Introduction To Corporate Governance
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BWRR3123/ CORPORATE GORVERNANCE
CHAPTER 1 INTRODUCTION TO CORPORATE GOVERNANCE
Lecture Outline 2
Introduction Definition Important Features of Corporate Governance Concepts of Sound CG Management vs Governance Code of Corporate Governance Benefits of Good Corporate Governance
1. Introduction 3
Stage 1:
Equity Voting Rights
Company founded (owned and managed) by individual, family, partnership, government or company. Stage 2:
Equity Voting Rights
New Equity
Debt
Voting Rights
Company expands by issuing more equity and debt. New equity holders also get voting rights as to who manages the company.
Ownership matters 4
Most companies are created by entrepreneurs who are either individuals or a small set of partners. In either case, they can be members of a family Over time, however, some firms may choose to go public via an initial public offering or IPO.
Introduction 5
Company founder must now choose between keeping control of the company or allowing the company to be managed by professional managers. Equity
New Equity
Voting Rights
Voting Rights
Debt
If they keep control there is a potential conflict between the founders and other shareholders. If they pass management to professional managers there is a potential conflict between owners and managers.
Who Owns the Business?
[Insert Exhibit 2.1]
Forms of business and conflicts of interest 7
Characteristic
Sole Partnership Proprietorsh ip Ownership Sole owner Multiple owners Legal requirements Few; entity Few; entity and regulation easily formed easily formed Legal distinction None None between owner and business
Corporation
Liability
Unlimited
Unlimited ownership Numerous legal requirements Legal separation between owners and business Limited
Ability to raise capital Transferability of ownership
Very limited Nontransferable (except by
Unlimited but shared among partners Limited Nontransferable
Nearly unlimited Easily transferable
2. Definition: Governance 8
The concept of ’governance’ has been formatted from the word ‘gubernare’, which means ‘to rule or to direct, guide’. Earlier the term was to be related to the exercise of power with acceptance of responsibility, by and accountability for running of kingdom. However over the years the term assumed greater importance in wider sense and scope for business entities to corporate world.
Governance is a term that refers to the way in which and enterprise or body of people is
Definition: Corporate Governance 9
•
•
•
Corporate governance is the system is the system of rules, practices and processes by which business corporations are directed and controlled. Boards of directors are responsible for the governance of their companies. The boards actions are subject to laws, regulations and the shareholders in general meeting. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. (Cadburry report, 1992)
Definition: Corporate Governance 10
“Corporate governance is defined as the process and structure used to direct and manage the business and affairs of the company towards promoting business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value while taking into account the interest of other” (MCCG, 2017).
Corporations: Corporate Governance
Private and Public Corporations
Separation of Ownership (Shareholders) and Management
Corporate Governance is the relationship between:
Shareholders (owners) Board of Directors Corporate Officers
Owners / Shareholders
Board of Directors
Corporate Officers
Middle and Lower Management
3. Important Features of CG 12
Adequate and appropriate system of internal controls in place. No single individual should have too much power. Relationship between company’s management, the board of directors, shareholders and other stakeholders Company managed in best interests of shareholders and other stakeholders Encourages transparency and accountability
13
4. Pillars of Corporate Governance 14
The overall CG practices show the following pillars: 1.Accountability 2.Transparency 3.Ethical behavior 4.Sustainability Companies that embrace these principles are more likely to produce long term value than those that are lacking in one or all.
Accountability 15
• •
•
•
•
Accountability means answerability or liability. Accountability can have a negative connotation because many people associate it with blame. “Who’s responsible for when something goes wrong?” is just one of the many questions that accountability seeks to answer. But accountability is more than that. It’s about having ownership over one’s actions whether the consequences of those actions are good or bad. Individuals who make decision in a company and take actions on behalf of a company on specific issues should be accountable for the decisions they make and the actions they take. Ensure that management is accountable to the Board and the Board is accountable to shareholders Shareholders are deeply interested in who will take the blame when something goes wrong in one of a company’s many processes. And even when everything goes smoothly as expected, knowing that someone will be held accountable for future mishaps increases shareholders’ confidence, which in turn increases their desire to invest more
Accountability
Transparency 17
Transparency “means having nothing to hide” . Refers to the ease with which an outsider is able to make a meaningful analysis of a company and its actions. This means it allows its processes and transactions observable to outsiders. It also makes necessary disclosures, informs everyone affected about its decisions, and complies with legal requirements. Transparency is a critical component of corporate governance because it ensures that all of a company’s actions can be checked at any given time by an outside observer. Transparency is no longer just an option, but a legal requirement that a company has to comply with.
