Chapter 4 - Other CG Issues Flashcards
Why would institutional investors want a company to comply with / follow a corporate governance code?
May be reluctant to invest if they don’t
Encourages good governance and stay accountable to its shareholders.
Companies with CG code - less risk (lose business, breach compliance, reputation)
Protect the interests of its own stakeholders.
Encourage directors to maintain good dialogue with shareholders and align their interests/consider concerns
What is the context behind the introduction of the Sarsbane-Oxley Act (2002) in the USA?
- Rules based approach
- Corporate collapses ex. Enron/Worldcom
- Bursting of ‘dot com’ bubble
What are 7 key changes introduced by SOX 2002?
1) Majority indepedent directors on boards of listed companies (regular executive sessions)
2) Audit Committee, Nomination Committee, Compensation Committee
3) Shareholder approval of all equity compensation plans
4) Rules on auditor independence (rotation and provision of non-audit services)
5) Certification of financial statements by CFO or CEO (with false being a crime)
6) Clawback of bonuses/incentive or equity-based rewards where misconduct of an individual
7) Civil action for employees subject to retaliation by their employer for whistleblowing
What are the key factors/issues re South Africa and King Code(s)
- Hybrid CG regime (principles Code and company law)
- Based on ‘stakeholder inclusive’ approach
- CR & ethics form part of its definition of corporate governace
- Apply and explain
- Well established- apply to all types of organisation
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Outcomes Based
Ethical culture,
Adequate effective controls,
Trust / good reputation / legitimacy with shareholders
Performance / value creation in a sustainable manner - Assumes application of principle - then describe what is implemented in line to achieving the assoicated principle
- The governing body of an org are accountable - they can chose how/what to disclose, but this needs to be public
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What changes/shifts in South African society does the King Code aim to align its best practice recommendations with? (3)
- Capitalism – financial capital to more inclusive capital market systems
- Reporting – ‘silo’ by capitals (human, financial etc) – move towards integrated reporting
- Capital markets – short-term to sustainable capital markets
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It is hoped these moves will allow organisations to see the appropriateness of CGto their sustainability of their organisation with the consequential economic development it should produce.
What are the key factors in Germany’s CG Framework?
- Two-tier board system
- Concentrated ownership<br></br>
Safeguards were introduced (for minority shareholders) with German Stock Corporations Act<br></br>
- Supervisory boards elected 50% by employees and 50% by shareholders
- Supervisory board appoint/dismiss management board (who manage the company)
- Prohibitions against unfavourable contracts being forced by large shareholders<br></br>
German CG Code 2017 contains 3 types of provision
* Legal stipulations (apply by law)
* ‘Shall’ recommendations - following ‘comply or explain’
* ‘Should’ suggestions - companies do not need to disclose any deviation
- Committment to Corporate Governance will be judged on the organisation’s application of ‘shall’ recommendations.
What are the key factors in Japan’s CG Framework?
- Shareholding is dispersed- primarily held by institutions and businesses
- Historically, CG model more like Europe - management give priority to employees rather than Anglo-US shareholder focus
- More recently - more market-orientated / adapting a hybrid approach to CG (elements of Euro and Anglo-US modles)
- Change in focus = government driven due to reforms in response to Japan economic issues
- Has a stewardship code for Institutional Investors (Principles for Responsible Institutional Investors) with 8 Principles
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Japan Corporate Governace Code
- Board responsibilities
- Equal treatment of shareholders
- Timely/transparent disclosure of appropriate information
- Cooperation with stakeholders other than shareholders
- Dialogue with shareholders
What are the key features of China’s CG system?
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Rules based
Laws
CG Code for listed companies
Listing Stocks and Trading Rules (set by each market)
<br></br> - Concentrated ownership structure
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Two-tier board system (BoD - manage company with management providing day-to-day, supervisory board oversee BoD to ensure compliant with law/AoA. The Supervisory Board may also inspect the company’s financial records. <br></br>
General CG Focuses - Protect minority shareholders
- Regulate controlling shareholders
- Disclosure and transparency
<br></br>Emphasises of most recent CG Code (2018)
- ESG
- Diversity and skills on the board
- Role of institutional investors as stewards
- Accountability of the board of directors
What are the 7 Nolan Principles of public life?
