Corporate Governance (CG) Presented By: Ismail Nur January, 2010

Transcription

1 Corporate Governance (CG) Presented By: Ismail Nur January, 2010

2 Corporate Governance (CG) The Contents The Background The Framework The Principles The Structure The Analysis of Board Activities The audit Committee The Role of Professional Accountants The Controls The Requirements The Values/Ethics/Moral Duties The Review The Suggestions

3 Corporate Governance (CG) The Background The emergence of large business corporations after world war II and the dominance of the agency theory/ principal of trusteeship prompted the acceptance by Boards/ Management of the rights of shareholders as the owners of the corporation and of their own role as trustees on behalf of the shareholders. The needs of shareholders to exercise their ownership rights and to increase the value of their shares / wealth initiated the debate over corporate governance. The massive bankruptcies/financial crisis and the shareholders concerns over administration pay and stock losses led to the calls for corporate Governance reforms.

4 The Definitions Governance is derived from a Greek verb which means to steer. Governance is what a Government does; sometime defined as : The exercise of political authority and the use of institutional resource to manage society s problems and affairs. In business context, corporate governance is: the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate Governance includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors (The Governing Body). Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

5 The Framework Governance Performance Conformance Value Creation Resource Utilization Accountability Assurance

6 The framework (Continued) Conformance: focuses on: o Effectiveness of strategic/operational risks identification, control, mitigation, reporting etc o Work effectiveness and efficiency to achieve strategic/operational goals. o Capability of the systems to produce accurate/ reliable financial/non-financial information which reflects the true performance of the company. o Meeting management s fiduciary responsibilities. o Ability to detect/ prevent criminal activities e.g. fraud, money laundering, misappropriations etc

7 The framework (Continued) Performance: Focuses on: o Implementation of strategy/ objectives and continuous evaluation of the company success. o Setting up a robust decision making process. o Aligning business operations and resource utilization with strategy and acceptable levels of risk. o Making essential decision in response to changing conditions

8 The Principles General: The CG principles follow a non-binding principlesbased approach which recognises the need to adapt implementation to varying legal, economic and cultural circumstances. They serve as a reference point. The principles are intended to be concise, understandable and accessible to the international community. They are not a substitute for government or private sector initiatives to develop Best Practice in CG.

9 Corporate Governance is : - One key element in improving economic efficiency/growth and enhancing investor confidence. - A set of relationships between a company s management, board, shareholders and other stakeholders. - A structure through which the objectives of the company are set and means of attaining those objectives and monitoring performance are determined. - To provide incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders.

10 - To provide a degree of confidence that lead to proper functioning of a market economy resulting in lower cost of capital and efficient use of resources. - To operate the corporation based on sound business ethics, environmental and social interests of the communities which greatly improves its reputation and long-term success. - To encourage companies to remain competitive and be innovatitive in adapting corporate governance practices that meet new demands and grasp new opportunities. - To encourage governments to shape an effective regulatory framework that provides sufficient flexibility to allow markets function effectively and to respond to expectation of shareholders and other stakeholders.

11 1- Ensuring the basis for an effective corporate governance framework. Should promote transparent & efficient markets. Positive impact on overall economic performance. Give incentive for market participants & the promotion of transparent & efficient markets.

12 Be consistent with the rule of law new laws/ regulation shall be possible to implement and enforce. consultations with all parties and mechanisms to protect their rights. Policy measures should be designed with a view to their overall cost & benefits to avoid over-regulation, unintended consequences, unenforceable laws etc Where Voluntary codes/ standards are used as an explicit substitute for legal provisions, then, their status in terms of coverage, compliance and sanction shall be clearly specified.

13 Clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities. The variety of legal requirements e.g. Company Law, Securities Regulations, Contract Law, Labour Law ect.. May impede the ability to pursue key corporate governance objectives. Measure should be taken to limit this effect. Allocation of responsibilities for supervision, implementation and enforcement among the different authorities shall be clearly defined to ensure efficiency and respect. Any overlapping and contradictory regulations should be monitored so that no regulatory vacuum is allowed and to minimise the cost of compliance.

14 Where the oversight responsibilities are assigned to no-public bodies, then, the regulatory delegation to such bodies shall be transparent and encompass the public interest. The regulatory responsibilities shall be assigned to bodies that can function without conflicts of interest and that are subject to judicial review. The regulatory and enforcement bodies shall be appropriately funded and supplied with fully qualified staff to enhance the quality and independence of supervision and enforcement.

