Corporate Governance & Corporate Social Responsibility Dr Clive Vlieland-Boddy 1

What is Corporate Governance? The system by which companies are directed and controlled. Ensure good management. Ensure ethical behaviour. Avoid conflicts of interest 2

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. 3

Voluntary Vs 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. 4

The Sarbanes-Oxley Act USA In direct response to Enron & WorldCom. 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. CEO’s and CFO’s have to swear accuracy of financial statements. 5

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: 6

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. 7

The OECD Principals 2005 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. 8

OECD – 5 Key areas The rights of shareholders The equitable treatment of shareholders. The role of stakeholders. Disclosure and transparency. The responsibility of the directors. Much of this deals with accurate and timely financial reporting and effective monitoring of management. 9

OECD principle: Stakeholders’ interest Employees participation in management: performance enhancing mechanisms to be promoted Whistle-blowers’ interest to be protected Creditors’ rights: –Through security interest enforcement and bankruptcy laws: Current enforcement is tardy 10

Principles of OECD code on Corporate Governance 2005 The corporate governance system should promote transparent and efficient markets. Should be consistent with rule of law. Should lay down clear roles of various regulatory and enforcement authorities. 11

Dr. Clive Vlieland-Boddy 12

Corporate Social Responsibility (CSR) Preliminary definitions of CSR The impact of a company’s actions on society Requires managers to consider his or her acts in terms of a whole social system, and holds them responsible for the effects of these acts. Today sustainability is all about appreciating all stakeholders interests. 13

Corporate Social Responsibility (CSR) Corporate Citizenship Concepts Corporate social responsibility – emphasizes obligation and accountability to society Corporate social responsiveness – emphasizes action, activity Corporate social performance – emphasizes outcomes, results 14

Corporate Social Responsibility (CSR) Historical Perspective Economic model – the invisible hand of the marketplace protected societal interest Legal model – laws protected societal interests 15

Corporate Social Responsibility (CSR) Historical Perspective Modified the economic model –Philanthropy –Community obligations –Paternalism 16

Corporate Social Responsibility (CSR) Historical Perspective What was the main motivation? –To keep government at arms length 17

Corporate Social Responsibility (CSR) Historical Perspective From the 1950’s to the present the concept of CSR has gained considerable acceptance and the meaning has been broadened to include additional components 18

Corporate Social Responsibility (CSR) Evolving Viewpoints CSR considers the impact of the company’s actions on society (Bauer) CSR requires decision makers to take actions that protect and improve the welfare of society as a whole along with their own interests (Davis and Blomstrom) CSR mandates that the corporation has not only economic and legal obligations, but also certain responsibilities to society that extend beyond these obligations (McGuire) 19

20 Philanthropic Responsibilities Philanthropic Responsibilities Be a good corporate citizen. Ethical Responsibilities Ethical Responsibilities Be ethical. Legal Responsibilities Legal Responsibilities Obey the law. Economic Responsibilities Economic Responsibilities Be profitable.

Corporate Social Responsibility (CSR) Arguments Against Restricts the free market goal of profit maximization Business is not equipped to handle social activities Dilutes the primary aim of business 21 Increase business power Limits the ability to compete in a global marketplace

Corporate Social Responsibility (CSR) Arguments For Addresses social issues business caused and allows business to be part of the solution Protects business self-interest 22 Limits future government intervention Addresses issues by using business resources and expertise Addresses issues by being proactive

CSR in the 21 st Century - Summary Demonstrate a commitment to society’s values and contribute to society’s social, environmental, and economic goals through action. Insulate society from the negative impacts of company operations, products and services. Share benefits of company activities with key stakeholders as well as with shareholders. Demonstrate that the company can make more money by doing the right thing. 23

24

Signalling Theory What is it? 25

Signaling Theory MM assumed that investors and managers have the same information. But, managers often have better information. Thus, they would: –Sell stock if stock is overvalued. –Sell bonds if stock is undervalued. Investors understand this, so view new stock sales as a negative signal. Implications for managers? 26

Share Repurchase This is an alternative way to return cash to the investors. It has the effect of reducing the number of remaining shares. Often a premium has to be paid to re- purchase. Caution…. Repurchases are often criticised as management often misuse them to gain personal advantage. 27

Transparency and independence! What is it? 28

Audit Committees Why do we need them? 29

Remuneration Committees What are they responsible for? 30

Non Exec Directors Why do we need them? 31

Rotation of Auditors Why? 32

Restriction on Auditor other Services Why? 33

Whistle Blowers….. Could you be one? 34

Preparation for next session 35

36 Bye for now! I’m ready for some leisure time. Please ensure you Prepare for next session