Theories On Corporate Governance And Their Application Accounting Essay


Corporate governance in worldwide are implementing several of practices in their organizations and the most important and common thing is that they should have a regulatory framework. In this writing, I would like to analyze the current framework in a selected organization and how the framework gives impact to the corporation governance. I will discuss mostly on the corporation I chose for the study and how corporate governance can be effective and how the effective governance gives impact on the corporation pertinent to the current market worldwide. Two significant theories in governance are agency theory and stakeholder theory, when applying in a corporation can give a great return and benefit.

Since the post-Enron society, corporate governance has become a hot issue. Some companies' claims they can regulate, the government intention is disagreeable. But what happens was those companies who they claim can be regulate, they can't proof themselves. At the end of era 1990s and beginning of business millennium, the world was shocked by the accounting scandals of companies like Enron (2001), Worldcom (2002), Ahold (2003) and Parmalat (2003). If we study the reason of this incident, what comes in research was these companies more concentrate on profit, share holder wealth and big bonuses only. They totally have forgotten about ethics, society welfare and the long tenure consolidation of the companies. When they give little intention to ethics and corporate social responsibility, they become ignorance of corporate governance. In this study, I will give an example organization and how the corporate governance gives a great impact to the organization when the corporate governance was not implemented effectively. Finally I do hope this paper gives a clear impression of the corporate governance issue and the implementation of the issue effectively.

Corporate governance

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In this part, I will deliberately provide the definition of corporate governance. The first thing we should know how effective is the corporate governance in certain organization, we need to know what the term is really signify. Understanding the term properly will give us big idea on how the term can be implemented and used effectively.

Corporate governance was defined in the course of narrow definitions and broad definitions. The narrow definition was 'Corporate governance deals with the ways in which suppliers of finance to corporations guarantee themselves of getting a return on their investment' (Shleifer and Vishny, 1997). Another definition was corporate governance is 'the process of management and control anticipated to make certain that the company's administration acts in unity with the interests of shareholders' (Parkonson, 1994).

If we see from the broad view, the definition is 'The governance role is not concerned with the running of the business of the company per se, but with giving largely direction to the enterprise, with supervision and scheming the executive actions of administration and with gratifying legitimate expectations of responsibility and guideline by interests beyond the company boundaries' (Tricker, 1984). Other than this, the other definition for this term is corporate governance as 'a set of association between a company's board, its shareholders and additional stakeholders. It also provides the configuration through which the objectives of the company are set, and the means of attaining those objectives, and supervising act, are determined' (OECD, 1999). We also can see corporate governance as a apprehension with holding the balance between fiscal and community goals and between entity and public goals. The aim is to bring into line as nearly as possible the welfare of individuals, corporations and society' (Cadbury, 1999).

Theories in corporate governance

Different theories in corporate governance have developed to explicate and scrutinize the corporate governance, which each of it have a range of approaches. The four main theories in corporate governance are agency theory, transaction cost theory, stewardship theory and stakeholder theory.

Agency theory derives from finance and economics fields, transaction theory comes from economic and organizational theory, stewardship theory are basically from hypothesis of agency theory and transaction cost theory and finally the stakeholder theory from a more societal perspective on corporate governance (Solomon & Solomon, 2004: 16). In this paper, I will discuss two theories which is agency theory and stakeholder theory and how it can be implemented for the use of proper corporate governance.

Agency theory illustrates the relative between a primary person, who assigns task, and the mediator who executes that task. Agency theory concerns solving two kinds of problems that can come up in this relationship. (Jensen and Meckling, 1976) Berle and Means (1932) highlight that as a country industrializes and develop its market, the possession and control of companies will be estranged. This severance together with the postulation that the agent is self interested has been creating the agency crisis: due to information asymmetries and dissimilar views in perceiving risks, first, the agents are not likely to act in the best interests of the principals, leading to the diminution of shareholders' value, and second, it is multifarious and expensive for the principal to scrutinize and authenticate the activities of the agent (Eisenhardt, 1989). In this theory, it is crystal clear to see the agent is playing a most vital part in determining the status of an organization.

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A researcher Dalton et al. (1998) clarify that agency theory has been the mainly outstanding hypothetical view in corporate governance field. This is generally because first, it decreases huge corporations into two participants, which are manager and agent and another two participants, the shareholder and the principal. Their interests are understood to be unmistakable and stable. Secondly the postulation that human beings are self interested is widespread (Daily et al., 2003). Other researchers like Jensen and Meckling (1976) propose that agency theory means the severance of ownership and control. For example the primary person allots the routine work to the mediator, which acts as an agent. This elucidate on how inadequate responsibility exists in companies.

