lecture01 introduction (part 1) ed, ned & board structure 37p

8/16/2019 Lecture01 Introduction (Part 1) ED, NED & Board Structure 37p

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CORPORATE GOVERNANCE

Week 1:Week 1:

Topic 1: Introduction? (Part 1) Topic 1: Introduction? (Part 1)


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TopicsTopics

1.1. The structure of corporationsThe structure of corporations

2.2. Relationship between shareholders andRelationship between shareholders and

BODBOD

3.3. Corporate officersCorporate officers4.4. Concept of ownership and controlConcept of ownership and control

5.5. Definition of CG and sound CGDefinition of CG and sound CG

..

!"portance of CG to #$Cs!"portance of CG to #$Cs

%.%. !ssues of CG!ssues of CG

&.&. Benefits of sound CGBenefits of sound CG


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$earnin' Outco"es$earnin' Outco"es

(how an understandin' of the concepts of(how an understandin' of the concepts ofownership and accountabilit)ownership and accountabilit)

Describe the relationship betweenDescribe the relationship betweenshareholders and BODshareholders and BOD

Describe cate'ories of shareholders andDescribe cate'ories of shareholders andcorporate officerscorporate officers

Define CG and sound CGDefine CG and sound CG

*+plain the benefits of sound CG*+plain the benefits of sound CG

Describe ,e) issues in CGDescribe ,e) issues in CG


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TheThe Structure of CorporationsStructure of Corporations

-reas of coera'e/-reas of coera'e/ Definition of a co"pan)Definition of a co"pan)

T)pes of co"pan)T)pes of co"pan)

Ownership and controlOwnership and control

(hareholders and board of directors(hareholders and board of directors

Corporate OfficersCorporate Officers

Board structuresBoard structures


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TheThe Structure of CorporationsStructure of Corporations

0hat is a co"pan)

- Has “legal personality” or often describedas an “artificial person”

- Able to enter into contracts and make biztransactions, borroings and on assets

- Can sue and be sued in la

- !erpetual succession


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The Structure of CorporationsThe Structure of Corporations

Basic t)pes of co"panies/Basic t)pes of co"panies/

"#"# (tatutor) co"panies(tatutor) co"panies

e#g# !etronas, S$CS$, %!&e#g# !etronas, S$CS$, %!&

'#'# Re'istered co"paniesRe'istered co"panies

e#g# public and pri(atee#g# public and pri(ate companiescompanies


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Continued )Continued )

a. #riate co"paniesa. #riate co"panies

(ery popular(ery popular

- do not re*uire public funding- do not re*uire public funding

- oners ha(e full control- oners ha(e full control

- usually operated by family members- usually operated by family members

- small to medium size businesses- small to medium size businesses


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Continued )Continued )

b. #ublic listed co"panies #$Csb. #ublic listed co"panies #$Cs

- large biz listed in Stock %+change- large biz listed in Stock %+change- re*uire public funding- re*uire public funding

- tend to in(ite the public to in(est- tend to in(ite the public to in(est

money ith it !$.money ith it !$.- regulated by (arious Acts and- regulated by (arious Acts and

go(ernment bodiesgo(ernment bodies


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#ublic listed co"panies #$Cs#ublic listed co"panies #$Cs areare modelled after Anglo-Sa+on companiesmodelled after Anglo-Sa+on companies

origin is from the /0 Anglo-Sa+on.origin is from the /0 Anglo-Sa+on. ob1ecti(e is to ma+imise shareholder2sob1ecti(e is to ma+imise shareholder2sealth onlyealth only

board structure is unitaryboard structure is unitary shareholdings are dispersedshareholdings are dispersed

3a+is 4hd# had 56,7"7 shareholders3a+is 4hd# had 56,7"7 shareholdersrepresenting 66#859 of total shareholdersrepresenting 66#859 of total shareholdersand 89 of issued shares as at ":;8;"7.and 89 of issued shares as at ":;8;"7.


