Mid-term Flashcards
1
Q
WHAT IS CORPORATE GOVERNANCE?
A
2
Q
“Corporation”
A
derives from corpus, the Latin word for body, or a “body of people”
3
Q
“Governance”
A
is the process of overseeing the control and direction of something with the help of norms, rules,
laws, language, etc.
4
Q
MANAGEMENT
A
the act or art of managing : the conducting or supervising of something (such as a business) (Merriam-Webster).
5
Q
A
Circle - board with non-executive
Triangle - management
6
Q
krc
A
7
Q
Issues to dwell on
A
- Growing complexity of the companies;
- Changes in Ownership patterns;
- Lack of board responsibility for enterprise risk management and business continuity;
- Governance by rule or by principle?
- Unitary board “marking their own exam papers”;
- Independent directors who do not know enough about the business;
- Members’ changing expectations of directors and boards;
- Society’s changing expectations of directors and boards;
- Corporate Governance affected by cultural considerations.
8
Q
DIFFERENT CORPORATE GOVERNANCE PERSPECTIVES
A
- Operational perspective;
- Relationship perspective;
- Stakeholder perspective;
- Financial economics perspective;
- Societal perspective.
9
Q
Focus
A
governance structures, processes, practices.
10
Q
Emphasis on the shareholders, the board, and the management –
A
their activities and interactions.
11
Q
RELATIONSHIP PERSPECTIVE
A
“The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization – such as the board, managers, shareholders, and other stakeholders – and the rules and procedures for decision-making”
12
Q
STAKEHOLDER PERSPECTIVE
A
Those involved in and affected by corporate governance. It is about the activities of the board and the relationship it has with stakeholders and/or members, management, auditors, regulators, etc.
13
Q
FINANCIAL ECONOMICS PERSPECTIVE
A
14
Q
OPERATIONAL PERSPECTIVE
A
15
Q
SOCIETAL PERSPECTIVE
A
16
Q
BOARD PERSPECTIVES AND PROCESSES
A
17
Q
Board structures
A
18
Q
Types of constitution
A
Formal
Informal
19
Q
Formal Constitution
A
under the law, f.e. under company law or the law registering cooperatives.
20
Q
Informal Constitution
A
consisting of little more than a name, a purpose, and a set of rules.
21
Q
Control levels
A
Level 1
Level 2
Level 3
22
Q
Level 1 of control
A
– the regulatory level, with laws, regulations, and levels
23
Q
Level 2 of control
A
– the advisory level involving voluntary codes of conduct
24
Q
Level 3 of control
A
the personal level, concerning individual beliefs and behaviour
25
The Agency Dilemma
“The directors of companies, being managers of other people’s money, cannot be expected to watch over it with the same vigilance with which they watch their own”.
26
AGENCY THEORY STEWARDSHIP THEORY
27
SHAREHOLDER -
is a person, company, or institution that owns at least one share of a company's stock or in a mutual fund.
28
TYPES OF SHAREHOLDERS
Common Shareholder
Preferred Shareholder
Debenture holders
29
Common Shareholder -
those who own the company. They have voting rights in the company depending upon the number of shares owned by them. They have the right to question the management of the company’s work
30
Preferred Shareholder -
do not have any voting rights in the company and thus cannot interfere with the working of the management of the company
31
Debenture holders -
are not the owners but are the creditors of the company. They do not have any voting rights. Instead of receiving dividends, they receive interest payments from the company.
32
SHAREHOLDER RIGHTS
- The right to inspect the company’s books and records
- The power to sue the corporation for the misdeeds of its directors and/or officers
- The right to vote on key corporate matters, such as naming board directors and deciding whether or not to green-light potential mergers
- The entitlement to receive dividends
- The right to attend annual meetings, either in person or via conference calls
- The right to vote on critical matters by proxy, either through mail-in ballots or online voting platforms if they’re unable to attend voting meetings in person
- The right to claim a proportionate allocation of proceeds if a company liquidates its assets.
33
INFORMING SHAREHOLDERS IS KEY
- Company’s financial situation;
- Performance;
- Ownership;
- Governance.
34
DIRECTOR -
is the senior operating officer or manager of an organization or corporation. Their duties are similar
to those of a chief executive officer (CEO) of a for-profit company. The executive director is responsible for strategic planning, working with the board of directors, and operating within a budget.
35
BOARD MEMBER -
is an elected participant on the board of directors of a corporation or the supervisory committee of an organization.
36
Non-executive director (NED)
is a member of the board who does not hold any executive management position in the company. In the board circle but not in the management triangle.
37
Independent non-executive director (INED)
is a director with no affiliation or other relationship with the company, other than the directorship, that could affect, or be seen to affect, the exercise of objective, independent judgment.
38
Connected non-executive director (CNED)
is a director who, although not a member of the management team, does have some relationship with the company.
