MODULE 1
INTRODUCTION TO
CORPORATE GOVERNANCE
ADB Private Sector Development Initiative
Corporate and Financial Governance Training
Solomon Islands
Dr Ann Wardrop
La Trobe University
Acknowledgement
These materials were produced by the Asian Development Bank’s Pacific Private Sector Development Initiative (PSDI).
PSDI is a regional technical assistance facility co-financed by the Asian Development Bank, Australian Aid and the New
Zealand Aid Programme.
Module 1 Outline
3

Introduction to corporate governance
 Meaning
of corporate governance
 Why is corporate governance important?
 The company – a legal person
 Overview of key company positions relevant to
corporate governance
 The
directors
 Directors’ duties
 The board of directors
 Board committees
Meaning of Corporate Governance
4
Corporate governance can be described as the
method of governing a company in a way that
ensures responsible behavior by and within the
company so the company can achieve its maximum
level of efficiency and profitability.
Meaning of Corporate Governance
5
Good corporate governance will ensure that a
company complies not only with its:


legal obligations; and
internal company rules;
But also ensures that the board and management are
performing in a way that puts the interests of the
company first.
Why is corporate governance
important?
6



Protects the company from fraud and destruction of
value
Makes it easier for the company to obtain finance
Enhances the reputational value of the company if it
has values of integrity, trust and ethical behaviour
Exercise 1
7
What do you think are the most important issues
concerning corporate governance for businesses in the
Solomon Islands?
Think of 6 issues. Rank them 1 – 6 in order of
importance.
Who are important in ensuring good
corporate governance?
8

The board of directors

Management

Shareholders
All of these people have different roles in ensuring
good corporate governance. Their roles are all
important.
What are their different roles?
9
In order to understand their different roles, you first
need to understand the structure of a company
compared to other business forms, for e.g. a sole
trader.
An important feature of a company is that it is a
separate legal person from those:



who formed it;
its owners – the shareholders; and
its directors.
What are the implications of it being a
separate legal person?
10
A company can:
 sue and be sue in its own name;
 continue to exist despite changes to its membership
(its shareholders);
 own and dispose of assets – shareholders own
shares in the company – they do not own the assets
of the company;
 enter into contracts and incur liabilities in its own
name
Implications of separate legal identity
11
 Because
the company is an artificial legal person it
must have people to act on its behalf (sometimes
referred to as the “organs” of the company)
 The
people authorised to act for the company are:
 The
board of directors and their delegates (business
& affairs of the company managed or under
direction or supervision of the directors)
 The
shareholders in general meeting (more limited
role)
Implications of separate legal identity
for corporate governance
12
As corporate governance is about good management
of the company, a very important part of setting up
good corporate governance is ensuring the board of
directors functions well. The following slides describe:
 different
 the
types of directors, and their duties
role of the board
 what
makes an effective board
Types of Directors
13
Executive director
Senior full-time employee of the company and
involved in the company management.
e.g. the managing director is an executive director.
He or she is a member of the board and has all the
duties of a director.
Types of Directors
14


Terms “managing director” and “chief executive
officer” often used to mean the same thing.
CEO is only a director if he or she has been
appointed as a director. If not appointed as a
director, the CEO will attend board meetings and
report to the board but will not vote at board
meetings.
Types of Directors
15
Non executive director
A part-time director who is not part of management.
Can bring:
 perspective
from outside management;
 diverse skills;
 is not necessarily an “independent director”
Types of Directors
16
Independent director

Is a type of non-executive director:
 not
a substantial shareholder of the company;
 not an executive or previous executive of the company;
 is not a material supplier or consultant to the company;
 does not have some other material contractual
relationship with the company.
Types of Directors
17
Nominee director
Appointed to represent the interests of stakeholders in
the company.
For example, could represent:
 majority
shareholder;
 employees;
 government agencies.
Types of Directors
18
The chair (or chairperson)
 Usually a non-executive director, heads the board
of directors
 Key responsibilities:
 Setting
the board agenda (in a broad sense)
 Runs board meetings, chairs general meeting
 Key advisor and mentor of other directors
 Ensures composition of the board effective
 Relationship with the CEO
 Provides leadership and external relations (with CEO)
Types of Directors
19
Exercise 2
Directors Duties
20