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The StructureThe Structure ofof CorporationsCorporations

0ho owns #$Cs0ho owns #$Cs- e"bers 6 e7uit) shareholderse"bers 6 e7uit) shareholders

0ho "ana'es #$Cs0ho "ana'es #$Cs- DirectorsDirectors 88 3ake decisions < plan3ake decisions < plan

- ana'ersana'ers 88 Arrange < coordinateArrange < coordinate

- *+ecuties*+ecuties 88 %+ecute transactions%+ecute transactions


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Shareholders -Shareholders -

CategoriesCategories

SHAREHOLDERS LARGE PRIVATE

SHAREHOLDERS

SMALL PRIVATE

SHAREHOLDERS

INSTITUIONAL

SHAREHOLDERS

CORPORATE

SHAREHOLDERS


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Shareholders -Shareholders -

CategoriesCategories PrivatePrivate

Individual shareholders in a companyIndividual shareholders in a company Usually, holds a small quantities of shares andUsually, holds a small quantities of shares and

have very little communication with the companyhave very little communication with the company Can also hold a large quantity of shares e.g. TanCan also hold a large quantity of shares e.g. Tan

Sri Dato Sri Dr Teh Hong iow ! u"lic #an$Sri Dato Sri Dr Teh Hong iow ! u"lic #an$#hd#hd

CorporateCorporate Shareholders in a company that are themselvesShareholders in a company that are themselves

companiescompanies %s legal persons, companies may own shares in%s legal persons, companies may own shares in

other companiesother companies


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Continued … CategoriesContinued … Categories

Institutional ShareholdersInstitutional Shareholders Institutions holding shares of &Cs e.g. '(,Institutions holding shares of &Cs e.g. '(,

S)CS), *#, Insurance + Unit Trust companiesS)CS), *#, Insurance + Unit Trust companies Majority – in terms of shareholdingMajority – in terms of shareholding

% shareholder holding a maority of the equity -% shareholder holding a maority of the equity -ordinary shares in a company i.e owns /0 sharesordinary shares in a company i.e owns /0 shares

Has controlling interest in the company e.g. has theHas controlling interest in the company e.g. has thevoting power to remove directors from the #)D !voting power to remove directors from the #)D !

can control the "oard.can control the "oard. Minority – in terms of shareholdingMinority – in terms of shareholding

Shareholders whose com"ined shareholdings areShareholders whose com"ined shareholdings arenot enough to affect resolutions "y the company innot enough to affect resolutions "y the company in

%12 i.e. own%12 i.e. own 3 0 shares3 0 shares


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Corporate OfcersCorporate Ofcers

ChairmanChairman &eader of the #)D&eader of the #)D

)ften referred to as the 4company chairman5)ften referred to as the 4company chairman5

6esponsi"le for the functioning of the "oard6esponsi"le for the functioning of the "oard

referred 7 a non7e8ecutive director referred 7 a non7e8ecutive director

Chief Executive OfficerChief Executive Officer / Managing irector/ Managing irector

The head of e8ecutive management team in anThe head of e8ecutive management team in an

organisationorganisation

2ost powerful 4officer9 of a company2ost powerful 4officer9 of a company


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Corporate OfcersCorporate Ofcers

!oard of irectors!oard of irectors Te co!!ecti"e #roup o$ indi"idua!% Te co!!ecti"e #roup o$ indi"idua!%

e!ected &' te %areo!der% o$ ae!ected &' te %areo!der% o$ acorporation to o"er%ee tecorporation to o"er%ee te

ana#eent o$ te corporationana#eent o$ te corporation Executive irectorExecutive irector

A director *o a!%o a% re%pon%i&i!itie%A director *o a!%o a% re%pon%i&i!itie%a% an e+ecuti"e ana#er , a e&era% an e+ecuti"e ana#er , a e&er

o$ top ana#eent teao$ top ana#eent teae# -arketin# Director. /inancee# -arketin# Director. /inanceDirector. Operation% DirectorDirector. Operation% Director


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Corporate OfcersCorporate Ofcers "on Executive irector #"E$"on Executive irector #"E$

% director who does not have any responsi"ilities for% director who does not have any responsi"ilities fore8ecutive management in the companye8ecutive management in the company

Independent "on Executive irector #I"E$Independent "on Executive irector #I"E$


%lso independent from personal and "i: relationship%lso independent from personal and "i: relationshipwith the company or its officerswith the company or its officers

(unctioning as watchdogs for shareholders(unctioning as watchdogs for shareholders "on Independent "on Executive irector #"I"E$"on Independent "on Executive irector #"I"E$


#ut, the director has personal or "i: relationship with#ut, the director has personal or "i: relationship withthe company or its officersthe company or its officers


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"Es% Su&'Categories"Es% Su&'Categories

NON-EXECUTIVE

DIRECTORS (NED!

