CG Approaches and Development Flashcards
Principles Based Approach
- Set out broad principles
- Comply or explain
- Allow investors to decide if agree with reasons for departure.
- Markets rather than state enforce and regulates - seen as more efficient
FOR
- Cheaper
- Flexible: own approach own needs. Low risk vs high risk industries
- Applies across different legal jurisdictions: More effective for multi national business
AGAINST
- Confusion of what is compulsory
- Assumes markets understand consequence/ risks of Non compliance. Non specialist shareholders may not understand
- No consistency in approach
- Requires regime where shareholders have meaningful rights by law
- Too broad: little use as a guide of best CG
Rules Based Approach
- Comply with detailed and rigid code
- Non compliance unjustifiable, succeed or fail
- No theoretical distinction between major or minor compliance failures
- Investors rely on third party to penalise (Law/Judiciary)
- Letter of law rather than spirit
FOR
- Consistent - Standard for all companies
- Easier and Clear compliance - unambiguous, no interpretation
- Criminal deterrent for non compliance
- Greater confidence in compliance
AGAINST
- Too rigid: cannot amend regardless of illogical situations
- Exploitation of loop holes
- Legal costs; disproportionate in minor areas of compliance
- No incentive to exceed the rules
- Checklist/ box ticking approach (no culture changing); companies lose perspective of whats important from CG; disproportionate management time spent in areas less important to shareholders.
Insider Systems
- Owned and controlled by small number of major shareholders (families, banks)
- Little division of ownership and control. No Agency gap/risk
Adv
- Reduced agency
- Easier to influence through dialogue
- More willing to take long strategic view of investment
DisAdv
- Discrimination against minority shareholders
- No development of formal governance structures
- Reluctance to employee outsiders in senior positions and NED
- Prone to opaque financial transactions and mis-use of funds
Outsider Systems
More widely dispersed shareholding with manager-ownership separation
Prominent in jurisdictions with strong protection for non controlling minority interests
Adv
- Developed robust legal and governance regimes
- All shareholders can exercise control
- Takeovers more frequent and act as disciplining mechanisms for management
DisAdv
- Agency problem and costs more likely
- Larger shareholders have short term priorities
Sarbanes-Oxley (SOx) 2002
PROVISIONS
• Auditor Independence - restricted in additional non audit services can provide client
• Audit Committee - must have; all NEDs w at least 1 financial expert; responsible for appointment, oversight and compensation of external auditors
• Audit Partner - rotation of lead 5yrs
• Restrictions on dealing - directors prohibited dealing at sensitive times
• Increase Financial Disclosures - detail off balance sheet financing
• Accuracy of Financial statements - vouched/ signed by CEO and CFO
• Internal Control Report - In Annual report detailing ICS (reviewed by auditors)
IMPACT
- Listed companies need to fulfil requirements
- Accountancy firms stripped of almost all non audit work of clients
- Lawyers required to whistle blow
- Non US companies listed in US need to comply
- US influence others to Rules Based
CRITICISMS
- Not strong enough in some areas, too rigid in others
- Directors avoid lawyers due to lawyer-client privilege override
- Companies turn away from US
Others
- Audit fee costs
- Onerous documentation
- Reduced flexibility
- Reduced risk taking
- Limited impact on ability to stop corporate abuse
- Legislation defines minimum only
For and Against developing CG Codes
FOR
• Market confidence - Attract investors
• Reduce Fraud, Risk and inefficiency
• Encourage best practise thereby improving management performance
• Guide and specify behaviour which will improve CG and discharging of agency responsibilities
• In principles based, reduce chances of inflexible expensive rules based
AGAINST Reactive approach Decrease directors power Red tape No added value to business Cannot stop fraud
Development of UK CG
Cadbury 1992 - BoD monitored, CEO and Chair split. Greater dialogue with institutional investors. Communication and disclosure (audit and accountability)
Greenbury 95 - Directors rem balance between salary and performance
Hampel 98 - Combined Code providing principles of good CG
Turnbull 99 - need appropriate ICS
Higgs 03 - role of NED
Tyson 03 - recruitment and development of NED
2010 - name changed to UK CG Code with sections redrafted
Section A - Leadership
Separate CEO and Chair
Effective BoD
Board Balance (50:50 NED and Exec’s)
Section B - Effectiveness
Board Balance (age, exp, gender background)
Nominations committee (maj NED) - directors must add value
Regular reelection (3 yrs)
CPS and induction
Section C - Accountability
Financial reporting
Audit Committee (all NED, 1 w finance ex)
Sound system of IC
Section D - Remuneration
3-all NED’s
Attract, Motivate, Retain
Section E - Relations with shareholders
Satisfactory dialogue
QansA @ AGM
Development of UK CG
Cadbury 1992 - BoD monitored, CEO & Chair split. Greater dialogue with institutional investors. Communication & disclosure (audit & accountability)
Greenbury 95 - Directors rem balance between salary & performance
Hampel 98 - Combined Code providing principles of good CG
Turnbull 99 - need appropriate ICS
Higgs 03 - role of NED
Tyson 03 - recruitment & devel of NED
2010 - name changed to UK CG Code with sections redrafted
Section A - Leadership
Separate CEO & Chair
Effective BoD
Board Balance (50:50 NED & Exec’s)
Section B - Effectiveness
Board Balance (age, exp, gender background)
Nominations committee (maj NED) - directors must add value
Regular reelection (3 yrs)
CPS & induction
Section C - Accountability
Financial reporting
Audit Committee (all NED, 1 w finance ex)
Sound system of IC
Section D - Remuneration
3-all NED’s
Attract, Motivate, Retain
Section E - Relations with shareholders
Satisfactory dialogue
Q&A @ AGM