From other researcher's view agency theory might be different. Blair (1996) propositions that to avoid the misuse of manager's power, they should be monitored and management must do routine checks on them. This is called agency costs. The costs may result managers mishandling their position, as well as the costs of observation and disciplining them to try to thwart ill-treatment. In this case, the boards of directors play their role in monitoring the principal, agent relationship in order to diminish the agency problems. Thus the directors are considered as company's stewards and will be disposed to act in the best interest of the principals, which is the main scheme of stewardship theory (Donaldson & Davis, 1991).

The stakeholder theory might give a different picture from agency theory. The traditional school of corporate governance focused on the maximization of shareholders' assets. (O' Sullivan, 2000) The Japanese or European model on the other hand, followed the pluralistic approach of stakeholder theory. In this theory, the company incorporates responsibility to a broader assortment of parties rather than only focusing on shareholders (Freeman, 1984). It stresses that not only must a company make the most of shareholder value, but at the same time it must also make use of its capital to transport reimbursement to the society as a whole (Mallin, 2007: 16). The main disagreement for this is that it is not only the corporeal assets in which shareholders invest that bring assessment for the company. Human efforts are also important as well. Moreover decisions of the firms have consequences for society as a whole, as they have a big force on for instance the depletion of capital or toxic waste (Bhasa, 2004). Solomon & Solomon (2004: 24) elucidate that as corporate social responsibility has been a major issue, it is the time for companies to act conscientiously and morally. Quinn and Jones (1995) also argue that the most important cause is the managers. The managers must not ignore their ethical obligations as human beings and they must stick to ethical behavior regardless the revenue it may or may not bring. Profit that comes in might not stay long in an organization, but human value and their thankfulness will remain forever.

British American Tobacco

For this paper, I have chosen British American Tobacco as an example organization, in implementing corporate governance in the working arena. Mainly before linking corporate governance in the organization, I will briefly do some write up on the company's history and background.

British American Tobacco Malaysia occurs from the amalgamation of Rothmans of Pall Mall (Malaysia) Berhad and Malaysian Tobacco Company Berhad on 3 November 1999. The combination pooled aptitude, knowledge and an unrivalled collection of extremely victorious domestic brands to generate the country's principal tobacco corporation. Today, British American Tobacco Malaysia is the clear marketplace manager with in the region of 60% market share, and ranks in the midst of the top 25 companies on Bursa Malaysia Securities Berhad in terms of advertise capitalization. British American Tobacco Malaysia's main industry is industrialized and markets high eminence tobacco goods designed to meet miscellaneous consumer preferences. Their portfolio includes well-established international names such as Dunhill, Kent and Pall Mall.

British American Tobacco has a shared narration of over 90 years in Malaysia going back to 1912. The wealth of knowledge, fixed with foremost periphery technology and efficient systems and progression employed in all portions of their business activities, site them well to meet the challenges of the future. They pay about 1,600 employees who are implicated in the full range of the tobacco manufacturing, from leaf business and dispensation to manufacturing, advertising and allocation. Their inclusive distribution arrangement spans the measurement lengthwise and wideness of the country, ensuring that their brands are accessible everywhere in Malaysia.

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The main aim of British American Tobacco is to preserve our leadership in the industry all the way through escalating their split of the tobacco industry and agreeable consumer difficulty better and more advantageously than their opponents. In meeting these goals, they ensure that they market reliably, and in a method sensitive to the surroundings. For them, guidance goes further than just market share; it has to be about qualitative guidance in our eyes, and in the eyes of the stakeholders.

British American Tobacco is the world's second major quoted tobacco group by global market share. It holds vigorous market positions in each of its regions and has leadership in more than 50 markets around the world. The British American Tobacco Group has 45 cigarette factories in 39 countries, purchasing roughly 460,000 tones of leaf in 2010, grown by around 200,000 farmers. In 2010, their supplementary companies sold 708 billion cigarettes. The Group employs more than 60,000 people worldwide. Its portfolio of more than 200 brands includes most important international brands such as Dunhill, Kent, Lucky Strike and Pall Mall. The British American Tobacco Group's vision is to achieve guidance of the global tobacco manufacturing in order to create long term investor assessment.

