Corporate Governance Professor: Clive Vlieland-Boddy.

Corporate Governance

Professor: Clive Vlieland-Boddy

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 2002 - 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.CEO’s and CFO’s 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!

Audit Committees

Remuneration Committees

Non Exec Directors

Rotation of Auditors

Restriction on Auditor other Services

Whistle Blowers…..

Corporate Social Responsibility

Professor: Clive Vlieland-Boddy

The End