Complete copy of CS CORPORATE GOVERNANCE AND ETHICS is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com


Following our continued effort to provide quality study and revision materials at an affordable price for the private students who study on their own, full time and part time students, we partnered with other team of professionals to make this possible.

Special appreciation and recognition to the lecturers who have helped in the development of our materials, These are: FA Kegicha William Momanyi (MBA Accounting, CPA, CISA and CCP), FA Bramwel Omogo (B.sc Actuarial Science, CIFA, CIIA, CFA first level and ICIFA member, Johnmark Mwangi (MSc Finance, CPAK, BCom Finance),CPA Gregory Mailu (Bsc. Economics) CPA Dominic Rasungu and CPA Lawrence Ambunya among others.





This paper is intended to equip the candidate with the knowledge, skills and attitudes that will enable him/her to practice the tenets of good corporate governance and demonstrate adherence to ethics for enhanced organisational performance and achievement of corporate and strategic objectives.



  • A candidate who passes this paper should be able to:
  • Apply leadership principles and practices in the context of good corporate governance and ethics
  • Apply best practices in good corporate governance and ethics
  • Demonstrate an understanding of the links between corporate governance and ethics and development of different types of corporate governance solutions.
  • Effectively resolve ethical dilemmas based on corporate policy and governing



1.         Overview of Corporate Governance and Ethics

  • Defining corporate governance
  • Importance of corporate governance and ethics
  • Pillars of good corporate governance
  • Principles of good corporate governance
  • Comparative corporate governance system
  • Evolution of corporate governance
  • New models for corporate governance and ethics
  • Ethics and the law
  • Universality of ethics


2.     Theories of Corporate Governance and Ethics

  • Agency Theory
  • Stewardship Theory
  • Stakeholder Theory
  • Legitimacy Theory
  • Resource dependence theory
  • Political theory
  • Transaction cost theory
  • Deontology Theory
  • Utilitarianism Theory

2.11       Rights Theory

2.11       Virtue Theory


3.                    Board governance models

  • Advisory board
  • Patron governance model
  • Cooperative model
  • Management team model
  • Policy board model
  • Fund raising board model
  • Traditional Model
  • Carver board model
  • Cortex board model
  • Consensus board model
  • Competency board model
  • Governance of family-owned firms
  • Emerging Board governance models: case study of independent offices and          constitutional commissions in Kenya


4.      The Board of Directors

  • Appointments
    • Appointments of directors, composition and size
    • Appointment of the Chair
    • Appointment of the CEO
    • Appointment of Corporate Secretary/Governance Professional
    • Appointment of external auditor


4.2                 Governance body roles and responsibilities

  • The legal context
  • The role of the Chair
  • Separation of roles of the Chairman, CEO and Corporate Secretary
  • Board induction and continuous skills development
  • The role of the board and management
  • CEO and other executives’ succession planning
  • Strategy performance and reporting
  • Policy
  • Oversight
  • Accountability


4.3                 Board Performance assessment and effectiveness

  • Board structure and composition
  • Board Procedures
  • Board functions and behaviors
  • Advancing corporate governance from compliance to competitive advantage
  • Assessing performance and remuneration of directors and senior management
  • Board effectiveness


5.                Internal Corporate Documents

  • Constitutive documents including memorandum association, articles of association, Bylaws, Trusteed, and constitution
  • Shareholder agreements
  • Board manual and charter
  • Board annual work plan
  • Internal regulations of the organisation
  • Codes of Corporate Governance
  • Codes of Ethics
  • Performance evaluation tools

6.                 Governance of Risk

  • Strategic risk and the board
  • Risk appetite framework
  • Different types of risk
  • Board oversight functions
  • Internal control framework
    • Internal auditor
    • External auditor
    • Audit Committee
    • Internal audit guidelines and procedures
  • Compliance risk
  • Best practices for overseeing risk, assurance and reporting

