1. Scope of corporate governance
Chapter 1
Scope of corporate governance

2. Introduction of this chapter
Main topic: corporate governance
Maybe you have learned this topic in many courses, like chapter 5 in ACCAF1.
Deeper in this chapter, both theoretically and practically.

3. Definition of C.G Cadbury report (1992)
The system by which organizations are directed and controlled (in the interests of the shareholders and other stakeholders)
OECD Principles of Corporate Governance 1999
Involves a set of relationships between a company’s directors, its shareholders and other stakeholders. Provides the structure through which the objectives of the company are set, and the means of achieving those objectives and monitoring performance, are determined.

4. Background of C.G.- practical
Corporate governance的问题早已存在，但直到1980年以后才开始出现在相关文献中，为人们所重视，为什么？
1. 公司高级管理人员的高薪引起了股东和社会的不满
2. 投资机构的兴起与股东参与意识的提高
3. 并购对利益相关者的损害
4. 转轨经济国家存在的内部人控制(internal control)

5. Background of C.G.- theoratical
Agency theory: Theory of the firm: managerial behavior, agency costs, and capital structure (Jensen, Meckling, 1976)
Agency relationship: a contract under which the principals engage the agent to perform some services on their behalf that involves delegating some decision-making authority to the agent. (such as the shareholders and the manager)

6. Key terms in agency relationship
Accountability （经济法上的责任）
The agent is answerable under the contract to his principal and must account for the resources of his principal and the money he has gained working on his principal’s behalf.
Question: how to enforce the accountability and are there any other parties that the agent should be accountable to?

7. Key terms in agency relationship
Fiduciary duty（诚信义务）
A duty of care and trust imposed upon certain person or entity because of trust and confidence in which they stand in relation to another.
1. Require full disclosure
2. Strict for accountability and avoidance of conflict of interests
3.Imply honesty and proper exercise of power

8. Other terms in the relationship
Performance
Obedience
Skill
Personal performance
No conflict of interest
Confidence
Any benefit

9. Agency theory problem
It occurs when the desires or goals of the principal and agent conflict and it is difficult or expensive for the principal to verify that the agent has behaved inappropriately.
Two types of agency problem
Moral hazard (道德风险)
Converse choice (逆向选择)

10. Resolution measures
Alignment of interests: profit-related or EVA pay, rewarding managers with shares, executive share option plan
Monitoring: management audit, board of directors, NED, internal control, additional requirement of disclosure, etc.(monitoring and agency costs?)
Market measures: managerial labor market, takeover, etc.

11. C.G. is a part of governance
Internal direction
board of directors
monitor major forces through risk analysis
internal control
External control
regulation
code
social responsibility
ethics

12. Underlying concepts of C.G.
Fairness
Transparency/openness
Innovation
Scepticism
Independence
Probity/honesty
Responsibility

13. Underlying concepts of C.G.
Accountability
Reputation
Judgment
Integrity

14. Fairness
The director’s deliberations and also the systems and values that underlines the company must be balanced by taking into account everyone who had legitimate interest in the company, especially for minority parties.
A sense of equality in dealing with internal stakeholders; a sense of even-handedness in dealing with external stakeholders; an ability to reach an equitable judgment in a given ethical situation.

15. Transparency
Open and clear disclosure of relevant information to shareholders and other stakeholders, also not concealing information when it may affect decisions.
Open discussions and a default position of information provision rather than concealment.
Full disclosure to decrease information asymmetry.

