CORPORATE GOVERNANCE INTRO

• 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
• Controlling shareholders mismanaged the resources of all shareholders through their poor investing and risky financing decisions
• The larger framework of corporate governance was weak and to the extent that early warning signals did not generate counter measures to curb poor management decisions
• 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 is primarily responsible for the governance of the corporation
• Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment
• 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
• 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
• Two broad routes can be taken to alleviate insider moral hazard: 1) Insiders' incentives may be partly aligned with the investors' interests through the use of performance-based incentive schemes, 2) 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 practices

  • 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
• Principal-agent problem

  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
  • 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 is 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: 1) The corporate governance framework should protect shareholders rights, 2) The corporate governance framework should ensure the equitable treatment of all shareholders, 3) Stakeholders should be involved in corporate governance, 4) Disclosure and transparency is critical, 5) The board of directors should be monitored and held accountable for what guidance it gives
• Internal mechanisms of corporate governance

  • Board of Directors (Board Size & Independence, Chairman/CEO Positions, Board Committees)
  • Executive Compensation
  • Ownership Structure (Concentrated versus Dispersed Ownership, Identity of Owners, Other Blockholders)
• External mechanisms of corporate governance

  • External Auditors
  • Debt & Equity Markets (Monitoring by debt holders, Analysts, Mergers & Acquisitions)
  • Legal/Regulatory System (Common versus Civil Law, Extent of Law Enforcement, Recent Regulations – Sarbanes Oxley Act, ASX Good Corporate Governance Principles)
• The board of directors is responsible for overseeing management and representing the interests of shareholders
• Corporate Governance

  Internal mechanisms and external mechanisms that monitor and hold directors accountable for the guidance they provide
• Corporate Governance Framework

  • Board
  • Audit Committee
  • President/CEO
  • CFO
  • CIO
  • COO
  • External Audit
  • Governance - Dual Reporting
• Corporate Governance Framework

  1. ACCOUNTABLE TO

  2. APPOINT & MONITOR

  3. REPORT TO/ ACCOUNTABLE TO

  4. Manages

  5. Operates

  6. Monitor

  7. PROVIDE REASONABLE ASSURANCE
• Internal Mechanisms

  • Board of Directors
  • Executive Compensation
  • Ownership Structure
• Board of Directors

  • Board Size & Independence
  • Chairman/CEO Positions
  • Board Committees