7.               Environmental, Social, and Corporate Governance (ESG) Framework

  • Environmental protection
  • The triple bottom line
  • Social audit
  • Sustainability
  • Diversity
  • Corporate reputation and image
  • Corporate Social Responsibility: Strategies, policies, ethical issues and impact of CSR
  • Shareholder and stakeholder relations
  • Stakeholder rights, interests and obligations
  • Stakeholder dispute resolution
  • The dynamics of institutional investors

8.                  Ethical Behavior

  • Understanding ethics, morality, values and integrity
  • Ethics versus regulation
  • Ethics and corporate governance
  • Roles of the board in promoting ethical conduct
  • Defining business ethics
  • Key components of ethical policy
  • Ethical culture
  • Resolving ethical dilemmas
  • Conflict of interest and related party transactions
  • Insider trading
  • Standards of conduct and personal integrity
  • Becoming a transparent organisation
  • Organisational integrity
  • Whistle blowing
  • Ethics and technology
  • Ethics and globalisation

8.17       Transparence and disclosure in promotion of corporate ethical culture

9.                         Compliance with Laws and Regulations

  • Overview of legal and regulatory framework on governance and ethics
  • Constitutional provisions on governance and ethics
  • Compliance strategy
  • Legal and compliance audit
  • Role of professional and regulatory bodies in promoting governance and ethics
  • International legislative and regulatory frameworks

10         Contemporary Issues and Case Studies in Corporate Governance and Ethics






Corporate Governance refers to the way a corporation is governed. It is the technique by which companies are directed and managed. It means carrying the business as per the stakeholders’ desires. It is actually conducted by the board of Directors and the concerned committees for the company’s stakeholder ‘s benefit. It is all about balancing individual and societal goals, as well as, economic and social goals.

Corporate Governance is the interaction between various participants (shareholders, board of directors, and company’s management) in shaping corporation ‘s performance and the way it is proceeding towards. The relationship between the owners and the managers in an organization must be healthy and there should be no conflict between the two. The owners must see that individual’s actual performance is according to the standard performance. These dimensions of corporate governance should not be overlooked.

Corporate Governance deals with the manner the providers of finance guarantee themselves of getting a fair return on their investment. Corporate Governance clearly distinguishes between the owners and the managers. The managers are the deciding authority. In modern corporations, the functions/ tasks of owners and managers should be clearly defined, rather, harmonizing.

Corporate Governance deals with determining ways to take effective strategic decisions. It gives ultimate authority and complete responsibility to the Board of Directors. In today ‘s market- oriented economy, the need for corporate governance arises. Also, efficiency as well as globalization are significant factors urging corporate governance. Corporate Governance is essential to develop added value to the stakeholders.

Corporate Governance ensures transparency which ensures strong and balanced economic development. This also ensures that the interests of all shareholders (majority as well as minority shareholders) are safeguarded. It ensures that all shareholders fully exercise their rights and that the organization fully recognizes their rights.

Corporate Governance has a broad scope. It includes both social and institutional aspects. Corporate Governance encourages a trustworthy, moral, as well as ethical environment.

Importance of Corporate Governance

  • Good corporate governance ensures corporate success and economic
  • Strong corporate governance maintains investors’ confidence, as a result of which, company can raise capital efficiently and
  • It lowers the capital cost.
  • There is a positive impact on the share
  • It provides proper inducement to the owners as well as managers to achieve objectives that are in interests of the shareholders and the organization.
  • Good corporate governance also minimizes wastages, corruption, risks and
  • It helps in brand formation and development.
  • It ensures organization in managed in a manner that fits the best interests of


Principles of Corporate Governance

Corporate governance in the Company is based on the following principles:


The Code of Corporate Governance envisages accountability of the Board of Directors of the Company before all shareholders in accordance with the legislation in force, and is the governing document for the Board of Directors in issues related to strategy planning, administration and control over the Company’s executive bodies.


The Company undertakes to protect the rights of its shareholders and treat all shareholders on an equal basis. The Board of Directors enables its shareholders to receive efficient protection if their rights are violated.