Contained in:

Companies Act 2009 (sections 64−70)
 Directors
 The
of state-owned enterprises (SOEs)
State Owned Enterprises Regulations 2010 regulations
17−27 (made under the State Owned Enterprises Act 2007)
Directors Duties
21


Directors’ duties are owed to the company. This flows
from the fact that the company is a separate legal
entity.
Because the directors are the ones who are controlling
the company’s affairs, they are in a position to harm the
company and the shareholders through:
 fraud
or enriching themselves at the company’s
expense; and
 mismanagement
Directors’ Duties
22
Two fundamental types of directors’ duties


To act in good faith, and in a manner that the
director believes to be in the interests of the
company (the good faith and interests duty)
To act with due care: a director must exercise the
care, diligence, and skill that a reasonable person
would (the duty of care)
The good faith and interests duty
23

The key aspect of this duty is to act:
 honestly
 for
the company
and NOT to treat the company assets as a treasure chest
for the directors’ own personal use.
What if the directors and shareholders are all the same
people?
The good faith and interests duty
24
Examples of breaches of this duty:





stealing from the company
making loans to friends, family, shareholders or other
directors on favourable terms
writing off debts owed to the company for no good reason
(e.g. just so a director won’t have to repay a loan)
Acquiring a competitor of the director’s company and using
company information to assist in acquiring the competitor
hiding company assets from creditors
The good faith and interests duty
25

Examples of breach (cont)
 Sole
director of a company diverts company assets to a
new company the director has set up, sells the assets to
the new company at an undervalue so that the original
company is left with no assets only liabilities and the
original company then goes into liquidation;
 MD
purchases shares in the company using mother’s
share trading account, the price of the company’s
shares goes up temporarily and he is able to claim a
cash bonus (b/c his bonus was tied to the share price)
The good faith and interests duty
26

MD authorises a large payment to another company
that he controls, where he knows it is not clear the
payment is due, and:

he pushes through the decision to make the payment
without debate or discussion at the board meeting;
 there
is a conflict of interest and nothing is done to
protect the interest of the company from the conflict.
The good faith and interests duty
27

Using a power for an improper purpose is a breach
of this duty. This means:
 powers
given to the board or others cannot be used for
their own private purposes, e.g.
 Using
the power to issue shares to create a new majority
of shareholders over the old majority; or
 Changing
contracts with employees or suppliers to
discourage someone from buying the company.
Conflicts of interest
28


A lot of the examples above involve conflicts of
interests between the director’s private interests and
his or her duty to the company.
There are sections in the Companies Act and the
SOE Act that specifically deal with conflicts of
interest and the procedures a director must follow
when there is a conflict. This will be covered in
detail in a later training session.
Other duties specifically mentioned in
the Act
29




Duty to comply with the Act
Duty to comply with the company rules
Duty not to disclose information or make use of company
information unless in the interests of the company or required
by law or in some other limited circumstances
Duty to prevent insolvent trading
 Note a D can be personally liable for the company’s debts
incurred after she or he fails to call a meeting to consider
appointing a liquidator in certain circumstances
2nd fundamental duty: the duty of care
30


Director must exercise or perform her or his duties
with care, diligence, and skill that a reasonable
person would exercise in the same circumstances.
The director must actively consider all decisions and
cannot sit passively by and allow other directors to
make inquiries and effectively make the decision
The duty of care
31

Director will be judged by what could reasonably
be expected of a person in the director’s position;
In other words, directors not required to exhibit a
greater degree of skill than may be reasonably
expected of people with the same degree of
knowledge and experience in the circumstances
Duty of care
32


So for example, if a director is a lawyer, she or he
would be expected to understand better the legal
implications of what the company is doing;
But, while a director’s experience is taken into
account, it is assumed a director will be reasonably
informed about the company’s financial capacity
Examples of breaches of duty of care
33

