Corporate Governance An Overview. 30 November 2010 Oliver Loch

Transcription

1 Corporate Governance An Overview

2 Agenda 1 Definition 2 Public focus in the past years 3 Aim of corporate governance rules 4 Development of Corporate Governance rules

3 Agenda 1 Definition 2 Public focus in the past years 3 Aim of corporate governance rules 4 Development of Corporate Governance rules

4 1 Definition Generically, good corporate governance for an organisation can be defined as the establishment of institutional arrangements that ensure that the organisation pursues its statutory goal (rather the organisation members private goals) Much of this literature focuses on the way governance structures limit insiders expropriation of outsiders through the enjoyment of private benefits, slack or diversion of resources (Frisell, Roszbach, Spagnolo: A Clinical Study of Central Banks, 2007)

5 1 Definition "Corporate Governance is concerned with holding the balance 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 for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society" (Sir Adrian Cadbury in 'Global Corporate Governance Forum', World Bank, 2000)

6 1 Definition Corporate governance is about promoting corporate fairness, transparency and accountability. The corporate governance structure specifies the distribution of rights and responsibilities of the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs.

7 1 Definition totality of legal rules and other recommendations related to good and accountable corporate management, e. g. accounting rules internal audit external audit board and management work role of the owners transparency

8 Agenda 1 Definition 2 Public focus in the past years 3 Aim of corporate governance rules 4 Development of Corporate Governance rules

9 2 Public focus in the past years accounting affairs at Enron, WorldCom and Parmalat increase of the usage of bonds in corporate financing usage of innovative financial products (see market turmoil in 2007/2008) accounting based rules became insufficient to keep the management under surveillance

10 Agenda 1 Definition 2 Public focus in the past years 3 Aim of corporate governance rules 4 Development of Corporate Governance rules

11 3 Aim of corporate governance rules owners interests ( principal ) managements interests ( agent )

12 3 Aim of corporate governance rules protection of owners interest conflict of interest managements flexibility to compete successfully fundamental principle-agent problem

13 3 Aim of corporate governance rules protection of owners interest conflict of interest managements flexibility to compete successfully solutions confidence balanced set of rules

14 3 Aim of corporate governance rules confidence balanced set of rules possible in small entities if investor and manager know each other necessary in large entities if the investors stay anonym if there are many investors Corporate Governance

15 3 Aim of corporate governance rules Mechanisms ensuring good corporate governance in literature external mechanisms internal mechanisms product market competition monitoring by large market for corporate control stakeholders contractual enforcement delegated monitoring by the through the legal system board of directors / boards market for managers long-term incentive contracts for managers aimed at increasing the congruence of managers and shareholders objectives

16 3 Aim of corporate governance rules transparency behaviour of staff code of conduct strategic planning common identity audits of the owners data protection public procurement Corporate Governance internal audits external audits cost accounting anti-money laundering anti-fraud anti-corruption

17 Agenda 1 Definition 2 Public focus in the past years 3 Aim of corporate governance rules 4 Development of Corporate Governance rules

18 4 Development of Corporate Governance rules 1930th: deviation of owner s and management s interests described first (agency theory) 1990th: term Corporate Governance widely used (e. g. Cadbury Report, Greenbury Report, Hampel Report) corporations try to describe their governing rules legal rules for management and supervision recommendations concerning accounting and audits work of the board (executive and non executive) accounting scandals: further work to fill gaps in the governance framework

19 4 Development of Corporate Governance rules OECD published Principles on Corporate Governance in 1999, revised in 2004 EU established European Corporate Governance Forum in 2004 to bring forward the convergence of the rules in the member states Germany worked out an Corporate Governance Codex in 2002 to make rules more transparent to investors; Governance Codex for public-sector enterprises reviewed in 2009; USA use COSO, COSO ERM and the Sarbanes-Oxley-Act to establish Corporate Governance rules (1992, 2004) IMF good governance fact sheet

20 4 Development of Corporate Governance rules OECD published Guidelines on Corporate Governance of State-Owned Enterprises in 2006; in principle applicable also for central banks details in following presentation Since 2009, OECD examines an action plan corporate governance and the financial crisis Aim: encourage and support the implementation of already agreed international and national standards, including the OECD Principles of Corporate Governance as a basis. BIS has established a Central Bank Governance Forum, made up of Central Bank Governance Group (group of 7 Governors) Central Bank Governance Network (45 CB s, ad-hoc surveys, analysis, etc.)

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22 4 Development of Corporate Governance rules Common understanding of Corporate Governance rules: Rights and equitable treatment of shareholders: Organisations should respect the rights of shareholders and help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings.

23 4 Development of Corporate Governance rules Common understanding of Corporate Governance rules: Interests of other stakeholders: Organisations should recognise that they have legal and other obligations to all legitimate stakeholders.

24 4 Development of Corporate Governance rules Common understanding of Corporate Governance rules: Role and responsibilities of the board The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There are issues about the appropriate mix of executive and non-executive directors. The key roles of chairperson and CEO should not be held by the same person

25 4 Development of Corporate Governance rules Common understanding of Corporate Governance rules: Integrity and ethical behaviour: Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure.

26 4 Development of Corporate Governance rules Common understanding of Corporate Governance rules: Disclosure and transparency: Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting. Disclosure of material matters concerning the organisation should be timely and balanced to ensure that all investors have access to clear, factual information.