Key Issues Management are separate from ownership and control. Management act as stewards for the shareholders. Increasing social responsibility and environmental issues. The collapse of high profile corporations.
What is Corporate Governance? The system by which companies are directed and controlled.
Key Factors Management and reduction of risk is a fundamental issue of good governance. The acceptance that overall performance is enhanced by good supervision and management within set best practice guidelines. Enables corporations to pursue their strategy in an ethical and effective way Accountability is generally the major issue.
Driving Forces Increasing internationalisation and globalisation. This has led to investors moving outside national boundaries requiring more transparency and higher standards of comparability. The increasing number of high profile scandals like Enron, WorldCom, Parmalat, Maxwell and Barings have brought attention to auditing standards and a demand for a more holistic approach. The general concern over executive and non- executive directors.
Voluntary v Statutory frameworks UK The Cadbury Report (1992) created a best code of practice for directors. The Turnball Report (1998) on internal controls. The Higgs Report (2002) stressed the need for effective non-executive directors and an independent audit committee. The government has confirmed that Company law will be updated.
The Sarbanes-Oxley Act USA In direct response to Enron. Shifts responsibility for financial probity and accuracy to the Audit Committee. Requires companies to have an internal code of ethics. Imposes restrictions on share dealings. CEOs and CFOs have to swear accuracy of financial statements.
German Corporate Governance Finalised in 2003 by statutory regulations. Requires both a management board and a supervisory board ( appointed by the shareholders). Requires disclosure of any departure from the code. The code covers 6 key areas:
German Code Continued… Shareholders and general meetings. Co-operation between Management and Supervisory Boards. Management Board. Supervisory Board. Transparency. Report & Accounting of the annual financial statements.
French Corporate Governance Converging towards US model. Reduction in cross shareholdings between friendly companies. Poor performing entities are now no longer subsidised. French firms aggressively adopting systems of incentivised pay. ( About 50% of top French companies now employ this.)
Japanese Corporate Governance Moving towards a mix of US & UK. But lags behind mainly due to the historical way that Japanese companies were formed. The problems with Japanese banks having shareholdings in many of their clients. The Keiretsu system of control by a hand full of major corporations like Mitsubishi.
Japan Continued.. However, changes are happening and banking dominance, lifetime employment, and managements loyalty to management rather than shareholders is underway. Japanese are well aware of the two kinds of governance. Their own insider oriented system and the open market oriented systems like UK and USA.
The OECD Principals 2004 These are non-binding but highly recommended. Intended to assist governments to evaluate and improve legal and regulatory systems. Deal mainly with the separation of ownership and management as well as ethical and environmental issues. The objective is to allow better access to capital markets.
OECD – 5 Key areas 1.The rights of shareholders 2.The equitable treatment of shareholders. 3.The role of stakeholders. 4.Disclosure and transparency. 5.The responsibility of the directors. Much of this deals with accurate and timely financial reporting and effective monitoring of management.
Remember Signalling Theory
Remember the issues of Share by backs!
Remember Agency Theory/Conflicts!
Transparency and independence!
Non Exec Directors
Rotation of Auditors
Restriction on Auditor other Services
Corporate Social Responsibility Professor: Clive Vlieland-Boddy