Corporate Governance
Week 10
BUSN9229D
Saib Dianati
Learning Objectives
>To understand what is meant by corporate governance
>To understand the main principles of corporate governance
>To understand the role of the Board of Directors in corporategovernance.
>Theoretical explanation for corporate governance
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Corporate GovernanceFramework
A system of corporate governance controls is implemented onbehalf of shareholders to discourage managers from pursuingobjectives that fail to maximise shareholder wealth
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The parties to corporategovernance
>governing body (e.g. Australian Securities and InvestmentCommission, Australian Stock Exchange, CorporateGovernance Council)
>CEO
>Board of directors
>Management
>Shareholders
>Stakeholders (customers, suppliers, employees, lenders and thecommunity at large)
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Corporate Governance
>‘the framework of rules, relationships, systems andprocesses within and by which authority is exercised andcontrolled in corporations. It encompasses themechanisms by which companies, and those in control areheld to account. Corporate governance influences how theobjectives of the company are set and achieved, how riskis monitored and assessed, how performance is optimised.
>Good corporate governance structures encouragecompanies to create value and provide accountability andcontrol systems commensurate with the risks involved’(ASX CGC 2007, p.3)
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Good Corporate Governance
>Monitor and assess risk
>Optimise performance
>Create value
>Provide accountability
(ASX CGC 2007)
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The ASX Principles of CorporateGovernance
1.Lay solid foundations for management and oversight.
2.Structure the board to add value
3.Promote Ethical and Responsible Decision making
4.Safeguard Integrity in Financial Reporting
5.Make timely and balanced disclosure
6.Respect the rights of shareholders
7.Recognise and manage risk
8.Remunerate fairly and responsibly
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1. Lay solid foundations formanagement and oversight.
Organisations should clarify and make publicly known the
roles and responsibilities of board and management to
provide shareholders with a level of accountability.
Boards should provide strategic guidance and overseemanagement. The division of roles and responsibilitiesbetween the board and management should provide a balanceof authority so that absolute power does not
rest with any single individual.
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2. Structure the board to add value
The board needs a range of skills and understanding, to be of
sufficient size and have an appropriate level of commitment
to fulfil its responsibilities and duties.
The board must be able to deal with various business issues
and have the ability to review and challenge management
performance.
The board should consist mostly of independent directors,
have an independent chairperson, and the key roles such as
chairperson and chief executive officer should not be shared.
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3. Promote Ethical and ResponsibleDecision making
Organisations should develop a code of conduct for their
directors and executives that promotes ethical and
responsible decision making. Organisations should also
publish their position on members of the board and
employees trading in company shares and associated
products.
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4. Safeguard Integrity in FinancialReporting
Organisations should implement procedures to independently
verify and safeguard the integrity of the company's financial
reporting.
This can be achieved through the formation of an
audit committee and
the use of skilled, independent external auditors.
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5. Make timely and balanceddisclosure
Organisations should develop written policies andprocedures that promote the timely and balanceddisclosure of all material matters that concern them.
These policies and procedures should ensure that all
investors have access to timely information and
that the organisation's announcements are clear, factualand balanced.
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6. Respect the rights of shareholders
Organisations should respect the rights of shareholders and
help shareholders to exercise those rights. Organisations can
help shareholders exercise their rights by effectively
communicating information that is understandable and
accessible and encouraging shareholders to participate in
general meetings.
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7. Recognise and manage risk
Organisations should establish a system of risk oversight and
management and internal control. Organisations should be
continually identifying, assessing, monitoring and managing
risk, and informing investors of changes to risk.
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8. Remunerate fairly and responsibly
Organisations should ensure that remuneration is sufficient
and reasonable and that the relationship between
remuneration and performance is clear. Organisations should
ensure that they are adequately remunerating directors and
employees to attract those who have the necessary skills to
enhance company performance.
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The parties to corporategovernance
>governing body (e.g. Australian Securities and InvestmentCommission, Australian Stock Exchange, CorporateGovernance Council)
>CEO
>Board of directors
>Management
>Shareholders
>Stakeholders (customers, suppliers, employees, lenders and thecommunity at large)
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Theoretical models of corporategovernance
>Agency Theory : Managers of companies are wealth maximisersand will consider their own welfare over and above those ofshareholders
3 Agency Problems
>Maximise wealth at the expense of shareholders
>Focus on short term performance at the expense of long term growth
>Difference between managers’ and shareholders’ attitudes to risk
>Corporate Governance help overcome these 3 agency problems
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Theoretical models of corporategovernance
>Stakeholder Theory : shareholders are only one of manypotential stakeholder groups – all stakeholders are impactedupon and also impact on the corporation
>Corporate governance is one of the key strategies to help anorganisation understand, respond to and relate to differentstakeholder relationships.
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Theoretical models of corporategovernance
>Stewardship Theory: rejects the view of Agency Theory –decisions are not only driven by economic considerations
>Managers wishes to do a good job, be a good steward ofcorporation’s resources
>Shareholders and their returns are best served by empoweringmanagement
>Corporate Governance structure - more power to management
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Theoretical models of corporategovernance
>Resource Dependency Theory : firm’s level of success dependson its ability to control external resources
>Corporate governance: The board and its individual member’sskills and contacts are essential
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Theoretical models of corporategovernance
>Which Theory?
>Agency Theory – Dominant one
>All these theories play a role in determining what should beappropriate corporate governance structure
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Board of Directors
>Major players in Corporate Governance System
>Formulate the organisation's strategy, develop policy, appoint,supervise and remunerate senior executives and to ensureaccountability of the organisation to its owners and otherstakeholders.
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Why companies need to have a boardof directors
>The board of directors is the ultimate decision making body of anorganisation
> It is responsible for major investment, financial and operation policiesand strategic directions of the company.
> Provides important supervisory role of company executivemanagement
> Central cog in an organisation’s corporate governance strategies andpractices
> Sets the corporate governance tone of the organisation.
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Corporate Governance Mechanisms
>Board Structure: Independent, Female directors, Diversity, CEO-Chairperson Duality
>Board Size (larger/smaller)
>Board committees (Remuneration committees, Auditcommittees, nomination committees)
Is it working?
>Despite increasingly stringent legislation, excessive topmanagement compensation has continued unabated in the lastfew years.
>CFO pay varies widely, from less than $600,000 to more than$60 million.
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Ethical Corporate Culture
>shared set of norms, values, and practices about appropriatebehaviour in the workplace
>values of senior management and the benefits of setting anethical tone
>develop and enforce a written code of corporate conduct
>good ethics is good for business and and may lead to goodbusiness
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Corporate Codes
>an authoritative statement of values and principles designed toset a minimum standard of acceptable behaviour and guideorganisational members in resolving ethical conflicts.
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Business leaders must walk thetalk
>Employees learn acceptable behaviour through the subtlereading of signals demonstrated by the actions and reactions ofsenior management
>stems from the firm's values – see slide 29 for examples ofvalues
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