GOVERNANCE, ETHICS, RISK, INTERNAL

• Corporate Governance


  The framework of rules, systems and processes in the corporation that governs the performance by the Board of Directors and Management of their respective duties and responsibilities to the stockholders
• Board of Directors


  The governing body elected by the stockholders that exercises the corporate powers of a corporation, conducts all its business and controls its properties
• Exchange


  An organized market place or facility that brings together buyers and sellers, and executes trades of securities and/or commodities
• Management


  The body given the authority by the Board of Directors to implement the policies it has laid down in the conduct of the business of the corporation
• Independent director


  A person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director
• Executive director


  A director who is also the head of a department or unit of the corporation or performs any work related to its operation
• Non-executive director


  A director who is not the head of a department or unit of the corporation nor performs any work related to its operation
• Non-audit work


  The other services offered by an external auditor to a corporation that are not directly related and relevant to its statutory audit functions, such as, accounting, payroll, bookkeeping, reconciliation, computer project management, data processing, or information technology outsourcing services, internal audit, and other services that may compromise the independence and objectivity of an external auditor
• Internal control


  The system established by the Board of Directors and Management for the accomplishment of the corporation's objectives, the efficient operation of its business, the reliability of its financial reporting, and faithful compliance with applicable laws, regulations and internal rules
• Internal control system


  The framework under which internal controls are developed and implemented (alone or in concert with other policies or procedures) to manage and control a particular risk or business activity, or combination of risks or business activities, to which the corporation is exposed
• Internal audit


  An independent and objective assurance activity designed to add value to and improve the corporation's operations, and help it accomplish its objectives by providing a systematic and disciplined approach in the evaluation and improvement of the effectiveness of risk management, control and governance processes
• Internal audit department


  A department or unit of the corporation and its consultants, if any, that provide independent and objective assurance services in order to add value to and improve the corporation's operations
• Internal Auditor


  The highest position in the corporation responsible for internal audit activities. If internal audit activities are performed by outside service providers, he is the person responsible for overseeing the service contract, the overall quality of these activities, and follow-up of engagement results
• The Board of Directors (the "Board") is primarily responsible for the governance of the corporation
• Corollary to setting the policies for the accomplishment of the corporate objectives, it shall provide an independent check on Management
• Corporate Governance


  Governs relationships among stakeholders that are used to determine and control the strategic direction and performance of organizations
• Corporate Governance


  Means used by corporations to establish order between parties (the firm's owners and its top-level managers) whose interests may be in conflict
• Corporate Governance


  Deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment
• Mechanisms of corporate governance are economic and legal institutions that can be altered through the political process – sometimes for the better
• Corporate Governance


  Reflects and enforces the company's values
• Corporate Governance


  Provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined
• Corporate Governance


  Refers to a system whereby shareholders, creditors and other stakeholders of a corporation ensure that management enhances the value of the corporation as it competes in an increasingly global market place
• Ways in which management may not act in the firm's (shareholders') best interest

  • Insufficient effort
  • Extravagant investments
  • Entrenchment strategies
  • Self-dealing
• Moral Hazard


  Insiders' incentives may be partly aligned with the investors' interests through the use of performance-based incentive schemes
• Moral Hazard


  Insiders may be monitored by the current shareholders (or on their behalf by the Board or a large shareholder), by potential shareholders (acquirers, raiders), or by debtholders
• Two broad routes to alleviate insider moral hazard


  • Insiders' incentives may be partly aligned with the investors' interests through the use of performance-based incentive schemes
  • Insiders may be monitored by the current shareholders (or on their behalf by the Board or a large shareholder), by potential shareholders (acquirers, raiders), or by debtholders
• Dysfunctional Corporate Governance

  • Lack of transparency (e.g. level of total compensation packages)
  • Tenuous link between performance and compensation
  • Compensation package may be poorly structured
  • Managers seem to manage to maintain or even increase their compensation despite poor performance
  • Managers may succeed in "getting out on time"
  • Managers receive large "golden parachutes"
  • Accounting manipulations
• Various Theories for thinking about corporate governance

  • Transaction Cost Economics
  • Agency Theory
  • Shareholder Theory
  • Corporate Governance
• Separation of Ownership & Managerial Control (Principal-agent problem)

  Principal—shareholders<|>Agent—managers<|>Principal-agent problem represents the conflict of interest between management and owners. For example, if shareholders cannot effectively monitor the managers' behavior, then managers may be tempted to use the firm's assets for their own ends, all at the expense of shareholders
• Managerial Incentives

  • Bonuses and stock options
  • (implicit) Threat of being fired by the Board or removed by the market for corporate control thru a takeover or proxy fight; the possibility of being put on receivership during financial distress; etc.
  • Capital market monitoring & product-market competition
  • (other non-economic incentives) Intrinsic motivation, fairness, horizontal equity, morale, trust, corporate culture, social responsibility & altruism, feelings of self-esteem
• Corporate Governance


  About minimizing the loss of value that results from the separation of ownership and control
• Corporate governance has been a hot issue in recent years (Enron, Worldcomm, HIH and One.Tel) but it is a problem that has been around for hundreds of years – Adam Smith (1776)
• Corporate Governance


  Focuses on a company's structure and processes to ensure fair, responsible, transparent and accountable corporate behavior
• Corporate Management


  Focuses on the tools required to operate the business
• Good corporate governance practices involve:

  • The corporate governance framework should protect shareholders rights.
  • The corporate governance framework should ensure the equitable treatment of all shareholders.
  • Stakeholders should be involved in corporate governance.
  • Disclosure and transparency is critical.
  • The board of directors should be monitored and held accountable for what guidance it gives.
• Internal Mechanisms of Corporate Governance

  • Board of Directors
  • Executive Compensation
  • Ownership Structure
• External Mechanisms of Corporate Governance

  • External Auditors
  • Debt & Equity Markets
  • Legal/Regulatory System
• The board of directors is responsible for overseeing management and representing the interests of shareholders
• Corporate Governance


  Internal mechanisms and external mechanisms that ensure a company is managed in the interests of its shareholders
• Internal Mechanisms

  • Board of Directors
  • Executive Compensation
  • Ownership Structure