Other governance issues Flashcards
South Africa and the King codes?
The south Africa corporate governance framework is often described as a hybrid corporate governance regime, as some of its provisions follow the principle-based approach, King IV, and others are rule based, being found in a number of laws that apply to companies and directors, including the companies Act of South Africa of 2008.
4.1 King IV
King IV assumed application of the principles set out within it, this is why it has adopted the ‘apply and explain’ regime. This disclosure is an explanation of the practices that have been implemented and how these support achieving the associated governance principle.
The governing body can choose where and how to make the disclosures, which should be publicly accessible.
The king reports have repositioned corporate governance in South Africa as a method of achieving sustainability of organisations than just a method of protecting investors.
The integration of corporate responsibility and ethics into the definition of corporate governance is also seen as essential in a region struggling with issues such as corruption, health issues and lack of much needed skills.
Corporate governance framework in China?
China follows the two-tier board system originating from Europe, whereby Chinese companies have:
- A board of director which is responsible for the management of the company including the oversight from an operational perspective of the management who run the company on a day-to-day basis and
- A supervisory board which is responsible for ensuring that the board of directors and management do not violate laws or the company’s articles of association which includes the company’s financial records
China’s corporate governance framework is rules based and costs of the:
- Laws
- Code of corporate governance for listed companies 2018
- Listing stock and trading rules made by the individual stock exchanges.
The Chinese code emphasis on environmental social and governance disclosure, the role of institutional investors as stewards, the accountability of board directors, and board member skills and diversity.
The US and Sarbanes – Oxley Act 2002 (SOX) to Corporate Governance?
The US and Sarbanes – Oxley Act 2002 (SOX) to Corporate Governance:
The US has a rules based approach to corporate governance in response to the corporate collapses in the US in the early 2000’s among them was Enron and Worldcom and the stock collapse following the bursting of the dot.com bubble.
The Sarbanes-oxley act of 2002 was enacted, the securities and exchange commission (SEC) adopted and new rules and the new York stock exchange and Nasdaq stock market changed their standards of governing listed companies.
Here are but a few:
- Section 307 – adopted a rule that required all stock markets to adopt standards in their listing rules governing the composition and functions of the audit committees and the independence of directors.
- Section 208 – Introduced new rules on auditor independence, restricting the non-audit services an auditor could provide to the company, introducing a ‘cooling off’ period for auditors, and audit partner rotation and expanded disclosure by the company relating to its auditors.
- Section 101 – of SOX introduced an independent, non-governmental board, the public company accounting oversight board to oversee the audit of the public companies.
Japan’s governance framework?
In the attempt to open the market to foreign investors Japan issued its ‘Principles for responsible institutional investors: Japan’s stewardship code’.
Comprises of 8 principles which aims to provide a framework for institutional investors in fulfilling their stewardship responsibilities with regard to both clients, beneficiaries, investee companies which contributes to the growth of the economy of Japan as a whole.
It adopts a ‘comply or explain’ regime.
A few of the principles are:
- Institutional investors should have a clear policy on how they fulfil their stewardship responsibilities, and publicly disclose it.
- Institutional investors should have a clear policy on how they manage conflicts of interest in fulfilling their stewardship responsibilities and public disclose them
- Institutional investors should monitor investee companies so that they can appropriately fulfil their stewardship responsibilities with an orientation towards the sustainable growth of the companies
- Institutional investors should seek to arrive at an understanding in common with investee companies and work to the solve problems through constructive engagement with investee companies
- Institutional investors should have a clear policy on voting and disclosure of voting activity
Japan’s Corporate governance Code?
Japan’s Corporate governance Code
It defines Corporate governance as ‘ a structure for transparent, fair, timely and decisive decision making by companies with due attention to the needs and perspectives of shareholder and also customers, employees and local communities’
The code adopts a principle – based approach.
Why have different countries’ corporate governance best practices developed in different ways?
Corporate governance has developed in different ways in different countries to reflect their distinct legal systems and also the specific issues that they are dealing with.
