Other governance issues

Question 1

What approach to CG has the US adopted?

What does s.302 SOX say?

What are the consequences?

Answer 1

• US has adopted a rules based approach to CG following the corporate collapses of Enron, WorldCom etc. = The Sarbanes-Oxley Act of 2002 (SOX) was enacted in 2002

• S.302 SOX = CEO and CFO must certify the quarterly and annual reports
○ False certifications = potential civil liability
S.309 = potential criminal liability

Question 2

What is the definition of CG according to King IV Report on CG for South Africa?

Answer 2

= the exercise of ethical and effective leadership by the governing body towards achievement of the following governance outcomes:
• Ethical cultures
• Good performance
• Effective control
• Legitimacy

Question 3

Which companies must comply with the King Code (the South African CG Code)?

Why are these Codes interesting? (4)

What is the most recent Code?

Answer 3

• Compliance is mandatory for all companies listed on the Johannesburg Stock Exchange

• Interesting for 4 reasons:
1. They created and still adopt the ‘stakeholder inclusive’ approach to CG
2. Corporate responsibility and ethics form part of the King Code definition of CG
3. They provide for a single CG framework in that they apply to all types of organisation
4. King III adopted the ‘apply or explain’ regime to be followed by the ‘apply and explain’ regime in King IV

King IV is the most recent Code.

Question 4

The King Reports have repositioned CG in South Africa as a method of achieving what?

Answer 4

= sustainability of organisations rather than just a method of protecting investors

Question 5

What is a unitary board system ? (4 points)

What is a 2-tier board system? (5 points)

Answer 5

1. A unitary board system = 1 Board of Directors exists and decisions are taken by a single group of directors, led by the company chairman.
2. Sometime referred to as a one-tier board system.
3. The board has, and exercises, both executive and oversight powers = responsible for manging the business and overseeing compliance with laws and regulations
4. Anglo-Saxon model and has also been adopted in the CG framework in Scandinavia.
5. A 2-tier board system splits up the executive and oversight powers into 2 distinct boards, a management board, and a separate supervisory board.
6. The management board hold executive powers only and are responsible for the management of the business = usually oversee managers who run the day-to-day business.
7. The supervisory board have oversight powers only and supervise the management board and management = responsible for ensuring the board of directors and management don’t violate laws or the articles.
8. Also responsible for appointing and dismissing the management board
9. The CG framework in Germany adopts a 2-tier board system.

Question 6

Why does the German CG framework operate a 2-tier board system?

What are the 3 types of provisions in the German CG Code 2017?

Answer 6

• Has a concentration of share ownership in large listed companies = single shareholder with an ownership stake of >25% of share capital

• German CG Code 2017 consists of 3 types of provisions:
1. Legal stipulations = oblige the company to follow
2. ‘Shall’ recommendations = comply or explain
3. ‘Should’ suggestions = do not need to disclose their deviation from them

Question 7

What approach to CG does Japan Use?

How could the shareholding in most Japanese companies be described?

What 2 Codes have been issued in response ?

Answer 7

Adopting a hybrid approach to CG.

Shareholding is dispersed and held predominantly by financial institutions and businesses = separation of ownership and control.

1. Principles for Responsible Institutional Investors: Japan’s Stewardship Code = 8 principles for institutional investors = comply or explain
2. Japan’s CG Code = principle-based = comply and explain = applies to companies listed on the Tokyo stock exchange

Question 8

What approach to CG does China use?

How could the ownership structure in most Chinese companies be described?

In response, what is the focus of their CG regime?

What board system do they use?

Answer 8

• Rules based governance framework = Consists of laws, Code of CG for Listed Companies, and Listing Stocks and Trading Rules

• China’s listed companies have a concentrated ownership structure (ownership and control are not separated)

• Focus of CG regime = protecting minority shareholders, regulating controlling shareholders, and disclosure / transparency

• Follows a 2-tier board system = a board of directors and a supervisory board

Question 9

What board system does the Scandinavia CG framework use?

How could the ownership structure in most Scandinavian companies be described?

Why is this not problematic?

Answer 9

= 1 tier board of directors but have a management structure below the CEO

• Share ownership is concentrated but not seen as problematic

• Scandinavian law supports the supremacy of a dominant majority shareholder = control the company

Counter balanced by the potential liability the shareholder may face for reckless behaviour or coercing the board of directors into a particular action for his own benefit

Question 10

Does the Dutch CG model use the 1-tier or 2-tier board system?

What are the 2 Codes in the Netherlands?

Answer 10

• Dutch CG model accommodates the 2-tier (German model) and the 1-tier (Anglo-Saxon model) because of Anglo-Dutch companies such as Shell and Unilever which require a 1-tier system

1. Dutch CG Code 2016 = Chapter 5 specifically applies to 1-tier board companies = The rest of the code focuses on 2-tier companies
2. Dutch Stewardship Code 2018 = principles and guidance for institutional investors = Comply or explain

Question 11

Why have different countries’ CG best practices developed in different ways?

Answer 11

= to reflect each country’s distinct legal systems and also the specific issues that they are dealing with

Question 12

Why have governance guidelines been developed in the UK?