Transparency
Ethical Behaviour 19
Ethics is a concept used to pass judgement on human behaviour. Ethics can be defined as the discipline dealing with moral duties and obligation, and explanation what is good or not good for others Ethics in these situations is to ensure consistency in decision making involving conflicting values, accountability , honesty and reflective judgements. Ethics is the first line of defence against corruption while law enforcement id remedial and reactive. Good corporate governance goes beyond rules and regulations that the government can put in place. Dilemmas on whether to pursue self-interest or company interest often leads to corporate misconduct
Ethical Behaviour
Sustainability 21
Both corporate governance and sustainability is essential for the continuous operation for any corporation. These two concepts are fundamentally related to each other. Good corporate governance is generally expected to have a positive impact on the sustainability performance and disclosure Through sustainability disclosures, organizations are demonstrating their sustainability governance and performance
Sustainability
5. MANAGEMENT vs GOVERNANCE
Governance refers to oversight and decision-making related to strategic direction, financial planning, and bylaws- the set of core policies that outline the organization’s purpose, values, and structure. Management refers to the routine decisions and administrative work related to the daily operations of the organization. Management decisions should support or implement goals and values defined by governing bodies Separating governance and management promotes accountability at all levels. It also provides a mechanism for good enterprise governance that focuses on stakeholder value by balancing performance and conformance.
MANAGEMENT vs GOVERNANCE Responsible for ensuring that the operational functions of corporate are effective and efficient.
Relates to governing of an organisation at the top.
Concentrates on the implementation of systems
Denotes the system by which companies are directed and controlled
To ensure that the processes of decision making and control are adhered to
Concerned with structures and process associated with management, decision making and control
MANAGEMENT vs GOVERNANCE Coordinates business Strives to protect in a most efficient way owner's interest while striving to attain goals and execute policies set by governing organ Focus on performance and results
Focuses on overall control
Translates into practice the view of governing organ about strategies direction
Represents a collection of board principles and practices
Recommends goals and polices supported
Approves high level organisational goal
MANAGEMENT vs GOVERNANCE Management is ‘hands Governance be on’ described as ‘hand off’ Good management is the means to make the corporation operationally effective
Good corporate governance is the means of ensuring due and adequate control over the strategy and direction of an organisation in achieving its key objective for the interest of stakeholders.
MANAGEMENT vs GOVERNANCE
6. Code of Corporate Governance 28
Following major corporate collapses in various developed stock markets in the last two decades, efforts to enhance the efficacy of governance structures have been undertaken by many countries via the establishment of Corporate Governance Guidelines (e.g. the Cadbury, Hampel and Higgs Reports in the UK, the Bosch Report in Australia and the Business Roundtable in the US). Similarly, the economic crisis of 1997–1998 that hit South East Asian stock markets, which was to a certain extent attributed to weak corporate governance prompted the governments in the region to seriously consider ways of improving the governance structures in their respective countries.
6. Code of Corporate Governance 29
Most of the countries in the region have each now established a Code of Corporate Governance to ensure the continuous flow of funds and to boost the confidence of investors in their capital markets. However, the principles outlined in most of the Codes in these countries are largely derived from recommendations in developed countries and may not necessarily be applicable to developing countries. Every nation has its own national character as well as social and economic priorities and as such, what is desirable in one country may not be so in another. Likewise, every corporation has its own unique history, culture and business goals. Hence, efforts to reform corporate governance should take into account all of these factors.
6. Benefits of Good Governance 30
Researchers have shown that companies with good corporate governance practices are valued more highly and run more effectively. So the benefits of good governance include:
Increases trust - providing clear and accurate information to their stakeholders on a regular basis Encourages positive behaviours - Having clearly defined policies and processes and a board of directors and executive managers who take an interest and responsibility for such matters can help to prevent future failures whilst setting the organisations cultural expectations.
7. Benefits of Good Governance 31
Lower the costs of capital – An organisation that is seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a lower rate than those with no, or weak governance systems.
Enhances Sustainability (Improved company performance) - A company committed to good governance is more able to quickly identify and resolve any systemic issues thus reducing the likelihood of costly corporate crises and scandals. Higher share price
7. Benefits of Good Governance 32
Minimises waste, risks, corruption and mismanagement - Companies committed to implementing and maintaining good governance practices will likely find that certain risks are drastically minimised. This is because strong governance practices typically increase levels of transparency, trust and integrity, all of which create an environment conducive to reducing risks, opportunities for corruption and any source of mismanagement.
Greater international following
Some key points
Corporate governance is an essential mechanism to help the company attain its corporate objectives and monitoring performance is a key element in achieving the objectives. Corporate governance is fundamental to well-managed companies and to ensuring that they operate at maximum efficiency.