NONINDEPENDENT

NON-EXECUTIVEDIRECTORS (NINED!

INDEPENDENT

NON-EXECUTIVE

DIRECTORS (INED!


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Wo a% te po*er?Wo a% te po*er?0 -e&er% , !iited to "otin# ri#t%-e&er% , !iited to "otin# ri#t%

0 oard o$ director% , POWER/2Loard o$ director% , POWER/2L

W' e&er% a"e !iited po*er?W' e&er% a"e !iited po*er?

00 Separation o$ o*ner%ip and contro!Separation o$ o*ner%ip and contro!

Te Structure o$ Te Structure o$

3orporation%3orporation%


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Separation o$ o*ner%ip and contro!Separation o$ o*ner%ip and contro!0 O*ner%ipO*ner%ip %areo!der% , pro"ide%areo!der% , pro"ide

capita! &ut do not ana#e dai!'capita! &ut do not ana#e dai!'

operation%operation%

0 3ontro!3ontro! &oard o$ director% (OD) ,&oard o$ director% (OD) ,

ake% deci%ion% and contro!% operation%ake% deci%ion% and contro!% operation%

0 Sareo!der% de!e#ate po*er andSareo!der% de!e#ate po*er and

autorit' to ODautorit' to OD




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2020

=elegation of poer and authority=elegation of poer and authority

"OARD O# DIRECTORS

(LED "$ CHAIRMAN!

"OARD

COMMITTEES

TOP%EXECUTIVE

MANAGEMENT (LED "$

CEO%MD%PRESIDENT!

SHAREHOLDERS

DELEGATE

DELEGATE


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De!e#ation o$ po*er and autorit'De!e#ation o$ po*er and autorit'

and contro!and contro!

0 O*ner%ip and contro! %eparatedO*ner%ip and contro! %eparated %areo!der% (di%per%e) de!e#ate po*er%areo!der% (di%per%e) de!e#ate po*er

and autorit' to OD4 andand autorit' to OD4 and

0

OD una&!e to ana#e dai!' op%OD una&!e to ana#e dai!' op%

de!e#ate% %oe deci%ion akin# po*erde!e#ate% %oe deci%ion akin# po*er

to ana#eent teato ana#eent tea




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Board structures/Board structures/

1. 9nitar) or onetier co"bine the1. 9nitar) or onetier co"bine the

"ana'e"ent and superisor)"ana'e"ent and superisor)functionsfunctions

e.'. 9:; 9(; ala)siae.'. 9:; 9(; ala)sia

2. Twotier/2. Twotier/a. ana'e"ent boarda. ana'e"ent board

b. (uperisor) boardb. (uperisor) board

e.'. Ger"an);


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oard Structure%oard Structure%

1. 9nitar) or onetier1. 9nitar) or onetier A %in#!e deci%ion0akin# &od'A %in#!e deci%ion0akin# &od'

-ake% a!! te deci%ion% o$ te copan'-ake% a!! te deci%ion% o$ te copan'

3on%i%t% o$ &ot e+ecuti"e and non03on%i%t% o$ &ot e+ecuti"e and non0

e+ecuti"e director%e+ecuti"e director%

3eck and &a!ance , &' non0e+ecuti"e3eck and &a!ance , &' non0e+ecuti"edirector%director%


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oard Structure% 5 con6toard Structure% 5 con6t

2.2. Twotier board/Twotier board/ ana'e"ent boardana'e"ent board

-- copri%e% o$ e+ecuti"e director%copri%e% o$ e+ecuti"e director%

0 ake% deci%ion% a&out 7E8 operationa! atter%0 ake% deci%ion% a&out 7E8 operationa! atter%

0 !ed &' te 3EO9-D0 !ed &' te 3EO9-D0 accounta&!e to %uper"i%or' &oard0 accounta&!e to %uper"i%or' &oard

(uperisor) board(uperisor) board

0 onitor% te ana#eent &oard0 onitor% te ana#eent &oard

0 ake% %trate#ic and non0operationa! deci%ion%0 ake% %trate#ic and non0operationa! deci%ion%

