associate professor mak yuen teen nus business school national university of singapore
TRANSCRIPT
Why Corporate Governance Matters
Associate Professor Mak Yuen TeenNUS Business School
National University of Singapore
Outline
• What is corporate governance?• Some misconceptions about corporate
governance• Why is corporate governance important?• Global trends impacting corporate
governance• Key foundations of good corporate
governance• Shareholder and stakeholder perspectives
of corporate governance
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Corporate governance is about having the appropriate people, structure, systems and processes to direct and manage the organisation, in order to ensure its long-term success, through enhancing performance, accountability and risk management.
What is Corporate Governance? A Definition
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Corporate Governance
People
Structures/systems
Processes
Performance Accountability Risk Management
Long-Term Success
Values Rules
Culture Environment
What is Corporate Governance? Key Drivers, Objectives and Outcomes
• Myth 1: Corporate Governance Stifles Leadership/Entrepreneurship
• Myth 2: Corporate Governance is (Only) About Control and Compliance
• Myth 3: Corporate Governance Is Only Important for Corporations with Public Shareholders
Three Misconceptions about Corporate Governance
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Why is Corporate Governance Important?
• Critical to development of capital markets
• Key to building trust of investors and other stakeholders in the organisation
• Valued by certain investors who may only invest in well-governed companies or who are prepared to pay a premium for such companies (especially long-term institutional investors)
• Ensures long-term value creation, performance and sustainability of organisations
• Poor corporate governance can destroy organisations
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Corporate Governance and Capital Market Development
• Many studies have shown that good corporate governance is related to corporate performance and development of capital markets, e.g.,:
Studies by GovernanceMetrics International (GMI) found that their governance ratings of companies worldwide are correlated to firm performance over 3, 5 and 10-year periods.
La Porta et al. (1997) studied 49 countries and that found those with weaker investor protection tends to be have more concentrated share ownership, and another of their studies on these countries found that weaker legal rules and enforcement of these rules were associated with smaller and narrower debt and equity markets.
Corporate Governance and Stock Premiums: McKinsey Global Investor Opinion Survey 2002
Corporate Governance and Stock Premiums: McKinsey Global Investor Opinion Survey 2002
Poor Corporate Governance and Value Destruction
Global Trends Impacting Corporate Governance
• Greater corporate governance regulation in reaction to corporate scandals and financial crises
• Increase in shareholder engagement and governance focus by institutional investors, fund managers and other intermediaries
• Increased focus on governance, compliance and ethics of entities within the group and throughout the supply chain by global companies
Key Foundations of Good Corporate Governance
1. Robust Regulatory Framework and Enforcement2. Strong Shareholder Rights and Equitable Treatment of
All Shareholders3. Strong Regard for the Interests of Other Stakeholders4. Highly Ethical Culture5. Effective Board of Directors (Board Composition and
Practices) 6. Effective CEO7. Balanced and Constructive Board-Management
Relationship8. Properly Designed and Implemented Remuneration
Schemes9. Effective Internal Controls, Risk Management, Internal
and External Audit10. High Standards of Disclosure and Transparency
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Adapted from OECD Principles and CG Codes
Key People and the 3 C’s
• Key People Who Drive The Quality of Corporate Governance in an Organisation and Set the Tone at the Top:• Controlling shareholder• Board of Directors (especially the Board
Chairman)• CEO
• 3 C’s:• Character• Competence• Commitment
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The 3 C’s
"Somebody once said that in looking for people to hire, you should look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy."
Warren Buffett
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Role of the Board
Source: UK Corporate Governance Code (September 2014)
Profile of an Effective Board
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Determinants of Board Effectiveness
Importance of a Balanced and Constructive Board-Management Relationship• Need for clarity of roles and responsibilities
and appropriate division of responsibilities between board and management
• Corporate governance is not about centralising control with the board and having the board make all the key decisions
• An open and trusting relationship with mutual respect between the board and management is critical
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Importance of a Balanced and Constructive Board-Management Relationship
“In my family, my husband makes all the major decisions. So far, there have been no major decisions.”
Anonymous
This is not a good way to govern and manage an organisation!
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Importance of a Balanced and Constructive Board-Management RelationshipDrugmaker Sanofi Fired Its CEO And The Stock Is Tanking
The move appears to come after a clash of styles…Sanofi Chairman Serge Weinberg said Mr. Viehbacher was ousted because of his management style and relationship with the company’s board…. The move comes after Viehbachher wrote the board a letter telling them why changing CEOs would be a bad idea…In the letter, Viehbacher wrote that “it has come to my attention, first through rumor, that the chairman of the board is actively seeking a successor to me as chief executive officer.
Business Insider, October 29, 2014
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• A company/organisation can have many different stakeholders:
• Shareholders/members• Creditors• Management• Employees• Customers• Suppliers• Government• Community
• Some countries follow a stakeholder model of corporate governance while others follow a shareholder model – but the two models are converging to some extent
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Shareholders Versus Stakeholders
• The interests of different stakeholders may diverge
• Even shareholders may not have the same interests, e.g.,:
• controlling shareholders versus minority shareholders
• long-term shareholders versus short-term shareholders
• institutional shareholders versus retail shareholders
• The board’s role is to consider what is in the best interests of the organisation in light of these competing interests
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Shareholders Versus Stakeholders
CPAA/VCPAA Seminar, August 2007
“Corporate governance is an ongoing journey with no fixed destination”
Source: Well-known corporate leader in Singapore
For Reference Only
Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring.
OECD Principles of Corporate Governance, 2004
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We can think of corporate governance as dealing with the allocation of the powers of the company amongst shareholders, the board of directors, management and other stakeholders, the relationships between them, and how the exercise of these powers and relationships are governed by various structures, processes, incentives and other mechanisms.
What is Corporate Governance? Some Definitions
At its broadest, the governance of corporate entities comprehends the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It includes the practices by which that exercise and control of authority is in fact effected.
The relevant rules include applicable laws of the land as well as the internal rules of a corporation. The relationships include those between the shareholders or owners and the directors who oversee the affairs of the corporation on their behalf, between the directors and those who manage the affairs of the corporation and carry out its business, and within the ranks of management, as well as between the corporation and others to whom it must account, such as regulators. The systems and processes may be formal or informal and may deal with such matters as delegations of authority, performance measures, assurance mechanisms, reporting requirements and accountabilities.
HIH Royal Commission Report, 2003 (Australia)
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Corporate governance is affected by laws, regulations, listing rules, codes, constitutive documents of companies, etc.
What is Corporate Governance? Some Definitions
Corporate governance refers to the processes and structure by which the business and affairs of the company are directed and managed, in order to enhance long term shareholder value through enhancing corporate performance and accountability, whilst taking into account the interests of other stakeholders.
Report of the Committee and the Code of Corporate Governance (Singapore, 2001) – based on UK Cadbury
Committee
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Corporate governance is about enhancing long-term value of the company to shareholders/other stakeholders
What is Corporate Governance? Some Definitions
Corporate governance is “the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations.” It encompasses the mechanisms by which companies, and those in control, are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimised. Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved.
ASX Principles and Recommendations (2010, Australia)
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Risk governance and management is an important part of corporate governance
What is Corporate Governance? Some Definitions
Directors’ duties
Fiduciary duty
Act in good faith
Use powers for proper purpose
Avoid conflicts of interest
Related party transactions
Disclosure of and voting on matters of material personal interest
Exercise discretion properly
Care, diligence, skill
Of a reasonable person, subject to business judgment rule
Comply with legislation and listing rules
Not to misuse information, corporate opportunity or position
Legal Duties of Directors