Acco1143 session 2 corporate governance

Corporate governance part 2

Dr Agnieszka Herdan e-mail: A. Herdan@gre.ac.uk Tel: 0208 331 9024

Factors underlying the lack of confidence in

financial reporting:

• Loose accounting standards, that allows considerable latitude

• Lack of clear framework to ensure directors are able to continuously review business controls

• Competitive pressure within companies and auditors, making it difficult for auditors to maintain independence from demanding boards

• Lack of apparent accountability regarding directors remuneration and compensation for loss of office.

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Group Presentation of case study:

Group 1: WorldCome

Group 2: Parmalat

Group 3: Barrings

Group 4: Shell

• What was wrong with the company?

• Who fail to perform their duties?

• What mechanisms of corporate governance failed?

• What lesson could be learn from this situation?

• What solution would you suggest to avoid similar situation in the future?

Group work 1

3

Company departmental structure organised according to business function

Board of directors

Finance Personnel Operations Marketing

4

A divisional organisational structure

Central services – information technology, personnel,

research and development

Board of directors

North

division

South

division

East

division West

division

Finance

Marketing

Operations

Finance

Marketing

Operations

Finance

Marketing

Operations

Finance

Marketing

Operations

Other Other Other Other

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Board of Directors:

represent shareholders

Shareholders

Board of Directors

Management

Complex Operations

Legally

responsible

for the firm,

but mgt has

time,

expertise,

infrastructure

Theory:

mgt serves

the board.

Reality?

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Directors:

• Executive

– Chief Executive Officer (CEO) /Managing Director

– Chief Operating Officer (COO)

– Chief Financial Officer (CFO) / Treasurer

– Secretary.

• Non executive

Board Composition

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Directors Functions

• Review financials and financial projections

• Set long-term (strategic) goals

• Set capital structure

• Approve major debt financings

• Oversee resource allocations (investment)

• Dividend policy

• R & D

• Monitor competition

• Evaluate global prospects

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Director Liability

Adverse events causing losses to

shareholders where directors failed to

inform themselves and failed to assure that

there was an adequate information and

reporting system in place ( lack of good

faith).

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Cadbury Report (1992)

if the roles of chairman and chief executive were not filled

by two different individuals, then a senior member of

board should be present who was independent

a third of the board be comprised of non-executive

directors who are able to influence the board’s decisions

that majority of the non-executive directors should be

independent of management and free of any relationship

that could affect their independence

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Cadbury Report (1992)

It was recommended that at least two of the minimum

requirement of three non-executive directors should

be independent

concerns about the supply of adequately qualified

non-executive directors.

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Cadbury Report (1992)

Suggested ways of ensuring the independence of non-executive directors:

fees payable to non-executive directors,

stipulating that a balance needed to be struck between recognizing the value of contribution made by non-executive directors

avoiding compromising their independence

non-executive directors should not to take part in share option schemes

The central issue is to ensure that an appropriate relationship exists between the auditors and the management whose financial statements they are auditing

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Greenbury Report (1995)

focused specifically on issues relating directors

remuneration („Fat Cat”)

unseemly pay increase for company directors

establishing balance between directors

remuneration and their performance

the total compensation of directors and that of the chair and the highest paid UK director would each be separately disclosed, with a breakdown into base salary and performance-based elements

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Greenbury Report (1995)

the pay of executive directors should be determined by a

remuneration committee, to be comprised wholly or

mainly of non-executive directors and chaired by one of

the latter.

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the remuneration committees

be composed entirely of non-

executives and be directly

accountable to shareholders,

with committee chair

attending the AGM

Higgs Report(1998)

The roles of Chairman and Chief Executive should not be exercised by the same individual

at least half of a company’s board of directors should be independent non-executive directors.

one (or several) non-executive director(s) should take direct responsibility for shareholder concerns, effectively championing shareholders at board level

Institutional Investors should enter into a dialogue with companies based on the mutual understanding of objectives

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Turnbull Report (1999)

• Focuses on Internal Control

• formalize the sets of procedures and

represent an explicit framework for

companies to refer to as a benchmark

when developing their own internal

control strategies

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Higgs Report (2003)

• Effectivness of non-executive directors

• greater proportion of non executive directors on

boards

• remuneration of non executive directors

• stronger links between non executive directors and

companies principal shareholders

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Smith Report (2003)

• Relationship between auditor and audited company

• creation of audit committee

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Group work 2

• Discuss which issues highlighted by

different reports has been implemented

in your home country. Give examples.

Which areas are has not been put into

practise and why?

• Present your findings

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