15 2- The CG framework should protect and facilitate the exercise of shareholders rights. Basic shareholders rights should /include secure methods of shares registration, transfer etc Obtaining relevant information on timely and regular basis. Participating & voting in general meetings. Electing & removing members of the board. Sharing in the profits of the corporation with limited liability.

16 Shareholders should have the right to participate in and to be informed about decisions concerning fundamental corporate changes. Amendments to governing documents e.g. Articles of Association. Authorisation of additional shares. Extraordinary transactions e.g. transfer of all or substantially all assets.

17 Shareholders rights should include the opportunity to participate and vote in general meetings and should be informed of the rules that govern general shareholders meetings. Shareholders should have the opportunity to ask questions to the board, to place items on the agenda of general meetings and propose resolution subject to reasonable limitations. Shareholders participation in general meeting shall be encouraged by simplifying the process of filing amendments & resolutions. Shareholders should be able to submit questions in advance of general meeting and to obtain replies from management and board members.

18 Such questions may include those relating to external audit. However, in order to assure that abuse of such opportunities do not occur, it is reasonable for companies to require that for shareholder resolutions to be placed on agenda they need to be supported by shareholders holding a specified percentage of shares or voting rights. This thershold should be determined carefully in order to ensure that minority shareholders are not effectively prevented from putting any items on the agenda.

19 Effective shareholder participation in key corporate governance decisions:- The nomination and election of board members - Nomination committee with key participation of independent board members to co-ordinate the search for a balanced and qualified board. - Full disclosure of the experience and background of candidates. - Access to company s proxy materials subject to some conditions. Shareholders views on the remuneration policy for board members and key executives should be taken.

20 - disclosure of remuneration by the board and in particular the specific link between remuneration and company performance. - Introduction of advisory vote which conveys the strength and tone of shareholders opinion without endangering employment contracts. The equity components of compensation schemes for board members and employees should be subject to shareholders approvals. - This is mainly because equity- based schemes have the potential to dilute shareholders capital and powerfully determine managerial incentives.

21 Shareholders should be able to vote in person or in absentia, and equal effect should be given to votes cast in person or in absentia. - Generally voting by proxy is acceptable. - Measures should be taken to ensure that proxies are voted in accordance with direction of the proxy holder and that disclosure is provided in relation to how undirected proxies will be voted. - The use of information technology (IT) in voting should be favourbly considered to facilitate shareholder greater participation.

22 Capital structures & arrangements that enable shareholders to obtain a degree of control disproportionate to their to equity ownership should be disclosed. Capital structures e.g. shares with multiple voting rights may be used to diminish the capability of noncontrolling shareholders to influence corporate policy. Shareholders agreements may be used by group of shareholders, who individually may hold relatively small shares of total equity, to act in concert so as to constitue an effective majority. Such capital structures & agreement shall be disclosed.

23 Markets for corporate control should be allowed to function in an efficient and transparent manner. The rules and procedures for: - Acquisition of corporate control. - Mergers. - Sales of substantial portions of corporate assets. Should be clearly expressed an disclosed to enable investors understand their rights and recourse. Anti-take-over devices should not be used to shield management and the board form accountability.

24 The exercise of ownership rights by all shareholders, including institutional investors should be facilitated. Investors shall be allowed to undertake reasonable amount of analysis and use their rights. Institutional investors e.g. Pension fund acting in fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investment. They should also disclose how they manage material conflicts of interest.

25 Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholders rights, subject to exceptions to prevent abuse. Shareholders are encouraged to co-operate and coordinate their actions in nominating and electing Board Members, placing proposals on the agenda and hold discussions with the company to improve its corporate governance. Shareholders co-operation/ agreements should be monitored to ensure that it is not used to manipulate markets, circumvent competion law etc.. Specific measures should be taken to prevent such abuse.

26 3- The equitable treatment of shareholders The CG framework should ensure the equitable treatment of all shareholders including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights. Build investors confidence that the capital they provided is protected from misappropriation by Corporate Managers, board members or Controlling Shareholders.

27 Shareholders should be able to enforce their rights by : either - Initiating legal and administrative proceedings against management and board members. - Administrative hearing or arbitration procedure by regulatory bodies. Many legal systems introduced provisions to product management and board members against litigation abuse in the form of tests for the sufficiency of shareholders complaints or what so-called safe harbours for management & board members actions.

28 All shareholders of the same series of a class should be treated equally. Within any series of a class, all shares should carry the same rights. All investors should be able to obtain information about the rights attached to all series and classes of shares before they purchase the shares. Any changes in voting rights should be subject to approval by those classes of shares which are negatively affected.

