Impact of corporate governance on strategy Flashcards
What is corporate governance?
the system by which an organisation is directed and controlled
What qualities ensure best decisions are made?
Integrity - straightforward and honest
Fairness - Respecting the rights and views of any group
Judgement - Making decisions that improve the organisations prosperity
Independence - being free from bias or undue influence
Scepticism - Having an open mind with no preconceptions
What qualities ensure honesty and transparency?
Transparency - providing open and clear disclosure, including voluntary
Probity - being truthful and not misleading
Responsibility - Acknowledgement of praise or blame
Accountability - answering for consequences of actions
Innovation - Change happens and governance muststay fit for purpose.
Principles
Rules
Principle based system - broad set of ideas toset corp gov behaviour, usually requiring. comply or explain disclosure.
Rules - Based on. flexible rules that must be complied with or else there are sanctions.
Sarbanes Oxley
Rules based. Aroswe form Enron scandal.
Should be rotation of audit partner every 5 years.
Most auditors are not allowed to carry out most non audit work
Audit committees are reponsible for appointment, renumeration and termination of auditor
annual reports should contain internal control reports
CEO and CFO should certify the appropriateness of the financial statements.
Non US companies that list their shares in the US must be audited in SOx way.
Not rigid enough on some issues and too rigid on others.
Directors may avoid consulting lawers if they believe SOx could override lawer client priv.
Companies are turning away from US markets
South Africa
King report. A voluntary (unless prescribed by law or stock listing) in integrated approach. Embraces social, environmental and economic aspects.
Requires acknowledgement of the important role they play in society.
Notes that achievement should be linked to:
Ethical culture
Good perfomrance
Effective control
Legitimacy
Apply and explain approach - explain how reached.
Singapore code of corp gov
Comply or explain (same as UK). Emphasis on description of practices and explaining any deviation from the code.
Ways diff to UK
Non Execs - at least 1/3 but half of chair isnt independent (UK is just at least half)
Chair and exec roles should be seperate people but. if not can be allowed. with suitable safeguards. (UK is just not the same person)
Reelection of directors - All directors submit for reappointment every 3 years (UK is every year for FTSE 350)
Renumeration for directors - based on effort and responsibiltiies (UKshould not include share optins or performance reelated benefits)
Composition of audit committee - at least 3 non exec with 2 members. inc chair having recent financial experience. (UK entirely made up of ind non exec with at least one having financial expertise)
Appraisals
The board should be appraised based on:
Independance and innovation
Industry familiarity
Active participation
Positive and enthusiastic
Business development
CPD
The devision of responsibiltiies at the hed of an organisation is most simply achieves by seperating
the roles of chair and chief exec
What are the responsibilities of the chair?
Providing leadership to the board, ensuring effectivness and. setting the agenda
Ensuring accurate and timeley info
Ensuring communication with shareholders and that their views are expressed to the board
Ensuring contribution from NED’s
Provide induction programme for new directors and in. board development
Meet with NED’s without exec present
Board appraisal
What are the4 responsibiltiies of the CEO?
Provide leadership to the business
providing accurate and timely info
Communicating efefctivly with significant stakeholders
Implement board decisions
Cooperate in induction and development
Cooperate in board appraisal
What is the chairs job?
to run the board of dirctors, normally non exec.
What is the CEO’s job?
Manage company through exec directors
What are non exec directors jobs?
To support the board in the areas of strateg, scrutiny, people and risk. Not exec position so can remain independent.
Unitary boards
A board structure with only one board of directors
Multi-tier
Two or three tiered with a varierty of representation
What are the advantages of unitary structure?
Equal legal responsibility
Easier cooperation and coordination
Presence of NED’s should lead to better decisions being made
Independent NED’s are less likely to be excluded from decision making and given restricted access to information
What are the disadvantages of unitary structure?
A NED cannot be expected to both manage and monitor
Time requirements on NED’s may be onerous
Emphasises the divide between the directords and shareholders
What are the main sub committees?
Audit
Renumeration
Nominations
Risk
Non exec directors
No exec, managerial, responsibilities or power. Job is to consider and safeguard the interests of shareholders.
Includes strategy, risk, scrutiny and deciding renumeration for execs.
Directors renumeration
Enough to attract, retain and motivate.
Best to consider:
Fixed and variable elements
Cash and non cash elements
Long and short term elements
Immediate and deferreed elements
Service contracts
should ideallt be for 12 months or less as if ended early the payout can be deemd as payment for failure.
Can also reduce notice period. Cease payment once they’ve found new employment or giving shares.
annual report should disclose the renumeration policy, arrangements for directors performance conditions attached to renumeration
duration of contracts with directors and notice periods and the termination payments under such contracts
Insider system
when most companies listed on the stock exchange are owned by a small number of dominant investors (eg family owned).
Advant:
Easier to establish ties between owners and managers so the agency problem is reduced
Easier to influence management
Smaller base of shareholders more likely to be willing to make long term strategic options
Disad:
Discrimination against smaller shareholders
Tend not to develop more formal corp gov structures until forced to
May be reluctant to hire outsiders or NED’s
More prone to misuse of funds
Large shareholdrs tend to avoid which drives up share price of outsider systems.
Outsider systems
where shareholdering is more widely dispersed by large numbers of investors (eg stock market shareholders)
Manager ownership seperation. More likely in UK due to strong protection for minority interests.
Advant:
More likely robust legal and corp gov to protect shareholders
Shareholders have voting rights that they caqn use to exercise control
Hostile takoeovers are more frequent but the threat of these acts as a disipline mechanism on company management are a deterrent
Disad:
More likely to have an agency problem and costs
Larger shareholders tend to have long term priorities nd prefer to sell their shares
