Corporate Governance

Principles, Policies and Practices

 Corporate Governance
A subject whose time has come
It has been a hot topic in business world for centuries. Even though the term is quite new. In the first of the series of the lectures we will trace the development of the limited liability corporation and discuss role of directors, shareholders and management of the corporation and their rights and duties.

The evolution of the Corporate Governance

Corporate Governance is not a new idea. Separation of managers from owners. The arrival of the limited liability company Development through the 20th century The arrival of the codes of good practice Development in the 21st century.

The evolution of the Corporate Governance

Nothing new about CG except the phrase Corporate Governance. The Merchant of Venice Act 1, Scene 1 ANTONIO In sooth, I know not why I am so sad: It wearies me; you say it wearies you; But how I caught it, found it, or came by it, SALARINO Your mind is tossing on the ocean; There, where your argosies with portly sail, do over peer the petty ships. The merchant is worried for his wealth, he has made someone master of his wealth which is on ship being transported to an other country. This is where corporate governance is important.

The evolution of the Corporate Governance

The arrival of the joint stock, limited liability Company. 19th Century
Business run by sole traders or partnerships If business fails-debtors prison The creditors will look to you for return of their money. They will virtually take all your assets. Family suffers?

The evolution of the Corporate Governance

Industrial Revolution
New opportunities How to avail Finance required How to invest
Problems of raising new investments???

The evolution of the Corporate Governance

Owners
Shareholders Members

Board of Directors
Managers Employees

Limited Liability Company

1855 1st Companies Act Concept of separation of ownership from management

Concept of separation of ownership from management

The Limited Liability Company
Incorporate a legal entity separate from owners
Separate but with same legal rights Buy and Sell Own Assets Employ People Contract and incur debts Sue and be sued Liability for shareholders company debt limited Company has an existence independent from owners Shares can be transferred traded
It opened new horizons Changed fortune of the business world Changed whole structure of the financial business world.

The evolution of the Corporate Governance

Underlying concept of the company
Shareholders would meet around the table and appoint directors. Directors owe fiduciary relationship to owners No firms of auditors so one or two persons were appointed in the board.

Ownership is the basis of power Directors appointed by shareholders

Stewards of the shareholder assets Fiduciary duty to act on their behalf Responsibility to be accountable

The evolution of the Corporate Governance

From 1855 to early 20th Century
Many companies formedAll were publi

Then family firms/ sole traders incorporated

To benefit from limited liability

Some Companies Merged Some Wound up Then seen companies could own companies
Beginning of complex group of companies

The evolution of the Corporate Governance

Problems of the 20th Century
1930s USA
Domination by top management 100z to 1000z shareholders Could not sit around table and appoint Power shifted from meetings of shareholders to meetings of the Directors Shareholders had lost a great deal of management control Managers acquired a great deal of power Securities and Exchange Commission Berle and Means Concept of Separation

The evolution of the Corporate Governance

Berle and Means Concept
The Modern Corporation and Private Property is a book written by Adolf Berle and Gardiner Means published in 1932.
corporate person formally owns a corporate entity even while shareholders own shares in the corporate entity and elect corporate directors who control the company's activities

The evolution of the Corporate Governance

1970s EU- Two Tier Board
UK-Bullock Report
1970s First Stakeholder Ideas
Watkinson (UK) Nader (US) Corporate Report (UK)

The evolution of the Corporate Governance

Concept of different boards
In a one-tier board, all directors (both executive directors as well as non-executive directors) form one board, called the board of directors.
In a two-tier board there is an executive board (all executive directors) and a separate supervisory board (all non-executive directors).

The evolution of the Corporate Governance

Single Board System (US)
All corporate powers are vested in one board with no necessary representation from the labor. Single board is responsible for management and supervision. Elected by members

The evolution of the Corporate Governance

Two Tier Board
Germany Company Law required two board
Management Board Supervisory Board

The evolution of the Corporate Governance

Supervisory Board In Germany the supervisory board of large corporations is composed of 20 members, 10 of which are elected by the shareholders, the other 10 being employee representatives. The supervisory board oversees and appoints the members of the management board and must approve major business decisions. The minimum of members a board can consist of is three, the maximum 21. The number of members has to be divisible by three, as stated in the law. When it comes to internal elections the head of supervisory board Aufsichtratvorsitzender has two votes in case of a draw.