29 Minority shareholders should be protected from abusive actions by controlling shareholders and should have effective means of redress. - Such abuse may arise where the legal system allows and the market accepts, controlling shareholders to exercise a level of control disproportionate to the level of risk they assume as owners through legal devices e.g. multiple voting shares. - The minority shareholders protection mainly depends on the overall regulatory framework and the legal system. Examples of common provisions to protect minority shareholders: o Clearly articulated duty of loyalty by board members to the company and all shareholders. o Clear provisions of disclosure.

30 o Pr-emptive rights in relation to share issues. o Qualified majorities for certain shareholder decisions. votes should be cast by custodian or nominees in a manner agreed upon with the beneficial owner of the shares. - Custodian such as banks should inform shareholders of all upcoming shareholder votes and the available options of voting rights. Also that if no instructions to the contrary is received, the custodian will vote the shares in way it deems consistent with shareholder interest.

31 Impediments to cross boarder voting should be eliminated. - Usually foreign shareholders hold their shares through chain of securities intermediaries. This causes special challenges in communicating with such investors and in using their voting rights. - The regulations should clarify who is entitled to control the voting rights in such cross boarder situations. The voting process should be simplified and sufficient notice period should be given to foreign investors. - Laws and regulation should allow the use of modern technology in voting & participation.

32 Insider trading and abusive self-dealing should be prohibited. Insider trading entails manipulation of the capital markets, it is prohibited by securities regulation, company law and/ or criminal law in most countries. Where such practices are not prohibited or enforcement is vigorous, some measures should be taken. Members of the board and key executives should be required to disclose to the board whether they, directly, indirectly or on behalf of third parties, have a material interest in any transaction or matter directly affecting the corporation. Where such a material interest has been declared, it is good practice for that person not to be involved in any decision regarding the transaction or matter.

33 4- The role of stakeholders in CG. The CG framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises. Stakeholders constitue a valuable resource for building competitive and profitable companies by undertaking economically optimal levels of investment in firm- specific human and physical capital.

34 The governance framework should recognise that the interests of the corporation are served by regonising the interests of stakeholders and their contribution to the long-term success of the corporation. The rights of stakeholders whether established by law or through mutual agreement should be respected. Rights of stakeholders are established by law e.g. labour, business, commercial, insolvency laws etc or by contractual relationship. Where stakeholders interests are protected by law, stakeholders should have the opportunity to obtain effective pedress for violation of their rights. Performance-enhancing mechanism for employee participation should be permitted to develop.

35 Employee participation in CG may benefit companies directly as well as indirectly through the readiness by employee in firm specific skills. examples of participation:- - Employee representation on boards. - Employee stock ownership plans. - Profit sharing mechanism. - Pension commitments. Where laws and practice of CG systems provide for participation by stakeholders. It is important that stakeholders have access to information on a timely and regular basis, necessary to fulfil their responsibilities.

36 Stakeholders, including individual employees and their representative bodies, should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this. The CG framework should be complemented by an effective, efficient insolvency framework and by effective enforcement of creditors rights.

37 5- Disclosure and Transparency The CG framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership and governance of the company. A strong disclosure regime: - Promotes transparency, market- based monitoring of companies and enable shareholders to exercise their ownership rights on an informed basis. - Influences the behavior of companies and protects investors.

38 - Helps to attract capital and maintains confidence in the capital market. - By contrast, weak disclosure can contribute to unethical behavior and to a loss of market integrity. - Helps to improve public understanding of the structure and activities of the enterprises, specially with respect to environmental and ethical standards and relationship with the communities. Disclosure requirement are not expected to be unreasonably costly and companies are not expected to disclose information that may endanger their competitive position.

39 Companies are required to avoid misleading the investor and only disclose material information which is defined as information whose omission or misstatement could influence the economic decisions taken by users of Information. Disclosure should timely and reach all shareholders to ensure their equitable treatment. Disclosure should be include, but not be limited to, material information. The financial and operating results of the company. Company objectives. Missed share ownership and voting rights. Related party transactions. Foreseeable risk factors. Issues regarding employees and other stakeholders.

40 Remuneration policy for members of the board and key executives, and information about board members, including their qualification, the selection process, other company directorships and whither they are regarded as independent by the board. Governance structures and policies, in particular, the content of any corporate governance code or policy and the process by which it is implemented. The information should be prepared and disclosed in accordance with high quality standards of accounting and financial and non- financial disclosure. An annual audit should be conducted by an independent, competent and qualified auditor in order to provide an external and objective assurance to the board and shareholders that the financial statements fairly represent the financial position and performance of the company in all material respects.