Key issues in corporate governance?
- composition of boards
The make up of boards is key issue in governance. The focus is on:
- More representatives Boards: there are quotas for women on boards and growing requirements for more social and ethnic diversity on boards and within the pipeline for board succession
- Independence of board members to ensure that there is challenges to a dominant chairmen or CEO.
2. Financial reporting
Every company under the cA2006 is required to keep accounting records which enable the directors to prepare accounts which that comply with the appropriate accounting standards.
The accounts should be reasonable accuracy as to the financial position of the company at that time.
However, evidence has show that directors and senior managers for many reasons disguise the true financial performance of their company. This may be to:
- Enhance their own rewards
- Cover up a fraud
- Cover up poor performance due to their own lack of experience and understanding of the business.
- Stakeholder relations
172 of the CA2006 to take into consideration the interests of employees and foster business relationships with suppliers, customers and others.
The companies (Miscellaneous Reporting) Regulation 2018 have introduced reporting requirement for companies on their compliance with s 172. Companies will have to disclose how their directors have engaged with employees ad other stakeholders and how they have taken stakeholder interest into considering in their decision making.
For list companies, the UK Corporate Governance Code 2018 has suggested methods of workforce engagement that boards could adopt.
They include:
- A director appointed form the workforce
- A formal workforce advisory panel or
- A designated non-executive director
- Corporate Culture
Growing focus on corporate culture and the important for long term sustainability of the company on getting the culture embedded within the business practices of the company.
Code 2018 has provisions requiring boards to ‘assess and monitor culture’. Guidance provided by FRC, in the ‘Guidance on board effectiveness’, on how boards may be able to accomplish compliance with this provision, but boards must work out how they are going to do this and make disclosures about effectively based on their individual circumstances and challenges.
- Social responsibility and sustainability
This has grown over the years.
Why? The millennial generation entering the workplace.
Millennials want to be heard and have a voice in both contributing and making a difference in a broader community. They consistently share their views and opinions through social media platforms.
This has led to a demand for social responsibility as potential workforce and consumer-based look to do business only with those whom they feel are making a positive impact on society.
Boards are having to justify their activities more on the long term sustainability of their organisations rather than the previous short term view of meeting quarterly and half yearly targets.
- Remuneration of directors and senior executives
The issue of pay equality between men and women has been on the news i.e. BBC in 2017. This poses a reputational risk for many organisations. Boards should be reviewing their pay policies and ensuring that their remuneration practices are fair. - Risk Management
Since the global financial crises (2008-9) there has been growing expectation that the boards of listed companies focus more on risk management.
The FRC ‘Guidance on risk management, internal control and related financial and business reporting’ issued in 2014, made it clear that the board has a primary role in the identification and management of risk.
Corporate governance issues in developing and emerging markets?
Many organisations in developing and emerging countries are either state or family owned and or not listed and this brings with its own governance challenges:
- Lack of ownership control by government, no monitoring of management which is often lacking in capability and boards filled with inexperienced directors who would rather be somewhere else
- Conflict in family-owned businesses between controlling family members, informal governance structures and often inexperienced boards and management teams.
Governance and Management?
Bob Tricker – ‘management is about running the business and governance is about seeing that it is run properly’.
Board of directors is responsible for the ‘governance’ of the organisation: setting up the structures, policies and procedures and ensuring that they operate effectively.
The powers to manage the day-to-day affairs of the company are usually delegated to the CEO and their executives management team.
What is the difference between compliance and governance?
- Compliance answers ‘what is required’. It leads to an organisation adopting the appropriate structures, policies and procedures. On its own its purely a box-ticking exercise.
- Governance answers ‘how do we make this effective’.
The company secretary should ensure that the infrastructure is appropriate for the organisation, that people are focused and work well together, resources are used effectively and information flows smoothly.
Decisions are then made effectively, and this all contributes to a successful, sustainable organisation.
If the infrastructure is not appropriate for the organisation, then the anticipated ‘cultures’ will not be developed.