0 it% cairan i% a!%o te cairan o$ te0 it% cairan i% a!%o te cairan o$ tecopan'copan'

0 a!! e&er% are non0e+ecuti"e director%0 a!! e&er% are non0e+ecuti"e director%


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Denin# 3orporateDenin# 3orporate

;o"ernance;o"ernance >o standard definitions>o standard definitions

?efers to the ay companies are?efers to the ay companies are

go(ernedgo(erned Concerns ith@Concerns ith@

- !ractices and procedures to achie(e!ractices and procedures to achie(e

ob1ecti(esob1ecti(es- Check and balances to minimise abuse ofCheck and balances to minimise abuse of

poer and fair treatmentpoer and fair treatment


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Denition 5 con6tDenition 5 con6t

General definition/General definition/

"".. GovernanceGovernance refers to the ay in hichrefers to the ay in hichan entity or body of people is go(ernedan entity or body of people is go(ernedand to the functions of go(erningand to the functions of go(erning%#g# go(ernance of a country%#g# go(ernance of a country

'#'# Corporate governanceCorporate governance refers to therefers to theay a corporation is directed anday a corporation is directed andcontrolled to ma+imise shareholderscontrolled to ma+imise shareholders(alue#2 Cadbury, "::'. B generally(alue#2 Cadbury, "::'. B generallyaccepted definitionaccepted definition


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CCG=s definition/CCG=s definition/

“ “### as the### as the process and structureprocess and structure used toused todirect and manage business and affairsdirect and manage business and affairsof the company toards enhancingof the company toards enhancingbusiness prosperity and corporatebusiness prosperity and corporateaccountability ith the ultimate ob1ecti(eaccountability ith the ultimate ob1ecti(e

ofof realising long term shareholder (aluerealising long term shareholder (alue,,hilst taking into account the interests ofhilst taking into account the interests ofotherother stakeholdersstakeholders” ”


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Our preferred e+planation/Our preferred e+planation/- To describe the wa) corporations should be runTo describe the wa) corporations should be run

in accordance with le'al fra"ewor,; rules andin accordance with le'al fra"ewor,; rules andre'ulationsre'ulations

Purpose: to ensure proper compliance of lawsPurpose: to ensure proper compliance of laws- The sharin' and balancin' of powers betweenThe sharin' and balancin' of powers betweenBOD and shareholdersBOD and shareholders

Purpose: to maximise shareholders’ value byPurpose: to maximise shareholders’ value bytaking into account other stakeholders’ intereststaking into account other stakeholders’ interests

-

Therefore, CG system or processes by which aTherefore, CG system or processes by which acompany is directed and controlled company is directed and controlled

!ltimate ob"ective: to protect interests of!ltimate ob"ective: to protect interests of shareholders shareholders


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hat is sound CD Ehat is sound CD E

ndicates mechanisms put in place by hichndicates mechanisms put in place by hichthe oners and management ha(e the abilitythe oners and management ha(e the abilityto carry out their responsibilities and dutiesto carry out their responsibilities and dutiesdiligentlydiligently

$?$?

?obust monitoring ; o(ersight mechanisms?obust monitoring ; o(ersight mechanisms

put in place ithin and outside anput in place ithin and outside anorganisation in order to ensure thatorganisation in order to ensure thatshareholders2 ealth ma+imisation ob1ecti(eshareholders2 ealth ma+imisation ob1ecti(eis alays pursued ; protectedis alays pursued ; protected


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$(ersight mechanisms$(ersight mechanisms

$(ersight mechanisms are legal and$(ersight mechanisms are legal and

regulatory frameork, 4$=, auditregulatory frameork, 4$=, audit

committee, remuneration committee,committee, remuneration committee,e+ternal auditors, internal control and riske+ternal auditors, internal control and risk

management systems and shareholdersmanagement systems and shareholders

!urpose@ to monitor the e+ercise of poer!urpose@ to monitor the e+ercise of poer

and authority by 4$= and managementand authority by 4$= and management

teamteam


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-ore iportant in PL3% tan %a!! pri"ate co6%-ore iportant in PL3% tan %a!! pri"ate co6%

W'?W'?