The evolution of the Corporate Governance

Management Board
In German corporate governance, a Vorstand is the management board of a corporation. It is hierarchically subordinate to the Aufsichtsrat (supervisory board). In German corporate governance, a Vorstand is the management board of a corporation. It is hierarchically subordinate to the Aufsichtsrat (supervisory board) In contrast to Japanese corporate governance, the Vorstand has a real decision-making power. It is, by law, the driving management of a company, and may not be instructed by any person or entity to act in a way that is injurious to the business. The members of the Vorstand are personally liable for accepting any such instructions

The evolution of the Corporate Governance

Incorporation of Securities and Exchange Commission
In US, Companies cannot be incorporated under federal laws of US rather they have to be formed under company law of each state. By that time, companies had potential to control economies and leave impact on general pubic. They were in position to decide which town to succeed and which town to fail. So SEC was formed to control the companies Delaware, though a small state, is leading in company law matters.

 Two Tier System and EU European Economic Community made it mandatory for companies within Europe to adopt a two tier board system i.e. Germany Way London did not like it
Their response was Allan Bullock Report which stated Unitary Board is best if we have some directors from workers. The report went to shelves.

The evolution of the Corporate Governance

1980s Corporate Collapses
Maxwell (UK) Bond (Australia) Nomura (Japan) Carrian Investment (Hongkong) Burnham Drexall/Boesky (USA)

The evolution of the Corporate Governance

Robert Maxwell
Pergamon Press Mirror Group Newspaper & MCC
A refugee Very clever man can spoke many languages

The evolution of the Corporate Governance

Pergamon Press which published academic papers
Got Collapsed

Government appointed an examiner to find out why the press has collapsed because many people had lost their money.

The evolution of the Corporate Governance

Findings :
Dominates company Never be allowed to be British Board Member Twenty Years later he was running two large companies Mirror Newspaper Many distinguished persons on board. Robert was using company money for its own use. Taking money from some of the trusts formed for employee for his own use Found drowned

ALL IS NOT WELL Governance failing Shareholders losing money losses

The evolution of the Corporate Governance

Carrian Investment George Tan Singaporean
Jan 1980 bought Gammon House HK$998million (Bank America Tower) April 1980 sold for HK$1.6 B Acquired Shell listed companycreated Carrian Investments Interest in Finance, shipping, insurance, Property, largest HK taxi firm, Senior Partner PW appointed MD

The evolution of the Corporate Governance

1983 Collapsed.
Accounting Fraud Bribes Murder of bank auditor Suicide of advisor Raid Largest HK bankruptcy
We need some laws

The evolution of the Corporate Governance

UK Codes
Cadbury (1992) Greenbury (1995) Hampel (1998) Turnbull (1999) Myners (2001) Higgs (2003) Smith (2003) Tyson (2003) UK Combined Code (1998 -2003)

The evolution of the Corporate Governance

Codes of Best Practice
Codes around the globe
Australia (1993) Canada (1994) Holland (1997) Hong kong, Italy, India, Japan (1994) Russia (2001) Codes from International Agencies OECD/World Bank, Common wealth (1998)

The evolution of the Corporate Governance

Despite the codes problems persisted in the 21st century
Enron (USA) HIH Insurance (Australia) Independent Insurance (UK) Parmalat (Italy) Tyco (USA) Worldcoom (USA) Sarbanes Oxley Act 2002

The evolution of the Corporate Governance

Some key questions remain
Should the CEO shall also be chairman of the board? Should a retiring CEO go on to be chairman? Can outside directors be genuinely independent? How should directors remuneration be determined?

The evolution of the Corporate Governance

Should shareholders be able to nominate directors? Should institutional investors exercise more power? Are external auditors really independent?

 How should complex and often global entities be governed? Any governance processes around the glove converging ? Are rules of governance of listed companies appropriate to family companies, small firms, partnerships or not-for-profit entities?