39
A shadow director
is a person who, although not formally a member of the board, is able to exert pressure on the decisions of that board. In many jurisdictions, a shadow director can be held liable as though a legally appointed director of the company
40
Alternate director
is a person who can take the place of another director if that director cannot attend meetings. Often named for directors who live in different countries and cannot attend every board meeting.
41
Nominee director
is a director who has been nominated by the board by a major shareholder or other contractual stakeholder, such as a significant lender, to represent its interests.
42
Governing director
is a title used mainly in Australia to describe a director with dominant powers in a private company Corporate director is another company, not a human being.
43
Associate director
has the title of director but is not legally a member of the board at all. F.e. ‘director of operations’, ‘risk
and compliance director’, etc.
44
DIRECTORS’ DUTIES
A duty of trust
A duty of care
45
A duty of trust -
to exercise a fiduciary responsibility to the shareholders.
46
A duty of care
To exercise reasonable care, diligence, and skill.
47
THE UNITED STATES RULE-BASED MODEL
48
NEW YORK STOCK EXCHANGE
49
PRINCIPLES OF THE CORPORATE GOVERNANCE CODE FOR THE COMPANIES LISTED ON NASDAQ VILNIUS
Principle 1: General meeting of shareholders, equitable treatment of shareholders, and shareholders’ rights
* Principle 2: Supervisory board
* Principle 3: Management Board
* Principle 4: Rules of procedure of the supervisory board and management board of the company
* Principle 5: Nomination, remuneration, and audit committees
* Principle 6: Prevention and disclosure of conflicts of interests
* Principle 7: Corporate remuneration policy
* Principle 8: Role of stakeholders in corporate governance
* Principle 9: Disclosure of information
* Principle 10: Selection of the company’s audit firm
50
SUBSIDIARY COMPANY
* Each company governs itself and manages its own affairs;
* Subject to overall group-wide policies and resource allocation;
* Control exercised through the group’s shareholdings;
* Profitability and return on investment – measures of performance;
* Subsidiary companies run diverse businesses.
51
GROUP-WIDE GOVERNANCE
* Group companies treated as divisions or departments of the company;
* Control exercised through the group’s management control system;
* Performance measures set for each subsidiary company depend on the group control systems.
52
NOT-FOR-PROFIT ORGANIZATIONS
- they are working for the benefit of society and may have multiple objectives, not only long-term profit and growth;
- may have a ‘multiple bottom line’ to monitor these objectives;
- may have multiple stakeholders to satisfy;
- status may be rooted in the law of trusts, other;
- nomination and election to the governing body may come from members, funding bodies including state, representative bodies.
53
CORPORATE GOVERNANCE PRINCIPLES APPLICABLE TO ALL UNLISTED COMPANIES
* Principle 1: Shareholders should establish an appropriate constitutional and governance framework for the company.
* Principle 2: Every company should strive to establish an effective board, which is collectively responsible for the long-term success of the company, including the definition of the corporate strategy. However, an interim step on the road to an effective (and independent) board may be the creation of an advisory board.
* Principle 3: The size and composition of the board should reflect the scale and complexity of the company’s activities.
* Principle 4: The board should meet sufficiently regularly to discharge its duties and be supplied in a timely manner with appropriate information.
* Principle 5: Levels of remuneration should be sufficient to attract, retain, and motivate executives and non-executives of the quality required to run the company successfully.
* Principle 6: The board is responsible for risk oversight and should maintain a sound system of internal control to safeguard shareholders’ investment and the company’s assets.
* Principle 7: There should be a dialogue between the board and the shareholders based on the mutual understanding of objectives. The board as a whole has a responsibility to ensure that a satisfactory dialogue with shareholders takes place. The board should not forget that all shareholders have to be treated equally.
* Principle 8: All directors should receive induction on joining the board and should regularly update and refresh their skills and knowledge.
* Principle 9: Family-controlled companies should establish family governance mechanisms that promote coordination and mutual understanding amongst family members, as well as organise the relationship between family governance and corporate governance.
54
BENEFICIAL OWNER -
is a person who enjoys the benefits of ownership even though the title to some form of property is in another name.
55
BENEFICIAL OWNERSHIP REGISTRY -
is the central repository of information held by companies and industrial & provident societies in their own internal registries in respect of the natural persons who are their beneficial owners/controllers.
56
BOARD PERSPECTIVES AND PROCESSES
57
krc
58
clash
59
COMPANY STRATEGY
A GUIDING STAR OR PUBLIC RELATIONS EXERCISE?
60
MISSION –
a description of a company’s culture, values, or purpose of being and how they relate to various company’s stakeholders.
61
VISION –
describes what a company desires to achieve in the long run, generally in a time frame of five to ten years, or sometimes even longer.
62
STRATEGY –
is an action that managers take to attain one or more of the organization’s goals. Strategy can also be defined as “A general direction set for the company and its various components to achieve a desired state in the future. Strategy results from the detailed strategic planning process”
63
TACTICS –
specific steps that are taken to actualize goals in the short term and long term in an organization. Tactics are influenced by an organization’s strategic goals.
