day_1_-_introduction_to_corporate_governance

8/3/2019 DAY_1_-_Introduction_to_Corporate_Governance

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DAY ONE

Introduction to Corporate Governance


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Day One overview:

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Corporate Governance A brief Historicalperspective

Defining Corporate Governance

Corporate Governance Factors & Concerns

Corporate Governance in the Context of Investment

& Growth


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Corporate Governance (CG) from a

Historical Perspective

Private and Publicly owned business corporations can be considered as one of

the most successful institutions invented in the history of Capitalism. During its more than four hundreds years history it has been one of the main

driving forces of economic development and it has had a major impact on the

economy and society.

The fact that the corporation has huge wealth creating potential and at the

same time has the capacity to create important negative impacts whetherreal or potential to society and the economy, has always intrigued the

academic and business world, as well as governments, into directing their

attention towards the nature and workings of corporate governance.

In the last decade, though, the appearance of widespread and very damaging

problems of corporations, have reached an alarming scale making more andmore evident that the quality of corporate governance has a major impact on

the corporations profitability, as well as, on its international competitiveness,

and it has shown that it might affect the countrys financial strength

negatively.


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Corporate Governance from a

Historical Perspective

The stock market crash 1929-1933

The Securities Act of 1933 The Securities Exchange Act of 1934

Mandatory Public Disclosure of

Accounting InformationMandatory AuditingCreation of the SEC

GAAP APB FASB AICPAReviews & Enforcement

Financial Accounting Rules

Established by Private Sector

Standards for Auditing

Established by

Professional Accountants


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Corporate Governance from a Historical Perspective

(contd)

The term corporate governance was practicallyforgotten following the 1930s market crash in USA.

It was not even defined prior the traumatic collapses of

profound multinationals in late 1990s

Contemporary corporate governance as we know it todaystarted in 1992 with the Cadbury report in the UK

Cadbury was the result of several high profile company

collapses

It is concerned primarily with protecting weak and

widely dispersed shareholders against self-interested

Directors and Managers


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Corporate Governance from a Historical Perspective

(contd)

In the USA in the first half of the 1990s, the issue of

corporate governance received considerable press

attention due to the wave of CEO dismissals (e.g.:

IBM, Kodak, Honeywell) by their boards.

In the early 2000s, the massive bankruptcies (and

criminal malfeasance) of Enron and WorldCom, as

well as lesser corporate scandals such as Adelphia

Communications, AOL, Arthur Andersen, GlobalCrossing, Tyco, led to increased political interest in

corporate governance.
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Current status on Corporate Governance - Codes

Most Countries now have implemented Corporate

Governance is by way of legislation or best practice

Code, such Euro zone, India, Japan, Ghana etc.

These Codes are voluntary and are enforced byshareholders

Most of them operate on a comply or explainapproach

The Media also play a part in highlighting good orbad practices


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Corporate Governance Codes

Country Perspective

Corporate Governance is by way of legislation or best

practice Code

US adopted legislation in 2002 - Sarbanes Oxley Act

Most other developed and emerging marketcountries have adopted best practice Codes e.g.

Combined Code in the UK, Cromme Code in Germany

and the King II Code in South Africa


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Country Perspective (contd)

Countries in Africa have tended to adopt a hybrid

approach whereby they have followed the comply

and explain approach but have enshrined some of

the principles in law to assist in enforceability

The reason is the weakness of the shareholder base

and of the media


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Country Perspective (contd)

Quotingfrom James D. Wolfenson A battle for

Corporate Honesty THE ECONOMIST; THE WORLD IN

1999 PAGE 38

The governance of the corporation is now

therefore as important in the world economy

as the governance of countries.