VIDEOS The Governance Problem: How it Started https://www.youtube.com/watch? v=V0zemSfMWSQ
The importance of corporate governance https://www.youtube.com/watch? v=bEKumcUERtE
BWRR3123/ CORPORATE GORVERNANCE
CHAPTER 1 INTRODUCTION TO CORPORATE GOVERNANCE
Lecture Outline 2
Introduction Definition Important Features of Corporate Governance Concepts of Sound CG Management vs Governance Code of Corporate Governance Benefits of Good Corporate Governance
1. Introduction 3
Stage 1:
Equity Voting Rights
Company founded (owned and managed) by individual, family, partnership, government or company. Stage 2:
Equity Voting Rights
New Equity
Debt
Voting Rights
Company expands by issuing more equity and debt. New equity holders also get voting rights as to who manages the company.
Ownership matters 4
Most companies are created by entrepreneurs who are either individuals or a small set of partners. In either case, they can be members of a family Over time, however, some firms may choose to go public via an initial public offering or IPO.
Introduction 5
Company founder must now choose between keeping control of the company or allowing the company to be managed by professional managers. Equity
New Equity
Voting Rights
Voting Rights
Debt
If they keep control there is a potential conflict between the founders and other shareholders. If they pass management to professional managers there is a potential conflict between owners and managers.
Who Owns the Business?
[Insert Exhibit 2.1]
Forms of business and conflicts of interest 7
Characteristic
Sole Partnership Proprietorsh ip Ownership Sole owner Multiple owners Legal requirements Few; entity Few; entity and regulation easily formed easily formed Legal distinction None None between owner and business
Corporation
Liability
Unlimited
Unlimited ownership Numerous legal requirements Legal separation between owners and business Limited
Ability to raise capital Transferability of ownership
Very limited Nontransferable (except by
Unlimited but shared among partners Limited Nontransferable
Nearly unlimited Easily transferable
2. Definition: Governance 8
The concept of ’governance’ has been formatted from the word ‘gubernare’, which means ‘to rule or to direct, guide’. Earlier the term was to be related to the exercise of power with acceptance of responsibility, by and accountability for running of kingdom. However over the years the term assumed greater importance in wider sense and scope for business entities to corporate world.
Governance is a term that refers to the way in which and enterprise or body of people is
Definition: Corporate Governance 9
•
•
•
Corporate governance is the system is the system of rules, practices and processes by which business corporations are directed and controlled. Boards of directors are responsible for the governance of their companies. The boards actions are subject to laws, regulations and the shareholders in general meeting. The shareholders’ role in governance is to appoint the directors and the auditors and to satisfy themselves that an appropriate governance structure is in place. (Cadburry report, 1992)
Definition: Corporate Governance 10
“Corporate governance is defined as the process and structure used to direct and manage the business and affairs of the company towards promoting business prosperity and corporate accountability with the ultimate objective of realising long-term shareholder value while taking into account the interest of other” (MCCG, 2017).
Corporations: Corporate Governance
Private and Public Corporations
Separation of Ownership (Shareholders) and Management
Corporate Governance is the relationship between:
Shareholders (owners) Board of Directors Corporate Officers
Owners / Shareholders
Board of Directors
Corporate Officers
Middle and Lower Management
3. Important Features of CG 12
Adequate and appropriate system of internal controls in place. No single individual should have too much power. Relationship between company’s management, the board of directors, shareholders and other stakeholders Company managed in best interests of shareholders and other stakeholders Encourages transparency and accountability
13
4. Pillars of Corporate Governance 14
The overall CG practices show the following pillars: 1.Accountability 2.Transparency 3.Ethical behavior 4.Sustainability Companies that embrace these principles are more likely to produce long term value than those that are lacking in one or all.
Accountability 15
• •
•
•
•
Accountability means answerability or liability. Accountability can have a negative connotation because many people associate it with blame. “Who’s responsible for when something goes wrong?” is just one of the many questions that accountability seeks to answer. But accountability is more than that. It’s about having ownership over one’s actions whether the consequences of those actions are good or bad. Individuals who make decision in a company and take actions on behalf of a company on specific issues should be accountable for the decisions they make and the actions they take. Ensure that management is accountable to the Board and the Board is accountable to shareholders Shareholders are deeply interested in who will take the blame when something goes wrong in one of a company’s many processes. And even when everything goes smoothly as expected, knowing that someone will be held accountable for future mishaps increases shareholders’ confidence, which in turn increases their desire to invest more
Accountability
Transparency 17
Transparency “means having nothing to hide” . Refers to the ease with which an outsider is able to make a meaningful analysis of a company and its actions. This means it allows its processes and transactions observable to outsiders. It also makes necessary disclosures, informs everyone affected about its decisions, and complies with legal requirements. Transparency is a critical component of corporate governance because it ensures that all of a company’s actions can be checked at any given time by an outside observer. Transparency is no longer just an option, but a legal requirement that a company has to comply with.
