Other governance issues, Corporate Gov outside the UK Flashcards
The US and Sarbanes-Oxley Act 2002
SOX is the US has adopted a rules-based approach to corporate
governance in response to the corporate collapses in the US in the early 2000’s,
among them Enron and WorldCom, and the stock market collapse following
the bursting of the dot.com bubble. The Sarbanes-Oxley Act of 2002 (SOX) was
enacted, the Securities and Exchange Commission (SEC) adopted many new
rules and the New York Stock Exchange and Nasdaq Stock Market changed
their standards governing listed companies.
South Africa and the King Codes
The King Committee on Corporate Governance was established in the early
1990s and has issued four versions of the King Code of Corporate Governance
in 1994 (King I), 2002 (King II), 2009 (King III) and the latest version (King IV)
in 2016.
The King Codes are interesting for the following reasons:
They created and still adopt the ‘stakeholder inclusive’ approach to
corporate governance discussed in Cchapter 1.
Corporate responsibility and ethics form part of the King Code definition
of corporate governance.
They are well-established, having been first introduced in 1994 – only two
years after the Cadbury Code in the UK.
They provide for a single corporate governance framework in that they
apply to all types of organisation, not just listed companies.
King III adopted the ‘apply or explain’ regime to be followed by the ‘apply
and explain’ regime in King IV
King IV assumes application of the principles set out within it, this is why it has
adopted the ‘apply and explain’ regime. The 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.
Corporate governance frameworks in Germany, Japan, China Scandinavia, Netherlands
Germany - two-tier board system, supervisory (non-execs) and management board (execs)
Japan - separation of ownership and control, system similar to UK, but with stronger priorities to the interests of the employees.
China - two-tier board (board responsible for management, supervisory board for compliance to inspect co’s financial records
Scandinavia - Companies adopting this legal system maintain
the one-tier board of directors from the Anglo-Saxon model, but have inserted
beneath it a management structure which can be either the CEO on their
own or a group of senior executives including the CEO. The management
structure is subject to the instructions of the board of directors
Netherlands - The Dutch model of corporate governance accommodates both the two-tier
German model, which is followed by the majority of Dutch listed companies,
and the one-tier Anglo-Saxon model. This is because of the Anglo-Dutch
companies, such as Unilever and Shell, that were required by their listings in the
UK and the US to adopt a one-tier system. Chapter 5 of the Dutch Corporate
Governance Code 2016 applies specifically to one-tier board companies, with
the rest of the code focusing on two-tier companies.
Governance in other sectors
Governance in the public sector
Corporate governance in the public sector in the UK is based on the Nolan’s
seven principles of public life, which were developed by the Nolan Committee
on Standards in Public life in 1995. The Nolan Committee was set up in
response to concerns that the conduct of some politicians was unethical. The
Nolan Principles now form the basis of corporate governance codes in the
voluntary, as well as the public, sector in the UK.
Nolan’s seven principles of public life
1. Selflessness. Holders of public office should take decisions solely in terms
of the public interest. They should not do so to gain financial or other
material benefits for themselves, their family or their friends.
2. Integrity. Holders of public office should not place themselves under any
financial or other obligation to outside individuals or organisations that
might influence them in the performance of their duties.
3. Objectivity. In carrying out public business, including making public
appointments, awarding contracts or recommending individuals for
rewards and benefits, holders of public office should make choices on
merit.
4. Accountability. Holders of public office are accountable for their decisions
and actions to the public and must submit themselves to whatever scrutiny
is appropriate to their office.
5. Openness. Holders of public office should be as open as possible about
the decisions and actions that they take. They should give reasons for
their decisions and restrict information only when the wider public interest
clearly demands.
6. Honesty. Holders of public office have a duty to declare any private
interests relating to their public duties and to take steps to resolve any
conflicts arising in a way that protects the public interest.
7. Leadership. Holders of public office should promote and support these
principles by leadership and example.
For central government in the UK, there is a code of good practice: ‘Corporate
governance in central government departments: Code of good practice 2011’.