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Defining Corporate Governance

A generic term which describes the ways in whichrights and responsibilities are shared between the

various corporate participants

It represents the relationships created among thevarious stakeholders of a business corporation to

effectively direct its activities in meeting their objectives

Used in corporations to establish order between the

firms owners and its top-level managers

Is a commitment to values and to ethical business

conduct


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Conceptualizing Corporate Governance in the context of

institutions offering Islamic financial services (IIFS)

A defined set of relationships between a companys management, its Boardof Directors, its shareholders and other stakeholders which provides the

structure through which:

the objectives of the company are set; and

the means of attaining those objectives and monitoring performance are

determined.In the context ofIIFS, good CG should encompass:

a set of organisational arrangements whereby the actions of the

management of IIFS are aligned, as far as possible, with the interests of its

stakeholders;

provision of proper incentives for the organs of governance such as the

Board of Directors and management to pursue objectives that are in the

interests of the stakeholders and facilitate effective monitoring, thereby

encouraging IIFS to use resources more efficiently; and

compliance with Islamic Shar`ah rules and principles.


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Conceptualizing Corporate Governance (contd)

OECD Definition System by which corporations are directed and controlled.

Spells out the rules / procedures for making decisions oncorporate affairs.

Provide the structure through which the company objectives are

set, and the means of attaining those objectives and monitoringperformance

Specifies the distribution of rights and responsibilities amongdifferent participants in the corporation, such as, the board,managers, shareholders and other stakeholders

World Bank Definition

Corporate governance is about promoting corporate fairness,transparency and accountability


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What is Corporate Governance?

According to Hill & Jones (2001)

Corporate governance is: the mechanisms that are

used to govern managers and ensure that the actions

are consistent with the interests of key stakeholder

groups

CORPORATE GOVERNACE THEREFORE RELATES TO THE

INTERNAL MEANS BY WHICH CORPORATIONS ARE

OPERATED AND CONTROLLED, TAKING INTO ACCOUNT

THE INTERESTS AND GOALS OF ALL THE STAKEHOLDERS


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2005 YRK Reddy(Source: Corporate Governance Framework, Nadereh Chamlou, Magdi Iskande, World Bank)

1Reputational agents refer to private sector agents, self-regulating bodies, the media, and civic society that

reduce information asymmetry, improve the monitoring of firms, and shed light on opportunistic behaviour

External

Private

Reputational agents1

Accounts

Lawyers

Credit Rating

Investment Bankers

Financial media

Investment advisors

Research

Corporate GovernanceAnalysis

Markets

Competitive factor and

product marketsForeign direct investment

Corporate control

Standards

(for example, accounting

and auditing)

Laws and

regulations

Regulatory

Financial Sector

Debt

Equity

Shareholders

Board of Directors

Management

Core functions

Reports to

Appoints

andmonitors

Operates

Internal

Stakeholders

Modern corporations are disciplined by

internal and external factors


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Board of Directors

Shareholders, Auditors and External Corporate

Governance

Shareholders

Influence the hiring and firing of

Board members

Business Corporation

Shareholders

Senior Mgnt

Audit Committee Independent AuditorIndependent Auditor

Monitor and certify

internal control &

financial reporting

systems of the

company

Board of Directors

Provide strategic guidance

Hire and evaluate senior

management and auditor


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Corporate Governance Participants Roles

Shareholders those that own the company

DirectorsGuardians of the Companys assets for theShareholders

Managers and employees who use the Companys assets

Stakeholders - those who have direct or indirect interestsin the Company such as debt holders, trade creditors,suppliers, customers and communities affected by thecorporation's activities.


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Corporate Governance Concerns

Primarily concerned with public listed companies i.e.

those listed on a Stock Exchange

Particularly attempts to align the interests of the

company, the shareholders , the board, employees as

well as the community in which the company

operates

Focused on preventing corporate collapses such as

Enron, Polly Peck and the Maxwell companies


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Other Entities

Corporate Governance applies to all types of

organizations not just companies in the private

sector but also in the not for profit and public sectors

Examples are schools, hospitals, pension funds,

state-owned enterprises


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Corporate Governance and performance

Corporate Governance should be seen as a tool to

support increased performance of companies ratherthan being just a regulatory mechanism

Good governance leads to good performance

It creates an open and transparent system It improves communication and breaks down

systematic barriers to flow of information

Good governance allows decision making based on

data. It reduces risk

Good governance helps in creating a brand and

creates comfort for all stakeholders and society


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Does performance depend on Corporate

governance

Short term performance does not necessarily

depend on governance

Market asymmetries are responsible for this.

However, this increases risk. This also creates barrierto long term growth

Recall what happened to Enron?


