmental, and ethical responsibilities.

• Long-term value creation that benefits a wider range of stakeholders.

• Governance structures that promote transparency, accountability, and ethical

behavior.

These two theories represent different perspectives on corporate governance, with Agency
Theory focusing on aligning the interests of managers and shareholders, while Stakeholder
Theory advocates for a broader consideration of various stakeholders' interests.

Carroll’s pyramid of CSR

Keith Davis’s Model of Corporate Social Responsibility: Explanation and Examples

1. Social Responsibility Arises from Social Power

Explanation: Businesses wield significant influence over society due to their economic
power, workforce, and resources. This influence comes with the responsibility to act in
ways that benefit society rather than harm it.

Example: A multinational corporation like Apple has considerable social power due to its
size and global reach. Apple uses its power to address environmental issues by
committing to carbon neutrality and reducing its carbon footprint across its entire supply
chain. By doing so, Apple acknowledges its responsibility to contribute positively to
environmental sustainability.

2. Business Shall Operate as an Open System, with Open Accessibility to Its

Managers

Explanation: Transparency and openness are crucial for building trust with stakeholders.
Companies should be open to scrutiny and feedback, allowing stakeholders to
understand their operations and decision-making processes.

Example: Patagonia, the outdoor clothing company, operates with high transparency. It
openly shares information about its supply chain, labor practices, and environmental
impact. Patagonia's "Footprint Chronicles" provide detailed information on the
environmental and social footprint of its products, fostering trust and accountability with
consumers and other stakeholders.

3. Social Costs and Benefits of an Activity, Product, or Service Shall Be Thoroughly

Calculated and Considered in Deciding Whether to Proceed with It

Explanation: Before launching new products or initiatives, companies should evaluate the
potential social benefits and costs. This involves considering the broader impact on
society, including environmental and community effects.

Example: When Unilever, a global consumer goods company, considers launching new
products, it evaluates the social and environmental impact through its Sustainable Living
Plan. For instance, Unilever’s Lifebuoy soap campaign aims to improve hygiene practices
in developing countries, reducing disease spread and improving community health.

4. The Social Costs Related to Each Activity, Product, or Service Shall Be Passed on to
the Consumer

Explanation: The true cost of products, including social and environmental costs, should
be reflected in their pricing. This encourages consumers to make responsible choices and
ensures companies are accountable for their impacts.

Example: Fair Trade products, such as coffee or chocolate, often cost more than non-Fair
Trade alternatives. This higher price reflects fair wages, ethical labor practices, and
sustainable farming methods. By choosing Fair Trade products, consumers support these
responsible practices and contribute to social and environmental well-being.

5. Business Institutions, as Citizens, Have Responsibilities for Social Involvement in

Areas of Their Competence
Explanation: Businesses should use their expertise and resources to address social
issues and contribute positively to their communities. This involves leveraging their unique
capabilities to support societal well-being.

Example: Microsoft, a technology company, uses its expertise in technology to bridge the
digital divide through its AI for Good initiative. This program supports projects that use
artificial intelligence to address societal challenges such as healthcare, environmental
sustainability, and humanitarian action. By doing so, Microsoft leverages its technological
competence to make a positive social impact.

Aspect Carroll's Pyramid of CSR Keith Davis's Model for CSR

Hierarchical model with four

Structure Set of interconnected propositions
levels

1. Economic 1. Social Responsibility Arises from

Responsibilities Social Power 2. Business Shall
2. Legal Responsibilities Operate as an Open System 3. Social
Levels/Propositions Costs and Benefits Must Be
3. Ethical Responsibilitie Considered 4. Social Costs Should
4. Philanthropic Be Reflected in Pricing 5. Business
Responsibilities as a Social Citizen

Layered approach to CSR, Proactive social engagement and

Focus starting from economic to integration of CSR into business
philanthropic operations

Sequential fulfillment of Ongoing, proactive, and integrated

Implementation
responsibilities CSR efforts

Fulfill a progression of Active agents of social change with

Role of Businesses
responsibilities continuous duty

Economic Foundational level, focusing Implicit in the broader responsibility

Responsibilities on profitability arising from social power

Legal Compliance with laws and Not explicitly outlined, but included
Responsibilities regulations in social costs and benefits

Doing what is right, just, and

Ethical Integrated into the propositions,
fair beyond legal
Responsibilities especially social costs and benefits
requirements

Voluntary activities to Viewed as part of being a social

Philanthropic
improve community quality citizen and using expertise for social
Responsibilities
of life good

Not explicitly outlined, but

Transparency and Explicitly stated as operating as an
implied in ethical
Openness open system
responsibilities
Aspect Carroll's Pyramid of CSR Keith Davis's Model for CSR

Consideration of
Not explicitly outlined Explicitly stated as a key proposition
Social Costs

A tech company transparently

A manufacturing company
sharing its data privacy policies
ensuring profitability
(open system), assessing the social
(economic), complying with
impact of AI technology (social costs
safety regulations (legal),
Practical Example and benefits), pricing products to
treating workers fairly
reflect environmental costs (social
(ethical), and donating to
costs in pricing), and providing digital
local charities
education in underprivileged areas
(philanthropic)
(social citizen)

American Accounting Model

a. Historical Cost Principle:

• Explanation: This principle mandates that assets and liabilities be recorded at

their original purchase cost, rather than their current market value.