Directors failed:
 To
monitor management;
 Didn’t assess the company’s financial position properly
 Didn’t ensure there was a proper system to provide
accurate and reliable financial information
 To maintain enough cash to allow for liquidity
 Failed to employ a qualified finance director
Examples of breaches of duty of care
34


MD breached his duty of care by authorising the
company to make misleading and deceptive statements
to the stock exchange;
Directors breached duty by allowing the company to
overpay their directors’ fees
 make two loans to another director where no rate of interest
agreed or repayment terms, not in writing;
 sold assets of the company and distributed the assets to
shareholders and another director leaving the company
insolvent

Examples of breaches of duty of care
35

Director:

approved a payment of a dividend when the company
did not have any profits to pay a dividend;
 Approved
the company accounts knowing the profit
included certain amounts but had not made proper
inquiries as to whether the inclusion of these amounts
would result in the accounts not providing a true and
fair view of the company’s profit and loss
Directors of SOEs
36





Their duties are similar to the duties we have just been
discussing – to act in good faith, in the best interests of
the SOE and for a proper purpose;
Can’t allow the SOE to contravene legislation or rules
Must exercise, care, diligence and skill that a
reasonable director would exercise in the same circs (2
specific obligations that would also be a breach of the
care duty are also set out in the Act)
Must only use information for SOE purposes
Duty against conflicts and managing those conflicts
Duties of Directors
37
Exercise 3
The board of directors
38
The board has two fundamental roles:

The compliance and monitoring role: make sure
the company complies with internal procedures and
legal and regulatory requirements – including
providing accountability to stakeholders by
reporting
The board of directors
39

The performance role – setting goals and the
strategic direction of the company. Also includes:
 monitoring
performance of management and company
against strategic goals
 identifying
key issues, risks and opportunities to ensure
performance of the company is enhanced
Division of task b/w management and
the board
40

Division of tasks between senior executive,
management and the board will depend on:
 size
and complexity of the company
 relative
 stage
skills of directors and management
of company development
Division of task b/w management and
the board
41

Generally board not involved in day-daymanagement, role to govern not manage
The board steers and management rows
Board tasks









Strategy
CEO
Monitoring
Compliance
Communication
Corporate culture ethics
Board structure
Approve appointment of senior executives
Endorse T&C of senior management
Kiel, et al Directors at Work (2012)
Board composition
43


Size of the board
 Public company must have a minimum of 2 directors
and maximum of 10
Composition of the board
 All executive board
 Majority executive board
 Majority non-executive board
Composition of the Board
44

Board competencies
 Behavioural
 Governance
knowledge
 Technical professional skills
 Industry knowledge
 Diversity
Kiel, et al, Directors at Work (2012)
Composition of the board
45

Terms of appointment of the board
 “new
blood” versus retaining valuable experience
 Rules
might provide for length of term
Full board delegate work to
committees
46

Large company may require board to delegate
work to committees e.g.
 Audit
committee
 Nominations committee
 Remuneration committee
 Compliance committee
 Governance committee
 Risk committee
47
PLANNING, REPORTING
AND ACCOUNTABILITY
SESSION 3
MODULE 2
Introduction
48
Where are we?
We’ve discussed what corporate governance is
Looked at the different organs of corporate governance
and focused on directors and the board
We saw the board has 2 functions: the performance role
and compliance role
Introduction
49
In this module we are going to look at the board’s role in planning and
how it connects to reporting, and accountability. It mixes both aspects
of the board’s performance and monitoring role.



Why should the board plan and what types of plan should the
board oversee?
How must the results of the company’s performance be reported
externally?
External reporting is linked to accountability (good corporate
governance)
Why Planning?
50


Devising and monitoring strategy has been
described as “the heart of business success and
failure” and therefore central to corporate
governance (the business argument)
Strategic planning also seen as part of directors’
duties (the legal argument)
What role does the board have?
51



Precise role and extent of board’s role in devising
strategy will depend on the company’s size;
Directors of small companies deeply engaged in
strategy
Directors of large companies only able to review
and test strategy devised by management
The strategic plan
52
A strategic plan is an aspirational document that
communicates the long term goals of an organisation
describing at a general level the actions required to
achieve those goals and setting high level measurable
targets against which achievement of the plan’s goals
may be measured.
The strategic plan
53