Sa!! pri"ate co6%Sa!! pri"ate co6% director < %areo!der%director < %areo!der% In"e%tor% need to kno* tat teir one' i% %a$eIn"e%tor% need to kno* tat teir one' i% %a$e

Poor ana#eentPoor ana#eent "a!ue o$ in"e%tent a'"a!ue o$ in"e%tent a'

drop = di>cu!t to rai%e additiona! capita!drop = di>cu!t to rai%e additiona! capita!

3apita! arket una&!e to attract $orei#n3apita! arket una&!e to attract $orei#nin"e%tent , i!!iuid arketin"e%tent , i!!iuid arket

Te Iportance o$ 3; Te Iportance o$ 3;


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The benefits of sound CDThe benefits of sound CD

!"proes co"pan)=s perfor"ance!"proes co"pan)=s perfor"ance

-- better mgmt and prudent allocation ofbetter mgmt and prudent allocation ofresources unnecessaryresources unnecessary

*"pirical eidence/*"pirical eidence/Studies conducted by Credit FyonnaisStudies conducted by Credit FyonnaisSecurities Asia CFSA. on CD in emergingSecurities Asia CFSA. on CD in emergingmarkets in '77" found a strong correlationmarkets in '77" found a strong correlationbeteen higher CD rankings and superiorbeteen higher CD rankings and superior

financial ratios, higher (aluations andfinancial ratios, higher (aluations andmedium-term performancemedium-term performance

-- Critic@Critic@ >ot easily (erifiable due to the use of>ot easily (erifiable due to the use ofmany different accounting ratios B can bemany different accounting ratios B can bemanipulatedmanipulated


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*nhances inestor=s and "ar,et=s confidence*nhances inestor=s and "ar,et=s confidence %#g# !C ; 0FS% study in '77" and >ottingham /


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Enance te condent o$ %upp!ier% andEnance te condent o$ %upp!ier% and!ender% !ike nancia! in%titution%!ender% !ike nancia! in%titution%

Attract te ta!ent to @oin te copan'Attract te ta!ent to @oin te copan'

;ain %upport $ro te con%uer%;ain %upport $ro te con%uer%

Ipro"e te copan' ia#eIpro"e te copan' ia#e

etter re!ation%ip *it autorit'etter re!ation%ip *it autorit'

Te &enet% o$ %ound 3; Te &enet% o$ %ound 3;


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I%%ue% o$ 3;I%%ue% o$ 3;

Principal-Agent problemPrincipal-Agent problem-- Separation o$ o*ner%ip and ana#eent.Separation o$ o*ner%ip and ana#eent.conict% o$ intere%tconict% o$ intere%t

Financial disclosures and accountabilityFinancial disclosures and accountability

0 3reati"e accountin#. B*indo* dre%%in#60 3reati"e accountin#. B*indo* dre%%in#6 Directors’ remunerationDirectors’ remuneration

0 Lu+uriou% perk% and &enet%0 Lu+uriou% perk% and &enet% Decision making poersDecision making poers

0 Per%on% epo*ered to pur%ue %areo!der%60 Per%on% epo*ered to pur%ue %areo!der%6intere%tintere%t


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I%%ue% o$ 3;I%%ue% o$ 3; (cont6d)(cont6d)

!alancing the needs o"!alancing the needs o"corporationcorporation

-- Sareo!der% and %takeo!der%Sareo!der% and %takeo!der%

Poor in"ormation andPoor in"ormation andcommunicationcommunication

00 et*een director% and %areo!der%et*een director% and %areo!der%

0 Tie!ine%% and accurac' o$ annua!0 Tie!ine%% and accurac' o$ annua!andand nancia! report%nancia! report%

C# legislation and regulatorsC# legislation and regulators

0 3opan' !a*. Li%tin# Reuireent%.0 3opan' !a*. Li%tin# Reuireent%.


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I%%ue% o$ 3;I%%ue% o$ 3; (cont6d)(cont6d)

$%cessi&e business risk taking and$%cessi&e business risk taking andlack o" risk controllack o" risk control

-- In"e%tin# *itout due re#ard on ri%k%In"e%tin# *itout due re#ard on ri%k%

in"o!"edin"o!"ed0 Lack o$ proper ri%k ana#eent and0 Lack o$ proper ri%k ana#eent and

interna! contro!interna! contro!

lecture01 introduction (part 1) ed, ned & board structure 37p

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