Governance and Management

The significance of constitution for corporate entities The distinction between governance and management The performance and conformance aspects of governance Definition and scope of corporate governance

Governance and Management

Every corporate entity needs a constitution
Shareholders in a limited company Members of the profession in a professional body Club members in a sport, arts or other private club Registered members in a trade union Members of academic bodies Voting members of other corporate entities

Governance and Management

The Corporate Entity
Limited Liability Company Professional Organization Sports arts clubs Trade Unions University or Colleges Other corporate entities

Governance and Management

Incorporating a liability company
Memorandum
Name of the company Objectives Registered office Share capital Liability of shareholders limited

Governance and Management

Articles
Detailed rules for running the entity.

Governance and Management

Types of limited liability Company
Private Company limited by shares
It has shareholders with limited liability, and its shares may not be offered to the general public. The liability of the shareholders to creditors of the company is limited to the capital original investment. A shareholders personal assets are thereby protected in the event of insolvency, but money invested in the company will be lost.

Private Company limited by Guarantee

A Guarantee Company does not have shares or shareholders rather it has guarantors. The guarantors give undertaking to contribute a nominal amount in the event of winding up of the company.

Public Companies
Offer Shares to general Public Prospectus needs to be offered

Governance and Management

Other forms of incorporations
Savings and loan associations, building societies Co-operative: Supplier (Canada), Customer (UK) State Corporate Entities
Federal Mortgage Association Quasi autonomous non governmental organizations
- Not for Profit entities
- Charities - Sports Associations - Arts and Cultural Socities

Governance and Management

The essence of Corporate Governance

Members Governing Body Organization

 Governance is different from Management

Governance

Management

Governance and Management

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

INED

Governance

ED

Management Company Secretary General Manager

 We have different types of directors

Those who are in the circle and in the triangle
Executive Directors

Those who are in the circle but not in the triangle

Non Executive Directors

 Director: Any member of the board Executive Director: A director who, in addition to serving on the board, has a meaningful connection to the organization.
CEO CFO

 Non-Executive Directors:
They are custodian of the governance process. They are not involved in day to day affairs.
Duties: Strategy Performance Risk People

Governance and Management

Definition of the Corporate Governance is the process by which the companies are directed and controlled (Cadbury Report 1992)

 Corporate Governance is the relationship among various participants in determining the direction and performance of the corporations
The primary participants are shareholders, the management and the board of directors Bob Monks and Nell Minow 2001

Governance and Management

Corporate Governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship, in a market economy, between corporate managers and entrepreneurs, on the other hand, and those who invest resources in corporations, on the other.

Governance and Management

Corporate Governance is about the exercise of power over the corporate entities.
Professor Tom Clarke Australia (2004)

Governance and Management

When management is separate from membership, all organizations need governing as well as managing, Many Corporate Governing ideas are universal and can be applied to every governing body When management and governance are in the same hand (sole traders, small partnerships) the interest are combined.

Governance and Management

The basic board processes Outward looking Inward looking
Accountability Strategic Formulation

Supervising Policy making Executive activities

Past & Present focused

Future Focused

Governance and Management

Helicopter Vision

Governance and Management

The conformance and Performance of the Unitary Board
Conformance

Performance

Governance and Management

The basic board processes
Provide accountability
Outward looking

Strategic Formulation

Approve and work with and through the CEO

Monitoring and Supervising

Inward looking

Policy Making

Past & Present focused

Future Focused

Governance and Management

How Should boards spend their time? Guideline for a board strategy seminar or workshop
Careful planning, well in advance, is essential All directors shall be fully informed about the objectives All directors should be supportive of the event Agree a time when all directors can attend Fix a location

Governance and Management

Guideline for a board strategy seminar
Define the objectives clearly
To explore the strategic situation To discuss the implications To discuss alternative strategies To determine the next steps to be taken

All directors need briefing with relevant data in advance

Governance and Management

Guideline for board strategy seminar
Decide who is going to run the event Decide whether the other people shall be invited to participate -e.g. Senior Executives to brief the directors, external experts to give briefings,

Governance and Management

Guideline for a board strategy seminar
A free-ranging exchange of views Strategic decisions will not be made Discourage negative comment
The output of the strategy session should be an agreed list of next actions, who is responsible for taking them, and by when

Lecture 2
The significance of constitution for corporate entities The distinction between governance and management The performance and conformance aspects of governance Definition and scope of corporate governance