16. Jun
(b) Define ‘transparency’(定义) and construct the case for greater transparency(为什么赞同更多的透明度？) in the governance of the Horace Hoi organization. (8 marks)

17. June
(b) Transparency Define transparency Transparency is usually defined in terms of openness and adopting a default position of information provision rather than concealment(书中定义). This means that unless there is an overwhelming reason not to disclose information of any kind (perhaps for reasons of commercial sensitivity) then information should be disclosed or made available upon request to any interested stakeholder(进一步解释). The case for greater transparency at HHO Transparency is an important principle in corporate governance, including at HHO, for a number of reasons.(先提出基本论点，即透明度很重要。后文的设计要注意逻辑，比如从一般到特殊。)

18. June
In general, transparency has the effect of reassuring investors that their funds are being responsibly stewarded and used for worthwhile investments. In the case of a charity, such as HHO, without shareholders in the conventional sense, donors give money to support the charity’s stated aims and purposes. With the relief of suffering to animals being a prominent reason any donors give to HHO, the amount of money diverted for other purposes, such as salaries, would be information of considerable interest. (一般的作用，尤其对于慈善团体而言) Transparency would inform and placate HHO’s critics, including the journalists who are investigating it. Public commentators like journalists are capable of causing damage to HHO’s reputation and this in turn can affect donations and support for the organization.

19. June
There are a number of potentially damaging allegations made against Mr. Hoi including the likelihood of large payments to himself and some profligacy in the purchase of the private jet. These allegations could be rebutted if the organization were to make the accounts public and explain the case for the purchase of the jet. For a charity receiving money from ‘well-meaning individuals that care greatly about animal suffering’, the allegations have the potential to do much reputational damage to the charity. (面对批评时的作用)

20. June
The publication of the financial data is an inadequate expression of transparency and appears to be a poor attempt to give the appearance of providing information whilst providing no useful detail at all. This would not meet any stakeholder’s information needs and fails to address any of the concerns raised about HHO. It does not give any absolute financial figures, e.g., in terms of income and costs. Such a truncated summary actually gives the impression, to any informed observer, of an attempt at concealment and this provides a strong reason to provide a full financial statement. (针对财务报告与数据)

21. Jun
(d) Draft the press release as discussed in the case. It should: (i) Define and explain the importance of ‘integrity’ and ‘transparency ’ in the context of the case. (结合案例进行定义和解释) (6 marks)

22. Jun
Press release (发表声明的前言省略，内容主要是介绍基本情况，以及表明态度) Transparency and Hoppo Hoppo regrets the perception that it lacked transparency in considering issues concerning its investment in Yuland. The company also wishes to re-emphasise its belief in the importance of transparency in matters of corporate governance(先表明态度). To Hoppo, transparency means providing open and clear disclosure of relevant information to shareholders and other stakeholders(第一点). Hoppo believes that it should not conceal information when it may materially affect others(第二点). It means open discussions and a default position of information provision rather than concealment(第三点). （注意发表声明时的措辞）

23. Jun
This means that when there is no good and legitimate reason to conceal discussions or other information, it should be disclosed as a matter of course. This has been, and remains, Hoppo’s position.(最后表决心，因为重要，所以hoppo一定会保证披露的透明度)

24. Innovation & Scepticism
The environment are changing over time
The needs of businesses and stakeholders
The “comply or explain” requirement
Some people should adopt an air of scepticism
Non-executive directors
Auditors and audit committees

25. Independence
The avoidance of being unduly influenced by vested interests and being free from any constraints that that would prevent a correct course of action being taken. It is an ability to stand apart from inappropriate influences and be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue.
A quality that can be possessed by individuals and is an essential component of professionalism and professional behavior.

26. Independence
Independence from personal influence of senior management for NEDs (avoidance of managerial capture).
Independence of the board from operational involvement.
Independence of directorship from overt personal motivation.

27. Probity/honesty Tell the truth
Not misleading (presenting information in a slanted way)
Complete and confirmed integrity; having strong moral principles
Honesty in financial/positional reporting; perception of honesty of the finance from internal and external stakeholders; a foundation ethical stance in both principles- and rules-based systems

28. Responsibility
Management accept the credit or blame for governance decisions.
There must be a system in place that allows for corrective action and penalizing mismanagement
To whom the board of directors are responsible and the extent of their responsibility?

29. Accountability
Whether an organization (and its directors) is answerable in some way for the consequences of their actions.
Approach: information disclosure
To whom? Directors are accountable to shareholders (Cadbury report). But the shareholders should have willingness to exercise their responsibility as owners.
The extent of management’s accountability towards other stakeholders.