Even the company's main manufacturing products are tobacco which they sell cigarettes, they do aware of the consequences they might face by selling something that could harm human's body and organs. Thus they do implement safety courses and campaigns.

Corporate governance in British American Tobacco

Since 2001 until 2010, the British American Tobacco has gained lot of achievements, awards and recognitions. In the year 2001, the company achieved the best in Corporate Governance 2001 award and best in The Asset Magazine Corporate Governance Ranking 2001 award. In the year 2002, they achieved national Annual Corporate Awards 2002. In 2003, the organization achieved best in the asset magazine corporate governance ranking 2003, most commitment to creating shareholder value and best corporate governance in Malaysia 2003 and KPMG shareholder value awards 2002. In 2004, they achieved most Committed to Strong Dividend Policy, Best Managed Company and Best Corporate Governance in Malaysia 2004. In year 2005, the company achieved national Annual Corporate Report Awards (NACRA) 2005. In the 2006, the company still achieved KPMG shareholder value awards 2005, best managed company, best corporate governance, best commitment to strong dividend payment, third place for best investor relations 2006 and national annual corporate report awards (NACRA) 2006. Latest in the year 2010, the company achieved national Annual Corporate Report Awards (NACRA) 2010, KPMG/The Edge Shareholder value award 2010, Malaysian corporate governance(MCG) index 2009, the asset corporate governance awards 2009, finance Asia awards poll 2009, best corporate governance 3rd place and best corporate social responsibility 3rd place.

The Board of Directors in British American Tobacco Malaysia is committed to maintaining high standards of corporate governance throughout British American Tobacco Malaysia as a primary part of its everyday jobs in administration the production and affairs of British American Tobacco Malaysia. The Company's corporate governance structure is directed towards accomplishing the Company's key business objectives in a method which is accountable and in agreement with high standards of integrity, simplicity and responsibility. This proofs that the company implement agency theory and stakeholder theory in their daily business. Their main aim is not about profit only, but more on humanity.

In motivating high standards of corporate governance, the Board of Directors is also directed by the Company's Code of Corporate Governance (British American Tobacco Malaysia Code), which is formulated based on the ideology and best practices set out in the Malaysian Code on Corporate Governance (Revised 2007) (Malaysian Code) and developments of internationally predictable best governance practices. These principles and best practices are accomplished throughout British American Tobacco Malaysia as the fundamental principle in discharging the Board of Director's accountability and to make certain of simplicity and corporate accountability.

British American Tobacco Malaysia launched a corporate social responsibility (CSR) committee to evaluate the company's management. This is due the company's policy and the needs of implications of CSR. The committee will observe the management whether it is associated with the statement of Business Principles approved by the corporation.

The main compositions are the CSR Committee shall consist of members of the top team, the chairman of CSR committee will be the Managing Director, the Corporate Affairs director shall be the secretary of the CSR Committee, The CSR Committee will be reporting to the Board via the Audit Committee and to the Regional CSR Committee.

Purpose of the CSR Community

The main and foremost purpose of the community is to evaluate the Company's administration of CSR and this includes the managing of association with the Statement of Business Principles. Scrutinizing of fulfillment with the Standards of Business Conduct may stay put the purview of the Audit team.

The CSR Committee will search for to spotlight on the Company's community and ecological recital whereby social and ecological risks and issues or weaknesses of allegation are to be acknowledged and pertinent and timely achievement is being in use to undertake any of the same. The CSR Committee must also supply as a forum which exhibits that the main beliefs of CSR are proficiently entrenched throughout the company.

Authority of the Committee

The CSR Committee is certified by the Board of Directors to evaluate behaviors inside the company, which will be within the domain of the Company's administration of CSR. It is also endorsed to inquire about the information it requires from administration in order to accomplish this intention. The Managing Director will be the appropriate channel as his acquaintance will make sure that the CSR Committee has admission to all appropriate and significant information. The CSR Committee in performing its functions is also sanctioned by the Board of Directors to protect exterior self-governing professional suggestion and if essential, the presence of third parties with pertinent skill and expertise, as well as parties from within the Company. The Corporate and Legal Affairs Director will report noteworthy CSR performance matters and risks to the CSR Committee and afford the CSR Committee at each standard assembly with condition reports. The CSR Committee will meet at least twice annually.