Those within the organisation will develop their own cultures which may not be managed and often leads to bad practices, such as failure to follow policies, the misuse of resources, breakdown of important relationships, etc. this threatens the performance and long-term sustainability of the organisation.
Why is knowing your purpose important for an organisation?
Knowing the organisational purpose is very important as everything stems from it: its vision, mission, strategic goals, and governance framework including risk management.
It only through knowing the purpose and focusing efforts and resources on achieving that purpose that organisations can be successful in the long run.
If an organisation has clarity of the purpose then its employees know what they are working to, investors know what they are investing in and management know how to focus their resources and manage their risks.
For the company secretary / governance professional knowing the organisational purpose helps set up the organisation’s governance framework of structures, policies and procedures.
Implementation of a governance framework?
Implementation of a governance framework
When considering implementation of the appropriate governance framework, the company secretary or governance professional should consider:
- The organisations purpose
- The assimilation of corporate governance practices and
- What constitutes success for their organisation
- Purpose
It’s the reason why the company is in business and is set out in the memorandum of association. Knowing the purpose is very important as everything stems from it such as the vision, mission, strategic goals etc.
- Assimilation of corporate governance practices
Based on the organisational purpose, the company secretary / governance professional can advise the board on the appropriate corporate governance requirements for the organisation. They should ensure that the organisation puts in place the structures, policies and procedures required to meet the organisation’s specific needs, manage its risk ad comply with the appropriate laws and regulations, standards and codes that apply.
- Governance answers the ‘how do we make this effective’ question.
Company secretary / governance professional needs to ensure that the infrastructure is appropriate for the organisation, that people are focused and work well together, resources are used effectively, and information flows smoothly.
Decisions are then made effectively, which contributes to a successful and sustainable organisation.
If the infrastructure is not appropriate for the organisation, then the anticipated ‘cultures’ will not be developed and organisations will develop their own cultures which may not be managed and then may lead to bad practices such as failure to follow polices, misuse of resources, breakdown of important relationships.
What is the ‘comply or explain rule for listed companies?
‘Comply or explain’ refer to the system whereby a company is asked to comply with a voluntary principles-based code of best practice.
Where the company believe that is not in its best interests to ‘comply’ with a provision of the code it is required to explain to shareholders why they have not complied.
The company’s shareholder and shareholder representative bodies are then expected to assess whether the explanation is acceptable or not. The UK Corporate governance code works on the premise of a ‘comply or explain’ code.
How does ‘comply and explain’ differ from the ‘apply and explain’ rule in King IV?
The term ‘apply or explain’ was adopted in the South African King Code for two main reasons.
• The code first the first time, applied to all types of entities regardless of their form of establishment or incorporation.
These entities under a ‘comply or explain’ regime would only have had to the option of complying or not. As many of the entities were not listed companies, which the corporate governance practices was originally designed for, it was felt that the regime would put off many entities from adopting a good corporate governance.
Asking them how they were ‘applying’ the principles with the code was a less harsh way of reporting on what they were doing as they did not have to give a yes or no answer, they could tell a story of how corporate governance was being adopted in their organisations.
• To avoid a ‘mindless response’ to the corporate governance recommendations contained within the code. There was a felling amongst many stakeholders that the ‘comply and explain’ regime was leading to companies adopting a tick-box approach to corporate governance, adopting the provisions without considering whether they were suitable for their companies or not.
What are the pros and cons of a rules-based approach vs a principles based approach to corporate governance?
Critics of the rules-based approach argue that it only works
- Where the challenges faced by companies under the purview of the regulation are substantially similar, justifying a common approach to common problems and
- If the rules are their enforcement efficiently and effectively direct, modify or preclude to the behaviours they are aimed at affecting
The benefits of this system sends a message out to owners, potential investors ad other stakeholder that the country takes seriously their protection from immoral practices by those managing and overseeing the organisation’s they are investing in or dealing with. The enforcement of the rules to achieve this in many countries are week.