• Example: An accountant records the purchase of office equipment at its original

price of $5,000, even if its market value has changed over time.

b. Revenue Recognition Principle:

• Explanation: Revenue should be recognized and recorded when it is earned,

regardless of when the payment is received.

• Example: An accountant recognizes revenue for consulting services when the

service is performed and completed, even if the payment is received later.

c. Matching Principle:

• Explanation: Expenses must be matched with the revenues they help generate
within the same accounting period.

• Example: An accountant records the cost of goods sold at the same time as the
related sales revenue, ensuring the expense of producing the goods is matched
with the income from selling them.

d. Full Disclosure Principle:

• Explanation: All information that affects the full understanding of a company's

financial statements must be included.

• Example: An accountant includes a note in the financial statements explaining a

pending lawsuit that could significantly impact the company's financial position.
e. Consistency Principle:

• Explanation: Companies should use the same accounting methods and

procedures from period to period.

• Example: An accountant continues to use the straight-line method for

depreciation over multiple accounting periods to ensure comparability of financial
statements.

f. Materiality Principle:

• Explanation: All significant information that could influence the economic

decisions of users must be disclosed in the financial statements.

• Example: An accountant decides to expense a $100 office supply purchase

immediately, rather than capitalizing it, because it is not material to the company's
overall financial position.

g. Prudence Principle:

• Explanation: Accountants should exercise caution and make reasonable

estimates when preparing financial statements.

• Example: An accountant makes a conservative estimate for doubtful debts to

avoid overestimating the company's assets and income.

Cooking Jar Technique

Simple Explanation: The Cooking Jar Technique involves setting aside extra profits during
good times to use them during bad times. This makes a company's earnings look more
stable and predictable.

Simple Example:

1. Good Year:

o A company makes $10 million in profit but only reports $8 million. The extra
$2 million is saved in a "cookie jar" reserve.

2. Bad Year:

o In a later year, the company makes only $5 million. To make its profits look
better, it adds $2 million from the "cookie jar" reserve, reporting $7 million
instead of $5 million.

This technique helps smooth out earnings, making the company appear more stable over
time.
Accounting Bath Technique

Simple Explanation: The Accounting Bath Technique involves deliberately reporting

higher expenses or losses in a bad year to make future financial results look better. This is
often done during a change in management or during a tough period when poor results are
expected anyway.

Simple Example:

1. Bad Year:

o A company knows it’s going to have a bad year with a loss of $5 million.

o Management decides to write off additional expenses and losses, like

outdated inventory or restructuring costs, totalling an extra $3 million.

o They report a total loss of $8 million for that year.

2. Future Year:

o In the following years, the company has fewer expenses to deal with since
they already took the "big bath."

o This makes future profits look better because many of the one-time losses
were already accounted for in the previous bad year.

By taking an "accounting bath," the company hopes that by clearing out many of the bad
expenses all at once, it will have cleaner and more favourable financial statements in the
following years.

Preventing and avoiding money laundering and crime involves implementing a variety of
measures, both at the organizational and regulatory levels. Here are several effective
ways:

Organizational Measures

1. Know Your Customer (KYC) Procedures:

o Explanation: Establish strict KYC procedures to verify the identity of

clients and understand their financial activities.

o Example: Banks requiring clients to provide valid identification and proof

of address before opening an account.

2. Anti-Money Laundering (AML) Policies:

o Explanation: Develop and enforce comprehensive AML policies that

comply with legal requirements and best practices.

o Example: Regular training for employees on AML laws and how to

recognize suspicious activities.

3. Monitoring and Reporting:

o Explanation: Implement systems to monitor transactions for suspicious

activity and report such activities to relevant authorities.
 o Example: Using software to flag transactions that exceed certain
thresholds or show unusual patterns.

4. Internal Controls and Audits:

o Explanation: Establish strong internal controls and conduct regular audits

to detect and prevent money laundering.

o Example: Routine audits of financial transactions and accounts to identify

irregularities.

5. Employee Training and Awareness:

o Explanation: Provide ongoing training for employees on how to detect and

prevent money laundering and financial crimes.

o Example: Workshops and e-learning modules on the latest AML

techniques and regulations.