CORPORATE GOVERNANCE

Week 1:
Topic 1: Introduction? (Part 1)

Topics
1.
2.

3.
4.
5.
6.
7.
8.

The structure of corporations

Relationship between shareholders and
BOD
Corporate officers
Concept of ownership and control
Definition of CG and sound CG
Importance of CG to PLCs
Issues of CG
Benefits of sound CG
2

Learning Outcomes

Show an understanding of the concepts of

ownership and accountability

Describe the relationship between

shareholders and BOD

Describe categories of shareholders and

corporate officers

Define CG and sound CG

Explain the benefits of sound CG

Describe key issues in CG

3

The Structure of Corporations

Areas of coverage:
Definition of a company

Types of company

Ownership and control

Shareholders and board of directors

Corporate Officers

Board structures
4

The Structure of Corporations

What is a company?
-

Has legal personality or often described

as an artificial person

Able to enter into contracts and make biz

transactions, borrowings and own assets

Can sue and be sued in law

Perpetual succession
5

The Structure of Corporations

Basic types of companies:

1. Statutory companies
e.g. Petronas, SOCSO, EPF

2. Registered companies
e.g. public and private companies

The Structure of Corporations

Continued
a. Private companies
- very popular
- do not require public funding
- owners have full control
- usually operated by family members
- small to medium size businesses
7

The Structure of Corporations

Continued

b. Public listed companies (PLCs)

-

large biz listed in Stock Exchange

require public funding
tend to invite the public to invest
money with it (IPO)
- regulated by various Acts and
government bodies
8

The Structure of Corporations

Public listed companies (PLCs) are
modelled after Anglo-Saxon companies
origin

is from the UK (Anglo-Saxon)

objective is to maximise shareholders
wealth only
board structure is unitary
shareholdings are dispersed

Maxis Bhd. had 68,010 shareholders

representing 88.46% of total shareholders
and 4% of issued shares (as at 19/4/10)
9

The Structure of Corporations

Who owns PLCs?

-

Members equity shareholders

Who manages PLCs?

-

Directors
Managers
Executives

} Make decisions & plan

} Arrange & coordinate
} Execute transactions

10

Shareholders Categories
SMALL PRIVATE
SHAREHOLDERS

SHAREHOLDERS

LARGE PRIVATE
SHAREHOLDERS
CORPORATE
SHAREHOLDERS
INSTITUIONAL
SHAREHOLDERS
11

Shareholders Categories

Private
Individual shareholders in a company
Usually, holds a small quantities of shares and
have very little communication with the company
Can also hold a large quantity of shares e.g. Tan
Sri Dato Sri Dr Teh Hong Piow Public Bank
Bhd

Corporate

Shareholders in a company that are themselves

companies
As legal persons, companies may own shares in
other companies
12

Continued Categories

Institutional Shareholders
Institutions holding shares of PLCs e.g. EPF,
SOCSO, PNB, Insurance & Unit Trust companies
Majority in terms of shareholding
A shareholder holding a majority of the equity /
ordinary shares in a company i.e owns 51% shares
Has controlling interest in the company e.g. has the
voting power to remove directors from the BOD
can control the board.
Minority in terms of shareholding
Shareholders whose combined shareholdings are
not enough to affect resolutions by the company in
AGM i.e. own < 5% shares

13

Corporate Officers

Chairman
Leader of the BOD
Often referred to as the company chairman
Responsible for the functioning of the board
Preferred - a non-executive director
Chief Executive Officer / Managing Director
The head of executive management team in an
organisation
Most powerful officer of a company
14

Corporate Officers

Board of Directors

The collective group of individuals

elected by the shareholders of a
corporation to oversee the
management of the corporation.

Executive Director

A director who also has responsibilities

as an executive manager a member
of top management team
e.g. Marketing Director, Finance
Director, Operations Director
15

Corporate Officers

Non Executive Director (NED)

A director who does not have any responsibilities for
executive management in the company
Independent Non Executive Director (INED)
A director who does not have any responsibilities for
executive management in the company
Also independent from personal and biz relationship
with the company or its officers
Functioning as watchdogs for shareholders
Non Independent Non Executive Director (NINED)
A director who does not have any responsibilities for
executive management in the company
But, the director has personal or biz relationship with
the company or its officers

16

NEDs Sub-Categories
INDEPENDENT
NON-EXECUTIVE
DIRECTORS (INEDs)
NON-EXECUTIVE
DIRECTORS (NEDs)
NONINDEPENDENT
NON-EXECUTIVE
DIRECTORS (NINEDs)

17

The Structure of
Corporations

Who has the power?

-

Members limited to voting rights

Board of directors POWERFUL

Why members have limited power?