Has an “end in mind”

Sets framework for 3-5 years or more

Typically in three parts
 Vision
statement
 Key Initiatives to achieve the vision
 Translation of strategic initiatives into the budget
The strategic plan
54


‘Budget’ refers to the first year of the plan;
forecasts are provisional
Strategic plan will require detailed plans that set
out precisely how the strategic objectives will be
achieved.
The strategic plan
55

The more detailed documents include:
 The
annual business plan – how the company will
achieve annual milestones on the way to the overall
strategic goal;
 Plans
for division of the business that relate to annual
business plan
All of these plans should be aligned with the overall
strategic plan
The business plan
56



Business plan can be used for different purposes.
As mentioned above, it can be used in the context
of the strategic plan;
Can also be used to support an application for
finance, government grants or to attract investors
Kind of information in a business plan
57







Description of your business
Description of the target market
Analysis of the competition
Description of the management team and staff
Operations
Marketing
Financial performance
National Australia Bank "How to write a business plan"
Kind of information in a business plan*
58

Financial performance

Include a SWOT analysis
 This
analysis useful for all sorts of planning
National Australia Bank, "How to write a business plan"
Example of SWOT analysis
59
Strengths
Recently updated technology
Reliable suppliers
Quality product
Reputation for customer service
Weaknesses
Insufficient working capital
Inadequate cash flow
Opportunities
Market opening up in different
geographical area
Demand is increasing
Competitor weak in a particular area
Threats
Downturn in the economy
New competitor
Threatened regulatory change that will
increase costs
The financial plan and importance of
financial forecasts
60


Dr Judy Taylor will be dealing with these tomorrow.
Dr Taylor will show how to do these plans, how to
evaluate them and how they become a mechanism
for control and evaluation of the strategic plan.
Asset management plan
61


Object to ensure the company’s assets are used
efficiently and promote profitability.
They set out “how physical infrastructure assets will
be managed over a specific period of time” to
achieve asset management objectives defined in a
strategic plan or business plan.
WA, Dept of Local Government and Communities, Integrated Planning
Website
Asset management plan
62








Asset register (record of all assets and what
happened to them)
Define level of service expected
Identify assets critical to operation
Forecast demand for various asset categories
Include possible alternative delivery progams
Provide financial information about the assets
Include strategies to manage funding gaps
Include schedule for asset performance and review
WA, Dept of Local Govt and Communities, Integrated Planning Website
The asset register
63

Very important
 For
tax purposes – ensuring assets are being correctly
depreciated;
 For
 If
financiers – can value assets of company; and
you wish to sell the company
Other plans
64

Human resources plan
Risk management plans

Review and adjustment of plans

 Monitoring
discussed in next module
 Review should make adjustments to plan if necessary
Reporting to Stakeholders
65




External reporting is part of the governance
process
Reporting is an important legal and business
requirement
Reports provide accountability, providing they are
true and honest, not misleading
Part of the governance process is to ensure that
correct data is collected to include in the reports
Reporting: Companies Act
66



Public company must send an annual report about
the company within 20 days after it’s required to
complete its financial statements.
Private company and a community company don’t
have to provide an annual report unless a
shareholder gives written notice requiring one if
their rules say so.
However, if they don’t prepare an annual report
they have to send a notice to each shareholder to
that effect within certain time limits
Contents of the annual report
67


You should refer to the Companies Act and the
company’s rules to determine what should be
included.
Legal requirements in the Act are it must be:
 In
writing and be dated;
 Include financial statements that comply with the Act
 Include an auditor’s report if required
Contents of the annual report
68



Include the names of the directors and previous
directors during relevant accounting period;
Contain any other information required by the
regulations or the rules
Be signed on behalf of 2 directors, or if there is
only 1 director by that director
Contents of the annual report
69

Additional requirements for public companies:
 State
separately the total remuneration and value of
other benefits received by each director or former
director;
 Total
amount of donations made by the company
during the period;
 Audit
fees, and other amounts payable to the auditor
The annual report as a marketing
document
70

