1. Corporate Governance – Principles, Policies and Practices 3e
Chapter 2
Governance and management

2. Governance and management
in which we recognise:
Definitions of corporate governance
The scope of corporate governance
The significance of constitutions for corporate entities
The difference between governance and management
The performance and conformance aspects of governance
Alternative board structures.

3. Governance and management
Definitions of corporate governance
Definitions vary according to the perspective of
the user
operational
relationship
stakeholder
financial economics
Societal.

4. Governance and management
Defining corporate governance – operational Corporate governance is the process by which companies are directed and controlled - Cadbury Report 1992 and OECD 1999.

5. Governance and management
Defining corporate governance – relationship
The relationship among various participants in determining the
direction and performance of corporations. The primary
participants are the shareholders, the management and the
board of directors - Monks and Minow 2001
The corporate governance structure specifies the distribution of
rights and responsibilities among the different participants in the
organization – such as the board, managers, shareholders and
other stakeholders – and lays down the rules and procedures
for decision- making - OECD 2002.

6. Governance and management
Defining corporate governance - stakeholder Corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders - Demb and Neubauer, 1992.

7. Governance and management
Defining corporate governance – financial economics perspective Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment - Shleifer and Vishny, 1997.

8. Governance and management
Defining corporate governance - societal The whole set of legal, cultural, and institutional arrangements that determine what (public) corporations can do, who controls them. How that control is exercised, and how the risks and return from the activities they undertake are allocated Blair, 1995 Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. Cadbury, 2000

9. Governance and management
Defining corporate governance – overall Corporate governance is the exercise of power over a corporate entities - Tom Clarke, 2004

10. The spheres of Corporate Governance
Figure 2.1: The scope of corporate governance

11. Governance and Management
Every corporate entity needs a constitution
THE MEMBERS
Shareholders in a limited company
Members of the profession in a professional body
Club members in a sports, arts or other private club
Registered members in a trades union
Members of academic bodies
Voting members of other corporate entities
THE CORPORATE ENTITY
Limited liability company
Professional organisation
Sports, arts or other club
Trades union
University or college
Other corporate entities

12. Governance and Management
Incorporating a joint stock limited liability company
Companies Registrar
Memorandum
- name of company
- objectives
- registered office
- share capital
- liability of shareholders limited
Articles of Association
- detailed rules for running the entity
- Table A

13. Governance and Management
Types of limited liability company
Private companies limited by shares
Private companies limited by guarantee
(Private unlimited companies)
Public companies
offer to general public
in UK title XYZ Plc
prospectus needed to offer shares.

14. Governance and Management
Other forms of incorporation
Savings and loans association, building societies
Co-operatives: supplier (Canada), customer (UK)
State corporate entities
Federal National Mortgage Association (Fannie Mae)
QUANGOs Quasi-autonomous non-governmental organisation
Not for profit entities
e.g. Charities, sports associations, arts and cultural societies
Trust law, friendly societies law, charities law etc.

15. Governance and Management
The essence of governance
Figure 2.3: The board and management

16. Governance and Management
Management involves an organisational hierarchy

17. Governance and Management
Governance is different from management
governance
management

18. Governance and Management
Board Structure
INED ED
Investment
Manager
Co. Secretary
(Compliance
Officer)
General

19. Governance and Management
Management runs the business: The board ensures that the business is well run and running in the right direction.

20. Governance and Management
Wherever management is separate from ownership or membership, organisations need governing
Public listed company – board of directors
Small/medium company - board of directors
Subsidiary/associate/joint venture – board
Company limited by guarantee
University, college – council, governing body
Charity, club, hospital – board, committee
Quasi-governmental bodies– council, committee, board
Family firm
Many corporate governance ideas are universal and can be applied to any governing body
(contrast organisations where management and governance are in the same hands – sole traders, small partnerships).

21. Governance and Management
The basic board processes
Outward looking
Strategy formulation
Accountability
Supervising
executive activities
Policy making
Inward looking
Past and present focused
Future focused

22. Governance and Management
Outward
looking
Providing
Accountability
Strategy
Formulation
Approve and work with
and through the CEO
Inward
Monitoring and
Supervising
Policy
Making
Future
Past and
present focused
focused
Governance and Management

23. Governance and Management
The conformance and performance roles of the unitary board
conformance
performance

24. Governance and Management
Guidelines for a board strategy seminar or workshop
Careful planning, well in advance, is essential
Agree a time when all directors can attend
Fix a location where all directors can participate
Define the objectives clearly, for example:
- to explore the strategic situation
- to discuss the implications
- to consider alternative strategies
- to determine the next steps to be taken
(but not to take strategic decisions immediately)
All directors must be fully informed about the objectives
All directors should be supportive of the event
All directors need briefing with relevant data in advance.

25. Governance and Management
Guidelines for a board strategy seminar or workshop (continued)
Do not hold the event in the board-room (the board-room culture is decision orientated)
Decide who is going to run the event (this need not be the chairman)
Decide whether other people should be invited to participate
(senior executives to brief the directors, external experts
to give briefings, experts to contribute to process)
At the first session establish the ground-rules
- this is not a board meeting to make decisions, but a free- ranging exchange of views and insights
- strategic decisions will not be made
- call for imaginative contributions however unusual - discourage negative comment ('we tried that - it won't work', 'no good for us')
The output of the strategy session should be an agreed list of next actions, and who is responsible for taking them and by when.

26. Alternative board structures
All executive board
Majority executive board
Majority non-executive board
All non-executive board
Supervisory board
Two-tier board
Board structures around the world
Some complex structures.

27. The all-executive board
Figure 2.9: The all-executive director board

28. The majority-executive board
Figure 2.10: The majority executive director board

29. The majority non-executive board
Figure 2.11: The majority non-executive director board

30. Directors and board architecture
Board structure exercise: ED
NED
INED
TOTAL
MCM 3 8 11
BCOM 6
Excel Technology 4 1
Esprit Holding 5 2 10
Giordano 7
Percentage

31. Directors and board architecture
Two-tier board
Figure 2.13: The two-tier or supervisory board

32. Governance and management
We have considered
definitions of corporate governance
the scope of corporate governance
the significance of constitutions for corporate entities
the difference between governance and management
the performance and conformance aspects of governance
alternative board structures.