41 External auditor shall be accountable to the shareholders and owe a duty to the company to exercise due professional care in the conduct of the audit. Channels for disseminating information should provide for equal, timely and cost- effective access to relevant information by users. The corporate governance framework should be complemented by an effective approach that addresses and promotes the provision of analysis or advice by analysts, brokers, rating agencies and others, that is relevant to make decisions by investors, free from material conflicts of interest that might compromise the integrity of their analysis or advice.

42 6- The responsibilities of the Board The CG framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board s accountability to the company and the shareholders. Board structure can be two-tier or unitory. The board responsibilities include: - Guiding corporate strategy. - Monitoring managerial performance. - Achieving adequate return for shareholders. - Prevent conflicts of interest. - Ensure compliance with applicable laws. - Take regard of all stakeholders interests. - Observe environmental and social standards.

43 Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders. Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly. The board should apply high ethical standards. It should take into account the interests of stakeholders.

44 The board should fullfil certain key functions: Reviewing and guiding risk policy, annual budgets, & business plan, setting performance objectives, monitoring implementation and corporate performance and overseeing major capital expenditures, acquisitions and divestitures. Monitoring the effectiveness of the company s governance practices and making changes as needed. Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning. Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.

45 Ensuring a formal and transparent board nomination and election process. Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions. The board should be able to exercise independent judgment on corporate affairs. This is essential so that the board can exercise its duties of monitoring management performance, preventing conflicts of interest and balancing competing demands on the corporation.

46 Independence and objectivity of the board has important implications for its composition and structure, mainly: - Sufficient number of independent board members. - Separation of the role of chief executive and chairman. Ensuring the integrity of the corporation s accounting & financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the Low and relevant standards. Overseeing the communications. process of disclosure and

47 Objectivity requires that a sufficient number of board members not be employed by the company or its affiliates and not be closely related to the company or its management. Independent members of the board play a key role, hence, it is desiprable that boards declare who they consider to be independent and the criterion for this judgment.

48 Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities include:- - Ensuring the integrity of financial and non-financial reporting. - The review of related party transactions. - Nomination of board members. - Key executives remuneration. and board members

49 When committees of the board are established their mandate, composition and working procedure should be well defined and disclosed by the board. Board members should be able to commit themselves effectively to their responsibilities. - Publication of attendance records for individual board members. - Board members training and voluntary selfevaluation. Board members should have access to accurate, relevant and timely information in order to fullfil their responsibilities.

50 The Structure Different structures of CG are adopted round the word or even within one country: mainly Two-tier boards. Unitary Boards. Mixed structure. Family controlled companies.

51 The Structure (Continued) Tow- Tier Board General Shareholders meeting Board of Supervisors Board of Directors General Manger/CEO Internal Audit Department Functional Departments

52 The Structure (Continued) Unitary Board General Shareholders meeting Board of Directors Nomination Committee Compensation Committee Audit Committee Other Committee General Manager CEO Internal Auditors External Auditors Functional Departments

53 The Structure (Continued) Mixed Structure Board General Shareholders meeting Board of Directors Board of Supervisors Nomination Committee Remuneration Committee Audit Committee Other Committees General Manager CEO Department of Internal Audit Functional Departments

54 The Analysis of Board Activities Outward looking Inward looking Providing accountability Monitoring and supervising Past and Present focused Strategy formulation Approve and work with and through the CEO Policy making Future focused Conformance V performance Outward looking Inward looking Conformance Past and present Performance Future

55 The Audit Committee A strengthening of the role of the audit committee All members of the audit committee should be independent. At least one member of the committee should have significant, recent, and relevant financial experience. The audit committee should recommend the selection of the external auditor. An audit committee report should be included in the annual report to shareholders. The Chairman of the audit committee should attend the AGM to answer shareholders questions.

56 The role of professional accountants Accountants and Auditors domain in corporate governance includes many activities which are closely aligned with the corporate governance activities:-

57 The role of professional accountants (Continued) Corporate Governance Activates The Role of Professional Accountants 1- Providing strategic direction 1- Providing, analyzing and interpreting information to management for formulation of strategy, planning, decision making and control. 2- Ensuring that objectives are achieved. 2- Measuring performance, recording financial transactions and communicating the results to board and stakeholders. 3- Ascertaining that risks are managed appropriately. 4- Verifying that the organization s resources are used responsibly. 3- Managing risks and providing internal control and business assurance. 4- Generating or creating value through the effective use of resources through: a) Understanding the drivers of value to stakeholders. b) Organizational innovation.

