Chapter 5 Flashcards
When was first Corporate Governance code created ?
It was created in 1992 by the Cadbury committee as a result of several accounting scandals.
What was the key principles of the Code ?
what The Cadbury Commission recommended is still considered best practices. For example every public company should have audit comittee meetings at least twice a year. Another is that no individuals should have @unfettered powers of decision.
How Code is different among countries ?
All Code contains basic principles: alignment and accountability. At most basic level there are two-tier boards (management board and non executive boards, Germany) and single tier board (with domination of executives, Japan, US, France). Uk in the middle
In which contry now there is no one official Code standard ?
In US, because regulation id delegated on state level. In most countries if you don’t comply with the Code you must explain why (comply or explain, apply or explain, if not, why not).
What are the problems with Code
Inflexibility. Sometimes investor are expecting much more compliance than explanation. As a result companies may look negatively on corporate governance! Sometimes one of the reason is advisory firm that mediate the discussion between investor and the Board and investor’s unwillingness to make independent judgement.
What are the fundamental problems with minority shareholders?
Minority shareholders can be siphoned out of the business in way that benefit the controlling shareholders. That is why related party transaction are often under scrutiny.
- Minority does not want business to be changed dramatically. So in many jurisdiction voting right in case of big changes
- Protection of pre-emption rights: company should not issue shares without giving existing shareholders the right to buy sufficient amount. Sometimes relatively small issuance (5-10%0 can be granted without fully pre emptive basis. But even in this case large institutional investors on soft basis may receive new shares
- Dual - class shares. Different voting rights of different shares classes. Academically proven that after 7 years of company existence different rights became negative for the company.
What are the 3 Committies in a board ?
Audit, remuneration, nomination (with the task of preparing the election of Board members, the Chairman of the Board, and remunerations to Board members and Board committees)
What other form of single tier form
USA / France CEO and chair of Board one executive. In Australia CEO is part of Board but not traditionally chair
In Japan single-tier dominated by executives
In most other countries Board is dominated by non executives.
There is no ideal corporate governance structure! Ideally is to go beyond local standards contained in country specific codes.
Good starting point is OECD Corporate Governance Factbook
What are the critical elements of CG in Australia ?
Single - tier
Shareholders vote for no executives
Boards are small 6-7 people
Strong influence of shareholders on companies (partially through the dominance of pension mega funds).
A lot of sharehoder resolution with threshhold 5% - easy to reach via social media campaign
CG in France ?
Single - tier
40% should be female
30% employees
Strong control of third party transactions
Requirements of 2 auditors and the existemce of double voting rights
Double voting right - double voting right for long standing shareholders, defined as those who held hsrelodings in particular way for at least 2 years. In reality it strengthen rights of management vs international or minority investors (change of custodian or fund manager may influence)
CG in Germany
Two - tier structure.
Supevisory board + Management board
SB: half appointed by shareholders, half appointed from among workforce.
What is the CG in Italy ?
Typically single-tier with independent chair and single executive. Historically matket was dominated by state or family businesse -> control overboard. Now 30% of board backed by minority shareholders.
