July 2009 AA - Intro to CG - L4a 1

Audit and assurance

Introduction to corporate governance regulatory frameworks - UK

Lecture 4a(Hong Kong SAR, Malaysian and Singaporean institutions

may study equivalent structures in their countries)

July 2009 AA - Intro to CG - L4a 2

Cadbury Report, 1992

• ‘The way companies are directed and controlled’– Definition used by Solomon (2007)

• Corporate Governance and Accountability 2nd edn.

• ‘…principally a study of the mechanics of capitalist systems’

• Solomon, 2007

July 2009 AA - Intro to CG - L4a 3

The Combined Code on CorporateGovernance 2008 (FRC)

• Directors are in a privileged position– They run the business– For owners and other stakeholders

• Good CG means that all stakeholders’ needs are appropriately taken into account

• OECD– ‘Principles’ of CG

• In the UK– ‘The Code’

July 2009 AA - Intro to CG - L4a 4

The Combined Code on CorporateGovernance 2008 (FRC) (cont.)

• Main Principle– ‘Every company should be headed by an effective

board, which is collectively responsible for the success of the company’

• The ‘Turnbull Guidance’ and ‘Smith Guidance’– Detailed guidance that accompanies ‘the Code’

(revised September, 2005)

July 2009 AA - Intro to CG - L4a 5

The Combined Code on CorporateGovernance 2008 (FRC) (cont.)

• Some key areas Directors’ remuneration

Going concern

Internal control

Audit committees• An ‘independent’ sub-committee of the Board of Directors

• Non-executive directors (NED’s)

July 2009 AA - Intro to CG - L4a 6

Agency theory

• ‘Stewardship accounting’– Owners, shareholders…– Directors, stewards, managers…

• Agency theory– Principal (P)– Agent (A)

• ‘The agency problem’– Separation of ownership and control– Objectives of P and A may be different

July 2009 AA - Intro to CG - L4a 7

Agency theory (cont.)

• Short-termism– Agents

• Bonuses, salaries, benefits-in-kind…

• ‘Residual losses’

– Principals (institutional investors)• ‘Churning’

• Long term investment– Relies on optimum NPV from projects

• wealth maximisation for shareholders

July 2009 AA - Intro to CG - L4a 8

Agency theory (cont.)

• Control– AGM

• Time for agents to account for themselves?

• Practical problems– Large ownership base

– Interested in return not control

July 2009 AA - Intro to CG - L4a 9

Other theoretical viewpoints

• Transaction cost theory• Stakeholder theory

– The ‘Corporate Report’ (ASSC*, 1975)• Specifically considering financial reporting questioned:

– Who should report what to whom– Public accountability– Users of corporate reports

Equityholders Loan creditors Employee Analysts and advisors Business contacts Government The public * The original UK accounting standards body,

now the ASB

July 2009 AA - Intro to CG - L4a 10

References

• Combined Code (2008) http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20June%202008(2).pdf

• OECD Principles of Corporate Governance

(2004) http://www.oecd.org/dataoecd/32/18/31557724.pdf

July 2009 AA - Intro to CG - L4a 11

References (cont.)

• Hong Kong – The Code on Corporate Governance Practices (2005)– http://www.charltonslaw.com/corporategovernance/english.pdf

– http://aci.kpmg.com.hk/docs/Internal_control_Guide.pdf

– http://www.ecgi.org/index.htm