- Separation of ownership and control

18

The Structure of
Corporations

Separation of ownership and control

-

Ownership shareholders provide

capital but do not manage daily
operations

Control board of directors (BOD)

makes decisions and controls operations

Shareholders delegate power and

authority to BOD
19

Delegation of power and authority

SHAREHOLDERS

DELEGATE

BOARD OF DIRECTORS
(LED BY CHAIRMAN)
DELEGATE
BOARD
COMMITTEES

TOP/EXECUTIVE
MANAGEMENT (LED BY
CEO/MD/PRESIDENT)
20

The Structure of
Corporations

Delegation of power and authority

and control
-

Ownership and control separated

shareholders (disperse) delegate power
and authority to BOD; and
BOD unable to manage daily ops
delegates some decision making power
to management team
21

The Structure of Corporations

Board structures:
1. Unitary or one-tier (combine the
management and supervisory
functions)
e.g. UK, US, Malaysia
2. Two-tier:
a. Management board
b. Supervisory board
e.g. Germany, France
22

Board Structures
1. Unitary or one-tier

A single decision-making body

Makes all the decisions of the company

Consists of both executive and nonexecutive directors

Check and balance by non-executive

directors
23

Board Structures cont

2.

Two-tier board:
Management board
- comprises of executive directors
- makes decisions about KEY operational matters
- led by the CEO/MD
- accountable to supervisory board

Supervisory board
- monitors the management board
- makes strategic and non-operational decisions
- its chairman is also the chairman of the
company
- all members are non-executive directors
24

Defining Corporate
Governance

No standard definitions
Refers to the way companies are
governed
Concerns with:
-

Practices and procedures to achieve

objectives
Check and balances to minimise abuse of
power and fair treatment
25

Definition cont

General definition:
1. Governance refers to the way in which
an entity or body of people is governed
and to the functions of governing
E.g. governance of a country
2. Corporate governance refers to the
way a corporation is directed and
controlled to maximise shareholders
value. (Cadbury, 1992) generally
accepted definition
26

Definition cont

MCCGs definition:

... as the process and structure used to

direct and manage business and affairs
of the company towards enhancing
business prosperity and corporate
accountability with the ultimate objective
of realising long term shareholder value,
whilst taking into account the interests of
other stakeholders
27

Definition cont

Our preferred explanation:

To describe the way corporations should be run
in accordance with legal framework, rules and
regulations
Purpose: to ensure proper compliance of laws
The sharing and balancing of powers between
BOD and shareholders
Purpose: to maximise shareholders value by
taking into account other stakeholders interests
Therefore, CG = system or processes by which a
company is directed and controlled
Ultimate objective: to protect interests of
shareholders
28

What is sound CG ?

Indicates mechanisms put in place by which

the owners and management have the ability
to carry out their responsibilities and duties
diligently
OR

Robust monitoring / oversight mechanisms

put in place within and outside an
organisation in order to ensure that
shareholders wealth maximisation objective
is always pursued / protected
29

Oversight mechanisms

Oversight mechanisms are legal and

regulatory framework, BOD, audit
committee, remuneration committee,
external auditors, internal control and risk
management systems and shareholders

Purpose: to monitor the exercise of power

and authority by BOD and management
team
30

The Importance of CG
More important in PLCs than small private cos
Why?
Small private cos director = shareholders
Investors need to know that their money is safe
Poor management value of investment may
drop & difficult to raise additional capital
Capital market unable to attract foreign
investment illiquid market

31

The benefits of sound CG

Improves companys performance

- better mgmt and prudent allocation of
resources unnecessary
Empirical evidence:
Studies conducted by Credit Lyonnais
Securities Asia (CLSA) on CG in emerging
markets in 2001 found a strong correlation
between higher CG rankings and superior
financial ratios, higher valuations and
medium-term performance
- Critic: Not easily verifiable due to the use of
many different accounting ratios can be
manipulated
32

The benefits of sound CG

Enhances investors and markets confidence

E.g. PWC / KLSE study in 2001 and Nottingham U &
MSWG Minority Shareholder Watchdog Group study
2005 and 2006

Important factor for investment decisions

- investors place a CG premium on the amount
they are willing to pay for the share
Empirical evidence:
McKinsey & Cos Investor Opinion Survey on CG
(1999 to 2000)discovered that respondents placed
great importance on board practices. Also willing to
pay more for shares of well-governed companies
33

The benefits of sound CG

Enhance the confident of suppliers and

lenders like financial institutions

Attract the talent to join the company

Gain support from the consumers

Improve the company image

Better relationship with authority

34

Issues of CG

Principal-Agent problem
- Separation of ownership and management,
conflicts of interest
Financial disclosures and accountability
- Creative accounting, window dressing
Directors remuneration
- Luxurious perks and benefits
Decision making powers
- Persons empowered to pursue shareholders
interest

35

Issues of CG (contd)

Balancing the needs of

corporation
- Shareholders and stakeholders
Poor information and
communication
- Between directors and shareholders
- Timeliness and accuracy of annual
and
financial reports
CG legislation and regulators
- Company law, Listing Requirements,

36

Issues of CG (contd)

Excessive business risk taking and

lack of risk control
- Investing without due regard on risks
involved
- Lack of proper risk management and
internal control

37