30. Dec
(b) Explain what ‘accountability’ means, and discuss how the proposed new provisions for shorter re-election periods and biographical details might result in ‘greater accountability’ as the code suggests (解释，并讨论). (7 marks)

31. Dec
Accountability Boards of directors are accountable to the shareholders of the company. This means they are answerable to them in that they can be called to give an account for their behavior and actions as agents of the shareholders(详细定义). In the context of the code, it is recognized that boards do not always fully reflect the wishes and needs of shareholders and this can represent a failure of accounting from the board to the shareholders. The measures proposed aim to close that gap and make it less likely that unqualified or ill-equipped people will be appointed to, or remain on, the board.(结合准则要求进行解释)

32. Dec
Resulting in greater accountability (采用先总后分的逻辑，先总结，再说明原因。先总后分非常实用！) It will enable shareholders to remove underperforming directors much more quickly and to impose their will upon a board with less delay than previously. It will enable shareholders to rebalance or refresh a board in the light of environment changes or changes in strategy, rather than waiting for a period of time for the three-year terms of previously re-elected directors to elapse. The availability of biographical details will enable shareholders to clearly see the experience of a candidate and decide for themselves whether they are likely to add alue at a given point.

33. Reputation A very valuable asset of the organization
Purely commercial reasons for promoting the organization’s reputation: increasing the price of publicly traded shares.
Personal and professional reputation.
Reputation risk in Part B

34. Judgment
The ability that the board have to make decisions that enhance the prosperity of the organization.
Must have enough knowledge of the business and its environment.
Multiple conceptual skills to maximize long-term returns.

35. Integrity Cadbury report: straightforward dealing and completeness.
An essential principle of the corporate governance relationship.
High moral character; sticks to principles no matter the pressure to do otherwise.
Adhering to principles of professionalism and probity

36. Stockholder vs. stakeholder
道奇兄弟曾拥有福特公司约10%的股权，他们起诉福特暂停分红。董事长亨利·福特（Henry Ford）辩护说，之所以不分红，是因为他想用这些钱去扩大公司，并制造更多大众买得起的汽车。当被问及组建福特公司的目的时，福特说：“组建公司是为了尽我们可能做好事，在任何地方，为任何相关的人…并顺带赚些钱。”
法庭对此表示强烈意义，并称：“一家商业公司组建并运作的主要目的是为股东谋利。董事应围绕这一目的行使权力”

37. Stockholder vs. stakeholder
在1968年的什连斯基(Shlensky)诉里格利(Wrigley)一案中，少数股东起诉芝加哥小熊棒球队(Chicago Cubs)的公司，称公司拒绝按照照明设施并安排晚间比赛，因而牺牲了可能为股东造福的额外收入，伊利诺斯上诉法院受理此案。俱乐部认为， 晚间比赛会“对周围邻里造成破坏性影响”。
股东声称，俱乐部的决定把邻里利益放在股东利益之上，这违反了道奇一案的判定。伊利诺斯法院裁定支持俱乐部的决定。法院表示，俱乐部不是光看安排晚间比赛必将使股东获得直接利益，而是把眼光放得更远。如果邻里关系恶化，球迷们可能会不愿去看比赛，进而可能损害俱乐部股东的长期利益

38. Stockholder theory Focusing on the interests of shareholders.
Stating that shareholders alone have a legitimate claim to influence over the company.
Assuming that shareholders wish to maximize their returns, then directors’ sole duty is to pursue profit maximization.- fiduciary duty in agency relationship

39. Stakeholder theory
Proposing corporate accountability to a broad range of stakeholders.
Stakeholders: any entity that can affect or be affected by the achievements of an organization’s objectives.- bi-directional
Modern corporations have been seen as so powerful, socially, economically and politically, that unrestrained use of their power will inevitably damage other people’s rights.
一般很少考理论本身，而是如何运用该理论进行利益相关者的分析

40. Instrumental view vs. Normative view
From the point of instrumental view, the motivation of companies to full the responsibilities towards stakeholders is that they believe that it would have an impact on maximizing company’s profits if not to do so.
The companies don’t have any moral standpoint of its own, therefore is devoid of any moral obligation.

