2011 Autumn TBS 909 What is Corporate Governance and Why Does It Matter

8/3/2019 2011 Autumn TBS 909 What is Corporate Governance and Why Does It Matter

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Excellence in Business Education

What is CorporateGovernance and why does

it matter?

TBS 909 Autumn 2011

Lecture 2Dr Ross Clifton


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Excellence in Business Education2

Critical Questions

What is corporate governance?

Why does it matter?

Whos responsible for corporate governance?

Whos affected by corporate governance?

Whats involved in corporate governance?


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Some Definitions of Corporate Governance:

OECD:

Procedures and processes according to which an

organisation is directed and controlled. The corporate

governance structure specifies the distribution of rights

and responsibilities among the different participants inthe organisation such as the board, managers,

shareholders and other stakeholders and lays down

the rules and procedures for decision-making.(European Central Bank, 2004, Annual Report: 2004,ECB, Frankfurt, Glossary)


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Transparency International:

Procedures and processes for how private sectororganisations are directed, managed and controlled,including the relationships between, responsibilities of

and legitimate expectations among differentstakeholders (Board of Directors, management,

shareholders, and other interested groups).

(Institute of Chartered Accountants)


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Two More Definitions:

Sir Adrian Cadbury (in 'Global Corporate

Governance Forum', World Bank, 2000):

"Corporate Governance is concerned with holding thebalance between economic and social goals and

between individual and communal goals. The corporate

governance framework is there to encourage the efficient

use of resources and equally to require accountability forthe stewardship of those resources. The aim is to align

as nearly as possible the interests of individuals,

corporations and society."


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International Chamber of Commerce:

Corporate governance is the relationship

between corporate managers, directors and the

providers of equity, people and institutions who

save and invest their capital to earn a return. Itensures that the board of directors is

accountable for the pursuit of corporate

objectives and that the corporation itself

conforms to the law andregulations.


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What Does Corporate Governance

Mean to You?

As an investorAs a shareholder?

As an employee

As a managerAs a directorAs a member of another stakeholder groupAs a citizen, a taxpayer, a voterAs a consumer


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Corporate entities always need governing Corporate governance is necessary

whenever ownership or membership isseparated from management control

16th century traders and joint ventures 17th/18th century trading companies

East India Company Hudson Bay Company

19th century limited liability company


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The corporation is a creation of the law and haslegal standing independent of its owners.

Three features have made the corporationattractive and durable:1. its unlimited life,2. the limited liability of the owners, and3. the divisibility of ownership that permits

transfer of ownership interests without

disrupting the structure of the organization.


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The Joint Stock, Limited Liability

Company A concept of the 19thCcentury Incorporate a legal corporate entity Separate from its owners, but with similar legal rights

- to buy and sell own assets- to employ people

- to contract and incur debts

- to sue and be sued

Companies have an existence independent of owners Shares can be transferred, traded Liability of shareholders for company debts limited Directors stewards for shareholders

directors fiduciary duty to act on their behalf


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Evolution of Corporate Governance

Owner managers

Other employees

Owner-managed entity

Owners

ManagersEmployees

Separate legal entity


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Evolution Of Company (cont.)

Board of Directors

Managers

Employees

Limited liability company

Owners

(shareholders)


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Economic Foundations of the Corporation

Corporate governance bound up with economicdevelopment of industrial capitalism;

19th century increasing scale and complexity oforganisations (1862-UK: incorporated liability);

The growth of managerial capitalism; Growing concentration of economic power and anincreased dispensing of stock ownership; The divorce of ownership from control has resulted in

multiple layers of regulation as well as challengesto the principle that the principal responsibility ofmanagement and directors is to the firms

stockholders; But does corporations law still tend to support the

latter proposition?


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Elements of Governance

All bodies need to establish certain criteria fortheir governance. As a minimum these arelikely to be:

1. The identity of the body;2. Definition of its purpose;3. How the purpose is to be achieved;4. Membership criteria;5. How the body is to be administered;6. How the body relates externally;7. How success is measured;8. Termination arrangements.


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An overall perspective on corporate

governance and the factors affecting it: The relationship between individual, enterprise and

state

A broader definition of corporate entities to coverevery organisation where governance and

management are separate from the members A mapping of all the elements that affect and are

affected by the governance of such organisations

The expectations, requirements, and demands ofeach participant

The duties and responsibilities of each participant The powers, sanctions, and accountabilities of eachparticipant


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An overall perspective on corporate

governance and the factors affecting it (cont): Corporate governance theory needs a taxonomyof organisational types

public, private, family, subsidiary associate,joint venture, complex ownership structures -

pyramids, chains, nets, and the rest To be able to present a comprehensive and

coherent view of the governance arrangementsand structures around the world

Systems theory and cybernetic-based controlsystem concepts such as networks, systemboundaries, goals, and sub-optimisation mightprovide insights


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Some of the major aspects of corporate

governanceCorporate governance principles and codes ofpractice

Board's performance roles - strategyformulation and policy making

Board's conformance roles - executivesupervision and accountability

Understand the board's responsibility forhandling corporate risk

Assessment of board and directorperformance

Corporate governance rating systems


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Corporate governance decisions thus require

analysis from several perspectivesThese include:

The legal issues: What does the law require? The ethical dimension: How does the organization

define and fulfil its obligations to its constituencies

or stakeholders in view of conflicting interests? Effectiveness: How does the board ensure that it

and its management make effective decisions inan efficient and timely manner?

The boards relationships. How does the boardmaintain effective relationships with its

constituencies, particularly shareholders andmanagement?

The group dynamics. How well does the boardfunction as a group or team?


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Other Issues and Factors Affecting

Corporate Governance

Strategic risk management

Corporate social responsibility

Sustainability Business ethics Regulatory regimesnational and global


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Some Other Key Governance Issues:

Should the CEO ever also be chairman of the board? Should a retiring CEO go on as chairman? Can outside directors be genuinely independent? Should shareholders be able to nominate directors? Should institutional investors exercise more power? Are external auditors really independent?


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Key Governance Issues (contd.)

How should directors remuneration be determined? How should new complex, dynamic, and often global

corporate entities be governed?

Are governance processes around the worldconverging?

Are rules for governance of listed companies appropriateto family companies, small firms, partnerships, andpublic and not-for-profit (NFP) entities?


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Codes of Best Practice

UK codes

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


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Codes of Best Practice (contd)

Codes around the world

*Australia (1993) Canada (1994) Holland (1997) Hong Kong, Italy, India, Japan (1998) Russia (2001)Codes from international agencies

OECD/World Bank, Commonwealth (1999)Codes from institutional investors

CalPERS, PIRC, Hermes


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References:

Tricker, B. 2009 Corporate Governance: Principles,

Policies, and Practices, Oxford University Press.

Introduction and Chapter 1

2011 Autumn TBS 909 What is Corporate Governance and Why Does It Matter

Documents

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