58 The Controls Corporate Governance internal controls include: Monitoring process by the board of directors - Legal authority to safeguard invested capital. - Regular Board to discuss all business issues. - Access to information and evaluation of top management performance. Internal audit and internal control procedure - Audit committee functions. - Assurance of the entitie s ability to achieve the objectives. Balance of power: - Secregation of duties. - No undue concentration of power. - Clarity on governance matters Remuneration:- Performance-based- remuneration

59 The Controls (Continued) Corporate Governance external controls include: Competition Debt covenants. Demand for and assessment of performance in formation(e.g. Financial statements) Government Regulation. Managerial Labour market. Media pressure. Takeover schemes.

60 The Requirements Independence At least half the board, excluding the chairman, should be non-executive directors who are independent of the company. Audit committees and remuneration committees should be formed entirely with independent directors. The majority of nomination committee members should also be independent. Chief executives should not go on to become chairman of their own company, because that could compromise their independence.

61 The Requirements (Continued) Independence (Continued) The definition of independence included: - Not being employed by the company in the past five years. - Having no material business relationship with the company in the past three years. - Not having a significant shareholding. - Not having served on the board for more than nine years.

62 The Requirements (Continued) Professional Development All directors should receive induction training. All directors should have regular updates on relevant skills, knowledge, and familiarity with the company.

63 The Requirements (Continued) Diligence Non- executive directors should disclose their other commitments to ensure that they have sufficient time. Directors appointments should be rigorous and transparent. No individual should chair more than one major listed company

64 The Requirements (Continued) Boards Performance Evaluation Boards should undertake an annual evaluation of their own performance. There should also be an annual assessment of the performance of individual directors and of the main board committees.

65 The Values/ Ethics / Moral duties General: The Board of Directors/ Committees/ Management (Governing Body) should: - Put General Emphasis on behavior/ Effectiveness. - Accept the indisputable rights of shareholders as true owners of the corporation and accept their own role as trustees on behalf of shareholders. - Be committed to values, morals and ethical business conduct. - Make a distinction between personal and corporate funds in the management of the company.

66 The Values/ Ethics / Moral duties (Continued) The Governing Body should set the Tone at the top by : Defining the organizational values. Developing and implementing a code of conduct. Adhering to these principles as an example of appropriate behavior.

67 The Values/ Ethics / Moral duties (Continued) The Fundamental Values/ethics/ Moral duties are: Integrity which comprises straight forward dealing and completeness based on: - Honesty and objectivity. - High standard of probity in the stewardship of resources and management of the company. This depends on the effectiveness of the control framework and on the personal standards and professionalism of the individuals within the company.

68 The Values/ Ethics / Moral duties (Continued) Accountability which means responsibility to shareholders whereby all individuals are responsible for their decisions/actions and they are subject to external scrutiny. Transparency which means disclosure of information (Limited by competitive position). Being the basis for the confidence that needs to exist between the corporation and all its stakeholders.

69 The review Example: FRC 2009 review of the combined code, main conclusions of the review are: The prime objective of the review is to focus attention on the good governance support to the long- term success of the company more than the compliance process by companies or investors. The combined code requires some updating, however, it remains broadly fit for purpose. The principles of the code are intended to encourage appropriate board behavior. If the company faced difficulty in following one of the principles, it should exercise its right not to comply but should give full explanation to the shareholders.

70 The review (Continued) There is scope for further improvements in the quality of communication between companies and investors including the development investors. of stewardship code for institutional The FRC to work towards adopting a single code for all listed companies by adopting those recommendations relating to the governance of banks/ financial institutions where appropriate. new code principles are proposed: - The role of the chairman and non-executive directors. - The composition of the board. - The commitment expected of directors. - Board s responsibility for risk. - Board evaluation. - Frequency of directors re-election.

71 The Suggestions A company should: Lay solid foundations for management and oversight. Structure the board to add value. Promote ethical and responsible decision making. Safeguard integrity in financial reporting. Make timely and balanced disclosure. Respect the rights of shareholders. Recognize and manage risk. Encourage enhanced performance. Remunerate fairly and responsibly. Recognize the legitimate interests of stakeholders.

72 Acknowledgement Reference Made to Material From: OECD FRC ASX

73 Thank You