The Company shall provide timely disclosure of credible information on all the important facts related to its activities, including information on its financial condition, social and environmental measures, results of activities, ownership and management structures; the Company shall provide free access to such information for all interested parties.


The Company acknowledges the rights of all interested parties envisaged by the legislation in force, and aims at cooperation with such parties in order to provide steady development and ensure financial stability of the Company.




Corporate Governance is concerned with the establishment of an appropriate legal, economic and institutional environment that would facilitate and allow business enterprises to grow, thrive and survive as institutions for maximizing shareholder value while being conscious of and providing for the well-being of all other stakeholders and society.

Good Corporate Governance requires that the State puts in place and maintains an enabling environment in which efficient and well-managed companies can thrive. It is therefore expected that companies will continue to play their part in encouraging dialogue between the public and private sectors in promoting good public governance and an enabling business environment.

It is the responsibility of the owners of the corporation to elect competent directors and to ensure that they govern the corporation in a manner consistent with their stewardship.

Good corporate governance dictates that the Board of Directors governs the corporation in a way that maximizes shareholder value and in the best interest of society. It is neither in the long-term interest of the enterprise or society to short-change customers, exploit labour, pollute the environment or engage in corrupt practices.

The guidelines which follow set 21 principles of good corporate governance, aimed primarily at the Board of Directors in corporations with a unitary Board structure. These are followed by a sample code which expounds on these principles.

The following is a summary of the principles of good corporate governance:

Authority and Duties of Members [or Shareholders]

Members or shareholders [as owners] of the corporation shall jointly and severally protect, preserve and actively exercise the supreme authority of the corporation in general meetings. They have a duty, jointly and severally, to exercise that supreme authority of the corporation to:

Ensure that only competent and reliable persons, who can add value, are elected or appointed to the Board of Directors;

Ensure that the Board is constantly held accountable and responsible for the efficient and effective governance of the corporation so as to achieve corporate objectives, prosperity and sustainability.

Change the composition of a Board that does not perform to expectation or in accordance with the mandate of the corporation.



Every corporation should be headed by an effective Board that should exercise leadership, enterprise, integrity and judgment in directing the corporation so as to achieve continuing prosperity and to act in the best interest of the enterprise in a manner based on transparency, accountability and responsibility.

Appointments to the Board

Appointments to the Board of Directors should, through a managed and effective process, ensure that a balanced mix of proficient individuals is made and that each of those appointed is able to add value and bring independent judgment to bear on the decision-making process.

Strategy and Values

The Board of Directors should determine the purpose and values of the corporation, determine the strategy to achieve that purpose and implement its values in order to ensure that the corporation survives and thrives and that procedures and values that protect the assets and reputation of the corporation are put in place.

Structure and Organization

The Board should ensure that a proper management structure [organization, systems and people] is in place and make sure that the structure functions to maintain corporate integrity, reputation and responsibility.

Corporate Performance, Viability and Financial Sustainability

The Board should monitor and evaluate the implementation of strategies, policies and management performance criteria and the plans of the corporation. In addition, the Board should constantly review the viability and financial sustainability of the enterprise and must do so at least once every year.

Corporate Compliance

The Board should ensure that the corporation complies with all relevant laws, regulations, governance practices, accounting and auditing standards.

Corporate Communication

The Board should ensure that the corporation communicates with all its stakeholders effectively.

Accountability to Members

The Board should serve the legitimate interests of all members and account to them fully.

Responsibility to Stakeholders

The Board should identify the corporation‘s internal and external stakeholders; agree on a policy or policies determining how the corporation should relate to, and with them, in creating wealth, jobs and the sustainability of a financially sound corporation while ensuring that the rights of stakeholders [whether established by law or custom] are respected, recognized and protected.

Balance of Powers

The Board should ensure that no one person or group of persons has unfettered power and that there is an appropriate balance of power on the Board so that it can exercise objective and independent judgment.

Internal Control Procedures

The Board should regularly review systems, processes and procedures to ensure the effectiveness of its internal systems of control so that its decision-making capability and the accuracy of its reporting and financial results are maintained at the highest level at all times.