41. Instrumental view vs. Normative view
From the point of normative view, the motivation of companies to fulfill the responsibilities towards stakeholder is that they have consciousness of accepting moral duty towards others.
The companies are altruistic, and have ethical, philanthropic responsibilities in addition to economic, legal responsibilities.

42. Impact on the corporate governance
Including social objectives in the mission statement of organization is a sign that the board believes that they have significant impact on corporate strategy.
Ethical codes are part of corporate guidance to promote good corporate behavior among their employee.
Company should report on ethical and social conduct in their Operation and Financial Review and also may prepare social accounts showing impact to stakeholders.
Impact of stakeholders on C.G. may include representatives from key stakeholder groups on the board.

43. Classifications of stakeholders
Internal, connected and external
Legitimate and illegitimate
Direct and indirect
Recognized and unrecognized
Narrow and wide
Primary and secondary
Active and passive
Voluntary and involuntary
Known and unknown

44. Mendelow’s matrix
Assessing the relative importance of stakeholder interest.
Power: influence over a particular decisions
Level of interest: the effort stakeholder put in to attempting to participate in the organization

45. Mendelow’s matrix
Key players: strategy must be acceptable to them(e.g. major customer )
Kept satisfied: e.g. institutional shareholders
Kept informed: e.g. community representatives
Minimal effort is expended

46. Different stakeholders & roles
Directors: ED and NED
Company secretary: specially in UK
Sub-board management
Employee
Trade unions
Suppliers
Customers
External auditors: their works are important to the investors in the stock exchanges
Regulators

47. Different stakeholders & roles
Government: tax, laws, funds, etc.
Stock exchanges
Institutional investors: active and professional, can improving the governance of the organization(e.g. pension funds, insurance companies, investment and unit trusts, VC organizations)
Small investors

48. Jun
(a) Distinguish between voluntary and involuntary stakeholders, identifying both types of stakeholders in Hesket Nuclear. Assess the claims of THREE of the involuntary ‘affected’ stakeholders identified. (12 marks)

49. June
Distinguish and identify Voluntary stakeholders are those that engage with an organization of their own choice and free will. They are ultimately (in the long term) able to detach and discontinue their stakeholding if they choose. Involuntary stakeholders have their stakeholding imposed and are unable to detach or withdraw of their own volition. (注意下文识别时尽量多写) The voluntary stakeholders identified in the case are: Forward Together, Hesket Nuclear employees, the Ayland government, the board of HPC, local authorities, No Nuclear Now and other nuclear producers who use the reprocessing facility. The involuntary stakeholders are the governments of Beeland and Ceeland, the local community and the seal colony.

50. June
Assess the claims The case identifies three ‘affected’ stakeholders that are clearly involuntary. Both Beeland and Ceeland say that they are stakeholders because of their geographical position and the seals are unable to move because of local environmental conditions. (先说明involuntary与affected的关系) Beeland government’s claim is based on its position near to the Hesket plant. With the capital 70 km from the plant, it claims that it is already the ‘victim’ of low level radiation in the sea between the two countries (运用案例给的信息). The case does not give the radius of damage if a major incident wete to occur but it does say that there is ‘scientific support’ for the view that it could affect the capital of Beeland. Assuming that both of these statements are accurate then the Beeland

51. June
government would appear to have a legitimate and reasonable claim that they are affected by the Hesket Nuclear plant and could be further afffected in the future (运用一些联想和假设并得出结论). The government of Ceeland claims to be a potential ‘victim’ of nuclear contamination from the HN plant and has sought to have the plant closed as a result. The weakness of its claim rests upon the physical distance away from HN (500 km). If the threats to Ceeland are, as scientists have suggested, ‘unfounded and borne of ignorance’ then clearly Ceeland has a weak claim over HN. It may have political reasons of its own to make protestations, perhaps to appease opinion in Ceeland or to be populist to manage dissent at home. (受影响程度更轻) The local seal colony -> the local community