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Does performance depend on Corporate

governance (Contd)

Medium to long term performance requires

governance

Most companies which have grown in the last 25

years have outstanding performance and have goodgovernance structure

A good governance structure treats all stakeholders

fairly

Governance alone cannot ensure performance


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Investing in Corporate Governance

Companies need to invest in good governance Corporate governance has a direct bearing on

business performance and thereby ROI andwealth creation

On average, businesses with superior governancepractices generate 20 percent greater profits thanother companies

A study based on 256 companies conducted at the

MIT Sloan School of Management

FUTHERMORE !!!


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The Irresistible Case for CG

Korea-US Research: 160% premium ABN/AMRO: Best CG Rated companies had P/E ratios

20% higher

Russian study: 70,000% increase in firm value of 21

companies Deutsche Bank: S&P 500: 19% out-performance.

Harvard / Wharton: abnormal returns of 8.5%

Cheaper debt: Romania`s BCR

Operations too: better ROE; EVA


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Corporate Governance impact on the

Investment Process and the creation of Wealth

Equity and other forms of investment are likely toflow to those jurisdictions and companies that areknown and perceived to have adopted good

corporate governance practices.

Good corporate practices attract both local andforeign investments

This will have a positive impact on the economicdevelopment of the country or progress of theparticular company


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If a country does not have a reputation forstrong corporate governance practices, capital willflow else where.

If a country opts for lax accounting and reportingstandards, capital will flow else where. Allenterprises in that country will regardless ofhow steadfast a particular companys practicesmay besuffer the consequences.

If investors are not confident with the level ofdisclosure, capital will flow else where.

Corporate Governance impact on the Investment

Process and the creation of Wealth (Contd)


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WEALTH CREATION

Improved Corporate Governance and Corporate

Performance is a necessary condition for national

development. This in turn;

RESULTS IN WEALTH CREATION

DUE TO

increased flow of investments leading toincreased productivity growth, employment andconsequently, poverty reduction


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In General; Corporate Governance if well practicedshould lead to:

Create efficient companies Promote competitiveness

Increased performance and profitability ofcompanies

Increased share prices in listed companies Leading to increased sales/exports higher GDP

growth Send a powerful signal to encourage domestic and

international investor confidence (gives confidence toinvestors)


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In particular regarding the welfare of individuals,

Corporate Governance if well practiced should

lead to:

Create jobs, generate income and income tax

Produce a wide variety of goods and services

Provide mechanisms for savings and investments

Environmentally and socially responsible corporateorganizations


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Essentials for Developing Good Corporate

Governance Structures

Well-developed and well regulated securitiesmarkets

Laws that recognize shareholders rights and requirethe equitable treatment of minority and foreignshareholders.

Enforcement mechanism for protecting suchshareholders rights

Anti-corruption laws to prevent bribery andprotection against fraud on investors.


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Essentials for Developing Good Corporate

Governance Structures (contd)

Sophisticated courts and regulators

An experienced accounting and auditing

profession.

Significant corporate disclosure requirements.


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Final Thoughts: The Role of Corporate Culture

and the Gatekeepers

Regulation is a blunt and only partly effective tool in the governance

field... That is not to say that regulation doesnt have a vital role to

play Many of the provisions of the SarbanesOxley Act such as

officer certifications, bans on loans to officers, mandated audits of

internal controls and others have substantially improved theregulatory structure in areas where too many boards historically

failed to act*However, government+ regulation is less and less

efficient when issues become more subjective and less clear-cut In

contrast, boards of directors, outside auditors and outside counsel

are the gatekeepers of behavior standards who are able to preventdamage before it occurs if they are alert, and above all if they are

willing to act when necessary.

Restoring Trust, Report on WorldCom, Richard C. Breeden, August 2003


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Corporate governance is determined first and

foremost by company law, but there are also a

number of reports and best practice codes that

complement the recommendations and guidelines

contained in the strictly legal framework.

Corporate governance is one of the main means ofreducing agency costs arising out of the potentially

conflicting relationship between shareholders and

management.

Studies on corporate governance and value tend to

demonstrate that good corporate governance will

create value.

Summary


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Corporate Governance

End of Day One

Shokran

Thank You

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