Assessment of Performance of the Board of Directors

The Board should regularly assess its performance and effectiveness as a whole and that of individual members, including the Chief Executive Officer. A summary of the major findings together with a statement confirming that the Board has carried out a self-assessment exercise should be made to the annual general meeting.

Induction, Development and Strengthening of Skills of Board Members

The Board should recognize the need for new members to be inducted into their roles and for all Board members to develop and strengthen their governance skills in light of technological developments, changing corporate environment and other variables. The Board should accordingly organize for the systematic induction and continuous development of its members.

Appointment and Development of Executive Management

The Board should appoint the Chief Executive Officer and participate in the appointment of all senior management, ensure motivation and protection of intellectual capital crucial to the corporation, ensure that there is appropriate and adequate training for management and other employees and put in place a succession plan for senior management.

Adoption of Technology and Skills

The Board must recognize that to survive and thrive it has to ensure that the technology, skills and systems used in the corporation are adequate to run the corporation and that the corporation constantly reviews and adopts the same in order to remain competitive.

Pillars of good corporate governance

Rules of law

  • Legislating and issuing regulations that are fair and acceptable to employees and society
  • Legally authorizing the power
  • Improving the process of drafting, issuing, and implementing the law with the consideration on quality, fairness and quickness

Moral integrity

  • Embracing the morality and cultural values
  • Encouraging the employees to conduct their duties and be role model for society
  • Encouraging the employees to be honest, sincere, disciplined, and diligent.


  • Building the trust within the organization or nation by encouraging transparent working process in every division; disclosing information to employees, general public, and stakeholders to access the information.
  • Providing the opportunities for employees, general public or stakeholders to check the correctness


  • Providing the opportunities for employees, general public or stakeholders to understand the situation
  • Providing the opportunities for employees, general public or stakeholders to participate in solving the organization problems by giving opinions or voting.

Responsibility and accountability

  • Realizing that one has duties and responsibility for the society and environment
  • Concerning oneself with public problems
  • Enthusiastically solving the problems
  • Respecting the different opinions
  • Being responsible to one’s conduct

Effectiveness and efficiency

  • Managing the limited resources for the optimal benefits for public and encouraging the employees and public to be economical
  • Using the resources efficiently
  • Producing high quality goods and providing good service
  • Conserving the natural resources
  • Adding values


Management of Corporate Risk

The Board must identify key risk areas and key performance indicators of the corporation’s business and constantly monitor these factors.

Corporate Culture

The Board should define, promote and protect the corporate ethos, ethics and beliefs on which the corporation premises its policies, actions and behaviour in its relationships with all who deal with it.

Social and Environmental Responsibility

The Board should recognize that it is in the enlightened self-interest of the corporation to operate within the mandate entrusted to it by society and shoulder its social responsibility. For this reason, a corporation does not fulfill its social responsibility by short-changing beneficiaries or customers, exploiting its labour, polluting the environment, failing to conserve resources, neglecting the needs of the local community, evading taxation or engaging in other anti-social practices.

Recognition and Utilization of Professional Skills and Competencies

The Board should recognize and encourage professional development and, both collectively and individually, have the right to consult the corporation ‘s professional advisers and, where necessary, seek independent professional advice at the corporation ‘s expense in the furtherance of their duties as directors. [This is in addition to and not a substitute to their personal duty to acquire competence, training and information that would help them make informed, independent and astute decisions on issues relevant to the corporation.

Recognition and Protection of Members’ Rights and Obligations

Members of the corporation have a right to receive any information that would materially affect their membership, to participate in any meeting of members and to participate in the election of directors and be facilitated to fully participate in all other resolutions of interest to them as members.