Some explicit areas of responsiveness are to make sure there is due process for recognition and administration of key community and ecological issues. The identification of and engagement with key stakeholders are also considered as main objectives for this organization. Another objective is monitoring competence and efficiency of CSR management systems and controls. The company also must ensure the fidelity of social and ecological recital supervision information and lastly objective can be achieved by observing alignment with the Company's declaration of industry philosophies.


The British American Tobacco Malaysia recognizes the importance of maintaining transparency and accountability to its shareholders and investors. The Board therefore maintains a dialogue with shareholders directed towards ensuring a mutual understanding of the objectives of British American Tobacco Malaysia. The Board also ensures that all the Company's shareholders are treated equitably and that the rights of all investors, including minority shareholders are protected.

Annual Report

A major channel used by the Board to provide its shareholders and investors with information on its business, financials and other key activities is the Annual Report of the Company, which contents are continuously enhanced to take into account developments, amongst others, in corporate governance. An essential aspect of an active and constructive communication policy is the timeliness in disseminating information to shareholders and investors. The Company sends out the Notice of the Annual General Meeting and related circular to shareholders at least 21 days before the meeting as required by the Companies Act, 1965 and in order to facilitate full understanding and evaluation of the issues involved.

Where special business items appear in the Notice of the Annual General Meeting, a full explanation is provided to shareholders on the effect of the proposed resolution emanating from the special business item. Prompt and timely release of financial results on a quarterly basis enables shareholders to have an overview of the British American Tobacco Malaysia Group's performance and operations and make informed investment decisions.

Annual General Meeting

The Annual General Meeting (AGM) is the principal chance for the Board to meet the shareholders of the Company and for the Chairman to explain the Company's progress and receive questions from the shareholders. At the AGM, shareholders participate in the deliberations of the resolutions being proposed or on the British American Tobacco Malaysia Group's operations in general. 

Agency theory in the British American Tobacco Malaysia

The agency theory, when we do the association to the company British American Tobacco Malaysia, does contribute a number of statements and information. In agency theory, the most important criteria discussed were the management and the agent. In this theory, the agent plays an important role in determining the effectiveness of the theory. Thus in this case scenario, the agency will be the management. The management should play a responsible role in determining the prospects of the organization. This is an aspect worried by the stakeholders if they fully let the management determine their fate in the company they invest.

As for Jensen and Meckling (1976) defined the agency affiliation as a bond under which one party (the principal) appoints another party (the agent) to perform some service on their behalf. In this scenario, the other party assigns the management of British American Tobacco as another person to carry out overhaul on their behalf. As part of this arrangement, the primary person will delegate some or all of the decision-making ability to the agent. In practice in British American Tobacco, shareholders from most corporations hand over the verdict making ability to the board of directors (BOD). In turn, the BOD passes on power to the chief executive officers (CEO). Sometime this can create problems because of the unfeasibility of absolutely astringent for every possible action of an agent whose decisions affect both his own interests and the welfare of the primary persons. But as I studied the British American Tobacco, these kinds of problems are not keen to happen due to the strong ethic and responsible behavior of the management. As the management really gives priority to the humanity and the trust they gain from the stakeholders.

At the same time, the agency theory also disputes that an agency relationship subsists when shareholders (principals) hire managers (agents) as the decision makers of the corporations. The agency problems occur because managers will not completely act to maximize the shareholders' prosperity; they may defend their own wellbeing or seek the objective of maximizing companies' enlargement instead of earnings while making decisions. Jensen and Meckling (1976) suggested that the ineffectiveness may be abridged as administrative motivation to take value maximizing decisions increased. Agency costs are arising from divergence of interests between shareholders and company managers. "Agency costs" are defined by Jensen and Meckling as the sum of monitoring costs, bonding costs and remaining loss.

In 2010, the British American Tobacco developed a web-based workflow system, Bridge Net to improve the efficiency of work processes between British American Tobacco operating units in the Asia Pacific region and its agency partners based on the New Operating guidelines between British American Tobacco and its agencies. This new solution replaced the previous system of conducting work processes between British American Tobacco end markets in Asia Pacific and its agencies partners via email, wherein full visibility of work processes was not available to all team members. This shows how much the management concentrates on the agencies under them not to gain profit only, but to be responsible to them in an honest way.