64
CORE COMPETENCES OF A DIRECTOR
* Strategic reasoning, perception, and vision;
* A critical faculty capable of quantitative and qualitative analysis and financial interpretation;
* Planning and decision-making capabilities;
* Communication and interpersonal skills;
* Networking and political abilities.
65
DIRECTORS’ DUTIES
66
DIRECTORS’ RIGHTS
67
KNOWLEDGE OF THE COMPANY INCLUDES:
68
ROLES OF A DIRECTOR
1. Bringing wider business and board experience to the identification, discussion, and decision-making issues that the board, not management should be handling;
2. Adding specialist knowledge, skills, and know-how to board deliberations;
3. Being the source of external information for board discussions – a window on the world for other directors;
4. Being a figurehead or an ambassador for the company, being able to present it in the outside world;
4. Connecting the board to networks of useful people not otherwise available to the board;
5. Providing status to the board and the company, adding capability, reputation, and position;
7. Providing independent judgment, the ability to see issues in their totality;
8. Being a catalyst for change;
9. Being a monitor for executive activities;
10. Playing the role of watchdog;
11. Being a confidante or sounding board for the chairman, the CEO or other directors;
10. Acting as a safety valve, able to act in a crisis in order to release the pressure, and prevent further damage.
69
WHY UNITARY BOARDS FORM SUBCOMMITTEES?
* To enable independent directors to meet separately from the board as a whole, in order to fulfill their oversight roles;
* To delegate board activities to reduce the burden on the board as a whole;
* NB. The importance of audit, remuneration, and nomination committees.
70
ROLES OF A CHAIR
* Leadership of the board;
* Management of meetings;
* Strategic leadership;
* Linking the board with management;
* Arbitration between board members and others’;
* Being the public face of the company.
71
IN LITHUANIA
* Laws foresee the optional existence of boards (managerial bodies) and supervisory councils (supervisory bodies).
* Listed companies:
* Less than half of companies have supervisory councils; all
banks do;
* In the majority of companies CEO and the chair of the board are
separate;
* Few independent/non-related/non-executive board members;
* Only a few have audit committees;
* Limited information to stakeholders.
72
IMPORTANT LEGISLATION TO BE AWARE OF
* Republic of Lithuania Law on Companies
* Republic of Lithuania Law on State and Municipal Enterprises
* Republic of Lithuania Law on Partnerships
* Republic of Lithuania Law on Individual Enterprises
* Republic of Lithuania Law on Public Institutions
* Republic of Lithuania Law on Cooperative Societies
* European Economic Interest Grouping
* Law on European Companies
* Law on European Cooperative Societies
* Law on Cross-Border Mergers of Limited Liability Companies
73
BOARD STYLE AND CULTURE
Board Style is a function of:
* Board leadership
* The chairman’s role, abilities, and performance
* Board size
* Board composition
* Balance of executive and outside directors
* Board membership
* Board culture
* History, tradition, experience
* Cultural context
* Need to balance concern for relationships with concern for achieving board success
(task).
74
Criteria that influence board culture:
* Board traditions
* Corporate vision
* Attitudes to innovation
* The exercise of control by the board
* Decision taking by the board
* Leadership of the board
* Commitment of directors
* Adaptability by directors
* Collaboration between directors
* Conflict between directors
* Relationships between directors
* Communication between directors
* The significance of status
* The importance of conformity
* The extent of trust
75
Hofstede’s Cultural Dimensions
* Power distance;
* Individualism;
* Masculinity;
* Uncertainty avoidance;
* Long-term orientation;
* Indulgence.
76
TYPES OF DIRECTORS’ POWER
77
TO WHOM IS A BOARD ACCOUNTABLE?
78
The board can be influenced by:
* Dominant shareholder or group of shareholders putting pressure on the board;
* Threat of a potential takeover;
* Prospect of litigation;
* Influence of the auditors;
* Effects of legislation and regulation;
* Media pressure;
* Risk of damage to personal reputations;
* Dominant or charismatic leader;
* Changing business circumstances.
79
A CORPORATE CONFLICT OF INTEREST
occurs if a company (and therefore its shareholders) takes advantages of its unique position of trust.
80
A PERSONAL CONFLICT OF INTEREST
arises if a directors could benefit personally from a situation involving the company or from a decision taken by the board.
81
A sound ethics policy will:
* be orientated toward corporate values, rather than organizational discipline;
* seek genuine commitment rather than being a cosmetic exercise;
* recognize the cultural context of the company and its stakeholders;
* avoid credibility gaps between ethical codes and actual behavior;
* link with corporate governance policies and practices;
* have associated ethics management systems, including information and control systems, regular audits, policy review procedures, and social accounting systems;
* demonstrate accountability with regular reports.
82
CORPORATE GOVERNANCE BELOW BOARD LEVEL
83
CORPORATE GOVERNANCE BELOW BOARD LEVEL (2)
84
CORPORATE GOVERNANCE BELOW BOARD LEVEL (3)
85