Transparency
Ethical Behaviour 19
Ethics is a concept used to pass judgement on human behaviour. Ethics can be defined as the discipline dealing with moral duties and obligation, and explanation what is good or not good for others Ethics in these situations is to ensure consistency in decision making involving conflicting values, accountability , honesty and reflective judgements. Ethics is the first line of defence against corruption while law enforcement id remedial and reactive. Good corporate governance goes beyond rules and regulations that the government can put in place. Dilemmas on whether to pursue self-interest or company interest often leads to corporate misconduct
Ethical Behaviour
Sustainability 21
Both corporate governance and sustainability is essential for the continuous operation for any corporation. These two concepts are fundamentally related to each other. Good corporate governance is generally expected to have a positive impact on the sustainability performance and disclosure Through sustainability disclosures, organizations are demonstrating their sustainability governance and performance
Sustainability
5. MANAGEMENT vs GOVERNANCE
Governance refers to oversight and decision-making related to strategic direction, financial planning, and bylaws- the set of core policies that outline the organization’s purpose, values, and structure. Management refers to the routine decisions and administrative work related to the daily operations of the organization. Management decisions should support or implement goals and values defined by governing bodies Separating governance and management promotes accountability at all levels. It also provides a mechanism for good enterprise governance that focuses on stakeholder value by balancing performance and conformance.
MANAGEMENT vs GOVERNANCE Responsible for ensuring that the operational functions of corporate are effective and efficient.
Relates to governing of an organisation at the top.
Concentrates on the implementation of systems
Denotes the system by which companies are directed and controlled
To ensure that the processes of decision making and control are adhered to
Concerned with structures and process associated with management, decision making and control
MANAGEMENT vs GOVERNANCE Coordinates business Strives to protect in a most efficient way owner's interest while striving to attain goals and execute policies set by governing organ Focus on performance and results
Focuses on overall control
Translates into practice the view of governing organ about strategies direction
Represents a collection of board principles and practices
Recommends goals and polices supported
Approves high level organisational goal
MANAGEMENT vs GOVERNANCE Management is ‘hands Governance be on’ described as ‘hand off’ Good management is the means to make the corporation operationally effective
Good corporate governance is the means of ensuring due and adequate control over the strategy and direction of an organisation in achieving its key objective for the interest of stakeholders.
MANAGEMENT vs GOVERNANCE
6. Code of Corporate Governance 28
Following major corporate collapses in various developed stock markets in the last two decades, efforts to enhance the efficacy of governance structures have been undertaken by many countries via the establishment of Corporate Governance Guidelines (e.g. the Cadbury, Hampel and Higgs Reports in the UK, the Bosch Report in Australia and the Business Roundtable in the US). Similarly, the economic crisis of 1997–1998 that hit South East Asian stock markets, which was to a certain extent attributed to weak corporate governance prompted the governments in the region to seriously consider ways of improving the governance structures in their respective countries.
6. Code of Corporate Governance 29
Most of the countries in the region have each now established a Code of Corporate Governance to ensure the continuous flow of funds and to boost the confidence of investors in their capital markets. However, the principles outlined in most of the Codes in these countries are largely derived from recommendations in developed countries and may not necessarily be applicable to developing countries. Every nation has its own national character as well as social and economic priorities and as such, what is desirable in one country may not be so in another. Likewise, every corporation has its own unique history, culture and business goals. Hence, efforts to reform corporate governance should take into account all of these factors.
6. Benefits of Good Governance 30
Researchers have shown that companies with good corporate governance practices are valued more highly and run more effectively. So the benefits of good governance include:
Increases trust - providing clear and accurate information to their stakeholders on a regular basis Encourages positive behaviours - Having clearly defined policies and processes and a board of directors and executive managers who take an interest and responsibility for such matters can help to prevent future failures whilst setting the organisations cultural expectations.
7. Benefits of Good Governance 31
Lower the costs of capital – An organisation that is seen to be stable, reliable and able to mitigate potential risks will be able to borrow funds at a lower rate than those with no, or weak governance systems.
Enhances Sustainability (Improved company performance) - A company committed to good governance is more able to quickly identify and resolve any systemic issues thus reducing the likelihood of costly corporate crises and scandals. Higher share price
7. Benefits of Good Governance 32
Minimises waste, risks, corruption and mismanagement - Companies committed to implementing and maintaining good governance practices will likely find that certain risks are drastically minimised. This is because strong governance practices typically increase levels of transparency, trust and integrity, all of which create an environment conducive to reducing risks, opportunities for corruption and any source of mismanagement.
Greater international following
Some key points
Corporate governance is an essential mechanism to help the company attain its corporate objectives and monitoring performance is a key element in achieving the objectives. Corporate governance is fundamental to well-managed companies and to ensuring that they operate at maximum efficiency.
VIDEOS The Governance Problem: How it Started https://www.youtube.com/watch? v=V0zemSfMWSQ
The importance of corporate governance https://www.youtube.com/watch? v=bEKumcUERtE
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