Stakeholder theory in the British American Tobacco Malaysia

The management of British American Tobacco Malaysia believes that not only they liable to stakeholders but also responsible for running a victorious and dynamic relationship with their respective stakeholders. The Group also distinguishes the significance of continuing intelligibility and responsibility to its stakeholders. The Board ensures that all the Company's stakeholders are taken care of fairly and make sure that the rights of all investors, including minority stakeholders are sheltered. The Group's primary contact with stakeholders is through the Chairman, Managing Director, Finance Director and Company Secretary. All stakeholders' doubt will be received by the Company Secretary. The Company Secretary will give answers and responses to shareholders' queries and where any information may be regarded as unrevealed material information about the Group such information will not be made available to a stakeholder unless already in the public sphere through expose.

The main concern for the British American Tobacco Malaysia is maintaining the great relationship with the stakeholders. However, quantitative procedures do not in themselves address all the things they are obliged to do as a company. The company takes a long period view, giving priority to the eminence of their business and how they work. As a result, qualitatively, they seek to be accepted as a manufacturing leader and to be the partner of first choice for their treasured stakeholders. The company values for their stakeholders, not only for the sake of profits but as the management's companion in marketing. It is in the company's vision and mission.

As fittingly outlined by Bursa Malaysia in its Sustainability Guide, sustainability means dissimilar things to different people, and for British American Tobacco Malaysia, it is addressing key business related community, ecological and fiscal impacts to build stakeholder and shareholder value, thereby improving profitable sustainability. The move towards sustainability was further spurred by increasing prospects from stakeholders.


As for the conclusion, corporate governance can be complex and complicated. Mainly as it involves other issues as well, that makes this issue more complicated than any organization ever imagine of. The government, sole organizations and market plays their most important part in making the corporate governance effective. For instance, ethics and responsible is very important aspect and factor in determining the long term progress of a company. If there is lack of ethic in the management, the company will be doomed soon enough before it could even realize the consequences. The managers and board of directors are most common factors in determining the progress of the company and maintaining the relationship with the stakeholders and agencies. There are mechanisms in all organizations to solve this kind of behavior such as compensation practices. Additionally effective solutions for the tradeoff between ethics and efficiency should be in place. Most of all, all the employees of an organization should have their own roles and plays in maintain good business prospect.

Corporate governance objective grow from simple shareholder awareness (agency theory) to stakeholders (stakeholder theory) and the Triple-Bottom Line (legitimacy theory). However, there still issue of 'corporate psychopath' which obstructs the effort to deliver benefit accumulates to these parties. Following this matter and aftermath East financial crisis in 1997, a variety of corporate governance and sustainability mechanism have been implemented to improve corporate governance level among Malaysian companies such as Malaysian Code of Corporate Governance (revised 2007) (Malaysian code), main market listing requirements of Bursa Malaysia Securities Berhad, Corporate Governance guide: Toward boardroom excellence of Bursa Malaysia Securities Berhad, British American Tobacco Malaysia's Code of Corporate Governance (BATM Code), Standards of Business Conducts, Statement of business principles (Business principles) and Statement of Delegated Authorities. This shows that issue of corporate governance are being paid good attention by all. These guidelines have been implemented by the British American Tobacco Malaysia in defining the corporate governance.

Even there has been little experimental work done to revise the relationship between corporate governance and sustainability (from stakeholder perspective) in Malaysia. This study has done in order to have some experimental knowledge on this issue, by examining the relationship between stakeholder added value and corporate governance level. Overall we can see and understand that size matters most. The ethical value, responsibility, honesty and moral values has a significant consequence to corporate governance.

As we see the example company for this study was the British American Tobacco Malaysia and how this company puts great effort in implementing the corporate governance issue effectively. Aside from the abovementioned policies and procedures, other internal control policies, standards and guidelines such as British American Tobacco International Marketing Standards, Employment Principles, and the Environment, Health and Safety Policy which the company tolerates to in the running of its business can correspondingly be obtained from the company. The Group's obligation and perseverance in running its business dependably amidst a demanding situation for the tobacco manufacturing is manifest from the awards and tributes that the company had received from the year 2001 until the year 2010.

Generally there might be lots of factors and aspects in determining the effectiveness of corporate governance in organizations. But the core and fundamental of all is the agency theory and stakeholder theory which humanity, honesty, ethics and responsible is the primary key in the process of marketing. Profit is just a matter of finance, but what remain in the heart of humans are the humanity and the respects and the trust they gain from the organization. In this term, the British American Tobacco Malaysia can be an example successful company in implementing the corporate governance effectively.