Answer 12

• Principles of CG apply in all sectors but the governance challenges are different sector by sector so different codes or guidelines are applicable

Question 13

GOVERNANCE IN THE PUBLIC SECTOR.
What are Nolan’s 7 principles of public life?

Answer 13

1. Selflessness = holders of public office should take decisions solely in terms of the public interest
2. Honesty = holders of public office should be truthful
3. Objectivity = holders of public office should make choices on merit
4. Leadership = holders of public office should promote and support these principles by leadership and example
5. Accountability = holders of public office are accountable for their decisions and actions to the public and must submit themselves to scrutiny
6. Integrity = holders of public office should avoid undue influence and conflicts and declare etc.
7. Openness = holders of public office should act and take decisions in an open and transparent manner

Question 14

GOVERNANCE IN THE NON-FOR-PROFIT SECTOR.
What are the 7 headings of the Charities Code?

Answer 14

1. Organisation purpose
2. Leadership
3. Integrity
4. Decision-making, risk, and control
5. Board effectiveness
6. Equality, Diversity, and Inclusion
7. Openness and accountability

Question 15

GOVERNANCE FOR FAMILY-CONTROLLED COMPANIES.
At the shareholder level, what may an organisation wish to consider to try and keep conflict at a minimum? (2)

At the board level, what may an organisation wish to consider? (1)

At the management level, what may an organisation wish to consider? (1)

Answer 15

1. Setting up a family assemble or council so family members can interact with those running the business (document it in articles)
2. A mechanism for family members to sell their shareholding and exit the company
3. If the board is made up of wholly family members, then perhaps set up an advisory board of experienced individuals for support in specialised business areas
4. Set up education programmes and career planning so that family members are developed to take up positions on management within the company to ensure it stays under the control of the family

Question 16

GLOBAL PRINCIPLES OF CG.
What are the 6 G20/OECD Principles of Corporate Governance?

Answer 16

1. Ensuring the basis for an effective CG framework = framework should promote transparent and fair markets
2. The rights and equitable treatment of shareholders and key ownership functions = framework should protect and facilitate the exercise of shareholders’ rights and ensure equitable treatment of all shareholders
3. Institutional investors, stock markets, and other intermediaries = framework should provide sound incentives and good CG throughout the investment chain
4. The role of stakeholders in CG = framework should encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and sustainability
5. Disclosure and transparency = framework should ensure timely and accurate disclosure on all material matters
6. The responsibilities of the board = framework should ensure effective monitoring of management by the board, and the board’s accountability to the company and shareholders

Question 17

GLOBAL PRINCIPLES OF CG.
What global CG principles are there for banks?

What is the ICGN and what have they published? (2)

What is the aim of these?

Answer 17

= Basel CG Principles for Banks
= 13 principles

International CG Network (IGCN) = an international investor-led organisation aimed at promoting effective standards of CG

1. Published Global Governance Principles in 2017
2. Published Global Stewardship Principles 2020

• Aim to enhance dialogue between boards and investors by setting out the responsibilities of both parties

Question 18

What are 7 key issues in CG?

Answer 18

1. Composition of boards = more representative boards = quotas for women
2. Stakeholder relations = how have directors complied with their s.172 duty
3. Corporate culture = importance of embedding culture for the long-term sustainability of the company
4. Social responsibility and sustainability = Millennials have driven demand for social responsibility
5. Shareholder dialogue = amount of disclosure to shareholders is growing
6. Performance of directors = time commitment and capacity of directors
7. Risk management = FRC Guidance makes it clear board has a primary role

Question 19

CG ISSUES IN DEVELOPING AND EMERGING MARKETS.
What is the focus of CG in developing and emerging markets and why?

What are the CG issues? (5)

Answer 19

In many emerging markets listed companies have more concentrated ownership structures = small number of shareholder hold a significant portion of shares = exercise more control over boards and management = focus is on protecting minority shareholders

1. Regulatory institutions are often newer, less experienced, and underfunded = leads to less enforcement of laws and regulations
2. Term ‘corporate governance’ means some organisations that could benefit from best practices dismiss it because they are not corporate = Non-corporates lose out on the benefits of adopting good governance practices e.g. sustainability, cheaper capital, less risk etc.
3. Before capital can flow to emerging markets, investors need to better understand and trust these markets = need robust information = adhering to high CG practices could encourage more investors to invest in well-governed emerging market companies
4. Reliance on expatriate management (due to lack of capability of local managers) can lead to a cultural issue and a lack of communication and trust between expatriate managers and local boards
5. Many organisations are either state or family owned and/or not listed = Lack of ownership control by government, no monitoring of management, and boards filled with inexperienced directors

Question 20

Describe the tobacco crisis in Malawi 2001

Answer 20

= buyers of tobacco in Malawi introduced stricter quality controls on bales of tobacco bought from local buyers = 85% of bales submitted to buyers were rejected.
Had a devastating impact on the economy, which is one of the poorest countries in the world.

The decision to introduce the stricter quality controls came from an overseas holding company and was implemented by the expatriate manager without recourse to the local board.

It was claimed the crisis may have been diverted if the expatriate manager had consulted the local board.