The attention of the Boards of Directors is increasingly being drawn to the need to ensure that:


  • The governance framework takes account of gender and children’s rights and the special needs of disabled and/or handicapped citizens.
  • The Corporation promotes the interests, rights and welfare of host
  • The Corporation protects and preserves the environment


Complete copy of CS CORPORATE GOVERNANCE AND ETHICS is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) and in HARD copy 

Phone: 0728 776 317

Email: info@masomomsingi.com

Evolution of corporate governance

The topic of corporate governance is a vast subject that enjoys a long and rich history. It’s a topic that incorporates managerial accountability, board structure and shareholder rights. The issue of governance began with the beginning of corporations, dating back to the East India Company, the Hudson’s Bay Company, the Levant Company and other major chartered companies during the 16th and 17th centuries.

While the concept of corporate governance has existed for centuries, the name didn’t come into vogue until the 1970s. It was a term that was only used in the United States. The balance of power and decision-making between board directors, executives and shareholders has been evolving for centuries. The issue has been a hot topic among academic experts, regulators, executives and investors.

Corporate Growth Places Emphasis on Developing Corporate Governance

After World War II, the United States experienced strong economic growth, which had a strong impact on the history of corporate governance. Corporations were thriving and growing rapidly. Managers primarily called the shots and board directors and shareholders were expected to follow. In most cases, they did. This was an interesting dichotomy, since managers highly influenced the selection of board directors. Unless it came to matters of dividends and stock prices, investors tended to steer clear from governance matters.

In the 1970s, things began to change as the Securities and Exchange Commission (SEC) brought the issue of corporate governance to the forefront when they brought a stance on official corporate governance reforms. In 1976, the term ‘corporate governance’ first appeared in the Federal Register, the official journal of the federal government.

In the 1960s, the Penn Central Railway had diversified by starting pipelines, hotels, industrial parks and commercial real estate. Penn Central filed for bankruptcy in 1970 and the board came under public fire. In 1974, the SEC brought proceedings against three outside directors for misrepresenting the company’s financial condition and a wide range of misconduct by Penn Central executives.

Around the same time, the SEC caught on to widespread payments by corporations to foreign officials over falsifying corporate records. During this era, corporations started to form audit committees and appoint more outside directors. In 1976, the SEC prompted the New York Stock Exchange (NYSE) to require each listed corporation to have an audit committee composed of all independent board directors, and they complied. Advocates pushed to get governance right by requiring audit committees, nomination committees, compensation committees and only one managerial appointee.

The 1980s Brought a Corporate Governance Reform Counter-Reaction

The 1980s brought an end to the 1970s movement for corporate governance reform due to a political shift to the right and a more conservative Congress. This era brought much opposition to deregulation, which was another major change in the history of corporate governance. Lawmakers put forth The Protection of Shareholders’ Rights Act of 1980, but it was stalled in Congress.

Debates on corporate governance focused on a new project called the Principles of Corporate Governance by the American Law Institute (ALI) in 1981. The NYSE had previously supported this project, but changed their stance after they reviewed the first draft. The Business Roundtable also opposed ALI’s attempts at reform. Advocates for corporations felt they were strong enough to oppose regulatory reform outright, without the restrictive ALI-led reforms. Businesses had concerns about some of the issues in Tentative Draft No. 1 of the Principles of Corporative Governance. The draft recommended that boards appoint a majority of independent directors and establish audit and nominating committees. Corporate advocates were concerned that if companies implemented these measures, it would increase liability risks for board directors.

Law and economic scholars also heavily criticized the initial ALI proposals. They expressed concerns that the proposals didn’t account for the pressures of the market forces and didn’t consider empirical evidence. In addition, they didn’t believe that fomenting litigation would serve a purpose in improving board director decision-making.

In the end, the final version of ALI’s Principles of Corporate Governance was so watered down that it had little impact by the time it was approved and published in 1994. Scholars maintained that market mechanisms would keep managers and shareholders aligned.

The ‘Deal Decade’ Leads to Shareholder Activism

The 1980s was also referred to as the ‘Deal Decade.’ Institutional shareholders grabbed more shares, which gave them more control. They stopped selling out when times got tough. Executives went on the defensive and struck deals to prevent hostile takeovers.