This Code sets out the composition and the role of the boards of central
government departments.
Governance in not-for-profit sector
The Charities Code was published in 2017. It replaced ‘Good Governance:
a Code for the Voluntary and Community Sector’, which was first published
in 2005 and revised in 2010. The Code is split into two, providing a set of
guidelines and a diagnostic tool for larger charities, whose income is over
£1 million a year, and a separate set for charities whose income is less than
£1 million per year.
The Code is made up of principles, outcomes and recommendations under the
following seven headings:
Organisation purpose
Leadership
Integrity
Decision-making, risk and control
Board effectiveness
Diversity
Openness and accountability
Governance in family-controlled companies
Global principles of corporate governance
OECD Principles of Corporate Governance
The G20/OECD Principles of Corporate Governance help policy-makers,
investors and other stakeholders assess and develop the legal, regulatory and
institutional framework for corporate governance within a country.
Principles:
1. Ensuring the basis for an effective corporate governance framework:
‘The corporate governance framework should promote transparent and
fair markets, and efficient allocation of resources. It should be consistent
with the rule of law and support effective supervision and enforcement.’
2. The rights and equitable treatment of shareholders and key ownership
functions:
‘The corporate governance framework should protect and facilitate the
exercise of shareholders’ rights and ensure equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their
rights.’.
3. Institutional investors, stock markets and other intermediaries
‘The corporate governance framework should provide sound incentives
throughout the investment chain and provide for stock markets to function
in a way that contributes to good corporate governance.’
4. The role of stakeholders in corporate governance
‘The corporate governance framework should recognise the rights of
stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders in
creating wealth, jobs and sustainability of financially sound enterprises.’
5. Disclosure and transparency
‘The corporate governance framework should ensure that timely
and accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership, and
governance of the company.’
6. The responsibilities of the board
‘The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management
by the board, and the board’s accountability to the company and the
shareholders.’.
- Basel Corporate Governance for banks
- ICGN Principles
The International Corporate Governance Network (ICGN) was established
in 1995. It is an international investor-led organisation aimed at promoting
effective standards of corporate governance, in order to improve the efficiency
of markets and economies globally.
Key issues in corporate governance
Compositions of boards (more representative boards; independence of board members)
Financial reporting (accounting records, fin position of the company
Stakeholder relations
Corporate culture
Social responsibility and sustainability
Remuneration of directors and senior execs
Shareholder dialogue
Performance of the directors
Risk management
Tax planning
Technology and information governance
Corporate governance issues in developing and emerging markets
Corporate governance issues are different in different countries and this is why
countries should adopt governance practices to deal with their specific issues,
not just cut and paste governance frameworks from other countries. This has
been practiced in many developing and emerging market countries where
practices designed in developed countries for large listed companies have been
adopted in an attempt to attract foreign investment.
Regulatory institutions in both emerging and developing markets are often
newer, less-experienced and under-funded in comparison to their counterparts
in more developed markets. This leads to less enforcement of laws and
regulations.
Lack of transparency and disclosure is a red flag for investors in emerging
markets according to a 2010 IFC Emerging Market Investor Survey. A company’s
willingness to disclose information is factored heavily into investors’ decision
making. A lack of disclosure is seen as being indicative of other problems.
Why have different countries’ corporate governance best practices
developed in different ways?
Chapter summary
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.
There is a convergence in governance practices – all countries recognise the
importance of independent directors and the importance of the principles
of corporate governance: responsibility, accountability, transparency and
fairness.
There is a growing recognition of the value of having a governance
professional within the organisation.
The corporate governance frameworks recognise the differing roles of
the shareholder, director and manager and the relationship and dialogue
between them.
The adoption of corporate governance practices in other sectors such
as the public and not-for-profit sectors is growing. There are, however,
different challenges to be dealt with in these sectors so the focus is on
different aspects of corporate governance.
Many of the key issues in corporate governance are global issues.
