Ch 5. Governance Flashcards
governance is about
people and processes. Good governance also involves developing an
appropriate culture that will underpin the delivery of strong business performance without excessive risktaking and through appropriate conduct of business operations.
corporate governance comes down to two ‘A’s
accountability and alignment.
Accountability
People need to be:
▶ given authority and responsibility for decision-making; and
▶ held accountable for the consequences of their decisions and the effectiveness of the work they deliver.
Accountability and the board
board will be most effective when its non-executive members feel accountable to shareholders
for effective delivery. Therefore, corporate governance has a strong focus on board structure and the
independence of directors
need to avoid group think
The role of the chair of the board is vital
in facilitating a balanced debate in the boardroom. Consequently,
many investors prefer that the chair is an independent non-executive director
Chair should be
INED not CEO to avoid concentration of power
Accountability and accounts
Hence the central importance of transparent and honest accounting by companies, and of the
independence of the audit of those accounts by the auditor
Alignment and the agency problem
This challenge
is magnified at larger corporations, not least public companies, where ownership is fragmented between
many investors owning a small fraction of the company. Corporate governance attempts to ensure that
there is greater alignment in the interests of the agents with the owners through incentives,
Alignment and executive pay
the major focus in terms of executive pay is always on addressing the agency
problem and helping to ensure that executives are not subject to incentives to perform in their own interests
and contrary to the interests of the owners.
usually will include performance related metrics
Nominations Committee
aims to ensure that the board overall is balanced and effective, ensuring that
management is accountable
Audit Committee
oversees financial reporting and the audit, delivering accountability in the accounts.
Remuneration Committee
seeks to deliver
a proper alignment through executive pay
Germany and the Netherlands,
have two-tier boards
with wholly non-executive supervisory boards overseeing management boards;
whereas others have single-tier boards,
with some dominated by executive directors (in Japan), some having
a combined CEO and chair (most commonly seen in the USA and France), and some lying in between these
models (the UK being an example).
In the UK, shocks around pay levels at newly-privatised utilities led to the
Greenbury report, which revised the
corporate governance code in 1995. It increased the visibility of remuneration structures
The Enron, Tyco and WorldCom scandals in the USA led to t
Sarbanes-Oxley Act in 2002. This lifted
expectations for greater integrity in financial reporting a
The financial crisis of 2008 led to v
Most notable of the legislative changes was the 2010 Dodd-Frank Act in the USA
(formally the Dodd-Frank Wall Street Reform and Consumer Protection Act), which among its multiple clauses
tightened standards for, and oversight of, banks.
In Japan, the Olympus scandal of 2011–12 revealed long-running
market deceit, apparently not for personal
gain but to maintain the apparent health of the company and jobs for its workforce, whereby more than US$1.5
billion (£1.15bn) in losses were hidden.
For minority shareholders protections - money being siphoned out of the business in ways that benefit the
controlling shareholders
a transaction affects more than 5% of any of a company’s assets, profits, value or capital, there must be additional disclosures (Class 2 transactions); it affects more than 25% of any of them then there must be a shareholder vote to approve the deal, based on detailed justifications (Class 1 transaction)
pre-emptive rights
These rights ensure that an investor has
the ability to maintain its position in the company (company should not issue shares without giving existing shareholders the
right to buy a sufficient amount in order to maintain their existing shareholding)
Dual class shares are often
frowned upon by many investors, and are rare outside the USA. They are, however,
becoming more visible and more common because of the current success of technology businesses, the
founders of which have been keen to retain voting control
e Corporate Governance Code in the UK was published in 2018. It includes 18
principles under five themes:
▶ board leadership and company purpose; ▶ division of responsibilities; ▶ composition, succession and evaluation; ▶ audit, risk and internal control; and ▶ remuneration.
ICGN’s Global Governance Principles - questions about the independence of an individual who:
had been an executive at the company, a subsidiary or an adviser to the company, and there was not an
appropriate gap between their employment and joining the board;
▶ receives, or has received, incentive pay from the company, or receives fees additional to directors’ fees;
▶ has close family ties with any of the company’s advisers, directors or senior management;
▶ holds cross-directorships or has significant links with other directors through involvement in other companies
or bodies;
▶ is a significant shareholder in the company, or is an officer of, or otherwise associated with a significant
shareholder, or is a nominee or formal representative of a shareholder or the state; and
▶ has been a director of the company for a long enough period that independence may have become
compromised.