(HAILS OO)
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- Honesty - declare any private interests and revolve any conflicts of interest
- Accountability - regarding their decisions/actions - accountable to the public/only in the public interest
- Integrity - no involvemet with or obligations to organisations which could influence duties
- Leadership - promote and support principles and lead by example
- Selflessness - decisions made solely in the public interest
- Objectivity - choices regarding public decisions are made on merit
- Openness - be as open as possible regarding their decisions
What are other key public sector standards/frameworks?
2004 - Independence Commission for Good Governance in Public Service - “Good Governance Standards for the Public Sector”
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2007 - CIPFA & Solace framework for local government bodies- “Delivering Good Governance in Local Government Framework”
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2005/2015 - OCED revised guidelines — Corporate Governance of State-Owned Enterprises - how countries can more effectively manage responsibilities as company owners and thus make state-owned enterprises more competitive, efficient and transparent
What is the key legislation for CG in the not-for-profit Sector?
Charities Code (2020) - two sets of guideliness/diagnostic tool, for charities over and under £1m turnover annually
<br></br>HEADINGS
* Organisational purpose
* Leadership
* Integrity
* Openness and accountability
* Decision-making, risk and control
* Equality, diversity and inclusion
* Board effectiveness
(CGI Guidance Note ‘The Virtuous Cycle of Good Governance’ - April 2021)
Why have governance guidelines and codes of practice been developed for the not-for-profit sector?
- Increase in size and importance of voluntary sector.
- Perception of a decline in public confidence in charities. Restore public confidence.
- More competition for funding. Better governed charities are more likely to get funding.
- Lack of clarity about duties for voluntary board members.
- Growing demand for accountability to users/beneficiaries. Where and how money is spent on cause vs salaries and admin.
How does governance in the public sector and not-for-profit sector differ from corporate governance in private sector?
- No commercial pressure of accountability to shareholders.
- Not profit -making.
- Strongly influenced by** elected politicians** (advised by senior admin / ultimately accountable to electorate), the general public and pressure groups.
- Has its own specific circumstances and therefore adapted its principles of good governance.
What governance might family-owned companies wish to consider in order to minimise potential future conflict?
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Shareholder Level
- Agree/document vision, mission & values - shows those managing the direction the company should move in and under what ethical framework
- Set up structure where family members can interact with those running company (ToR/Arts agreed and written which will set expectations)
- Appointment/number of family members to be directors set out in AoA
- Mechanism to exit/sell shares (may use a fund which allows for family to sell shares at fair price, if this exists will need a committee to oversee management of such fund)
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Board Level (where board is family members only)
* Consider setting up an advisory board (experienced/respected individuals known to the family)
* Advisory board can help with areas like strategic planning/marketing/development of human capital/expansion into new markets
* Such could be seen as stepping stone to ‘opening company up’ to the appointment of indepedent directors -
Management Level
* Set-up of **education programmes/career planning** * Aim to **develop** **family** members so they can **take up** management **positions** (which **keeps** the company **under family control**) * Have **structures/procresses** in place: **committee** to **oversee** programme, **criteria** for **who** is **chosen** to participate, **how much** is to be **spent** **per individual** etc.
What are the 6 chapters of the G20/OCED Principles of Corporate Governance?
1) Ensure basis for an effective CG Framework (fair/transparent markets - efficient allocation of resources)
2) Rights/Equitable treatment of shareholders and key ownership functions (protect/faciliate exercise of shareholders’ rights / ensure equitable treatment inc. minority/foreign. Right to redress for violation)
3) Institutional investors / stock markets & other intermediaries (providing sound incentives through the investment chain / provide for stock markets to function in a way that contributes to good CG)
4) The Role of Stakeholders in CG ( recognise their rights via staute/mutual agreements and encourage cooperation which creates wealth/jobs/sustainability of financially sound enterprises)
5) Disclosure and transparency (ensure timely/accurate disclosure on all material matters)
6) Responsibilities of the board (ensure strategic guidance of company / effective monitoring of management by board and board accountability to company and its shareholders)