State legislators countered takeovers with anti-takeover statutes at the state level. That, combined with an increased debt market and an economic downturn, discouraged merger activity. The Institutional Shareholder Services (ISS) was formed to help with voting rights. Shareholders struck back with legal defenses, but judges often favored corporate decisions when outside directors supported board decisions. Investors started to advocate for more independent directors and to base executive pay on performance, rather than corporate size.

Financial Crisis of 2008

By 2007, banks had been taking excessive risks and there was growing concern about a possible collapse of the world financial system. Governments sought to prevent fallout by offering massive bailouts and other financial measures. The collapse of the Lehman Brothers bank developed into a major international banking crisis, which became the worst financial crisis since the Great Depression in the 1930s. Congress passed the Dodd-Frank Wall Street Reform and Consumer Act in 2010 to promote financial stability in the United States.

The fallout from the financial crisis has placed a heavier focus on best practices for corporate governance principles. Boards of directors feel more pressure than ever before to be transparent and accountable. Strong governance principles encourage corporations to have a majority of independent directors and to encourage well-composed, diverse boards.

Advancements in technology have improved efficiency in governance and they’ve created new risks as well. Data breaches are a new and real concern for corporations. The first targets were banks and financial institutions. As these institutions have bolstered their security measures, hackers have turned their efforts to smaller corporations within a variety of industries, including governments.

Today’s boards of corporations and organizations of all sizes are finding that the best way for them to protect themselves, their shareholders and stakeholders is to use technology to their advantage by taking a total enterprise governance management approach. Diligent, a leader in board management software, provides for their needs with Governance Cloud, a suite of fully integrated and highly secure governance tools. Diligent’s software solutions help boards put their best foot forth in assuring transparency, accountability, compliance and efficiency.

The history of corporate governance continues to be rewritten. How we define corporate governance will continue to be in a state of evolution in the coming years. Diligent will be following the trends and regulations to help boards perform their best regardless of what the future brings.


New models for corporate governance and ethics


The Principal-Agent or Finance Model

The principal-agent or finance model is the dominant theory of corporate governance. The model assumes that the only purpose of corporations is the maximization of shareholders’ wealth, whilst acknowledging that shareholders do not have enough control and influence over managerial action due to their distance from the day-today operations. Therefore, it argues regulation enhances the power and control of shareholders.

As the cornerstone of agency theory, the principal-agent relationship exists in any co-operative situation and thus at all levels of a corporation in which the principal delegates work to an agent who performs that work on behalf of the principal. Based on the assumption of self-interested human behavior, agency theory asserts that managers as agents may pursue their own interests at the expense of the shareholders, hence the so-called “agency problem” (Jensen and Meckling 1976). For agency theorists, to solve the agency problem is to determine the most efficient contract that governs the principal-agent relationship.

Agency Model in Corporate Governance

Agency theory assumes that all social relations in economic interaction can be reduced to a set of contracts (specifying duties, rewards and the rights of the principal to monitor corporate performance) between principals and agents, where the role of contracts serves as a vehicle for voluntary exchange by actors (Alchian and Demsetz 1972). Thus, the firm is best described as a “nexus of contracts” with the behavior of the firm simulating the behavior of a market, i.e., “the outcome of a complex equilibrium process” (Jensen and Meckling 1976).

The main goal of agency theory is to determine the most efficient or optimal contract governing the principal-agent relationship. The question is especially related to whether behavior-oriented governance (e.g., salaries, hierarchical governance) is more efficient than outcome-oriented contractual governance (e.g., commissions, stock options) (Eisenhardt 1989). For agency theorists, market-oriented governance structures best discipline managers’ behavior. Financial theorists, however, claim that since managerial behavior could be constrained by the pressures of capital markets, factor markets and the market for corporate control can best address the issue of management underperformance (Manne 1965). The advocates of this model insist that current corporate governance mechanisms should be allowed to operate freely and that any interference with the market governance mechanisms is irrational and distort those (Hart 1995).



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