Opportunity to communicate the company’s vision,
include headline achievements for the year, a
snapshot of the company

What community service projects

Chair’s statement and CEO’s strategic review
SOE reporting
71

Also required to provide an annual report but also
a half-yearly report;

Reports tabled in parliament

Government assistance to be disclosed

Statement of corporate objectives
 Include
board’s estimate of the current commercial
value of the Crown’s investment in the SOE group and a
statement of the manner by which that value was
assessed
EFFECTIVE BOARD MONITORING
SESSION 4
MODULE 3
Effective board monitoring
73


The previous module discussed why plans are
needed and how they are reported externally as
part of the company being accountable to its
stakeholders.
This module will examine the question how does the
board internally monitor the company’s
performance?
Effective board monitoring
74




Recall that ‘monitoring’ is one of the board’s critical
roles.
Oversight extends to all aspects of the company’s
objectives: operational, strategic, and financial.
Board also assesses the CEO
Board should also assess itself and individual
directors
Effective board monitoring
75

To perform this function it must have:
 An
effective reporting system
 Relevant
 timely

What kind of information/reports should the board
receive?
Effective board monitoring
76

Board information should include:
 Key
results indicators of business compared to:
 Plans,

strategic, annual, and others
Timing of reports will differ:
 Strategic
 Business
review annually
plan quarterly or monthly
Effective board monitoring
77


Object of reports to board should show overall
performance to ensure board focussed on strategic
issues and not detail of management
Following monthly report items should include:
 Actual
result against budget
 Year to date
 Results for previous year
 Forecast for next quarter and year-end
Board report
78

General
 Overview

of operations
Financial
 Profit
and loss, balance sheet, cash flow, capital
expenditure
 Working capital trends and analysis
 Loans
 Foreign exchange exposure
 Sales
 Costs
Archer & Thornton, "Seeing the wood for the trees" Co Dir Magazine
(2012)
Board report
79

Non-financial reports
 Human
resources
 Relevant
committee reports for particular meetings
 Progress
against strategic plans
Board reports
80





Too much information or not enough time to review
information
This is an area of risk for the board
Board needs to consider what information they
need in line with directors’ duties
Director packs can be large
No defence to say that you have been provided
with too much information
Board reports
81



If there is a lot of information then you need to
ensure there is sufficient time to read it
The board controls the information it receives so
work with management to ensure it provides
information in a format that is useful for the board.
One mechanism used: dashboard reporting
Reporting dashboard
82
*Image by Klipfolio: http://www.klipfolio.com
Dashboard reporting
83

Useful, also has its limitations
 If
too much information over a large variety of factors,
can be just as confusing to read

If dashboard highlights any problems the detail of
the problem should be provided in a separate
report
Performance review and its relationship
to planning
84
Plans
Performance review
Strategic 5 year plan
Sets the long term objectives
Annual review of strategic plan
Reviews progress and relevance of strategic plan
reported to the board
Annual business plan
Quarterly review of business plan
Sets out annual objectives and initiatives that are
determined in relation to strategic 5 year plan
Reviews progress and reported to the Board
Divisional plan
Monthly performance review of the division
Sets out detail of how annual plan is to be
implemented
Reported to the CEO/management and forms the
basis of report to the board
Performance development plans of staff
Annual performance reviews
Guidelines for developing
performance measures
85


Board’s role is to oversee management set up a
workable planning program that is linked to
performance review
Performance measures or key performance
indicators (KPIs):
 valid
 verifiable
 global
 communicable
 achievable
Kiel, et al, Directors at Work (2012)
Guidelines for developing
performance measures
86



Number of performance measures of the business
should not be excessive;
Assessment of the business should not only relate to
financial performance
“Balanced scorecard” approach
 Financial
 Customer
 Internal
processes
 Learning and growth
Guidelines for developing
performance measures
87



If badly designed lead to “gaming” by executives
and staff
Lead to short termism
Gaming reduced by better design and a valuesdriven culture in the company
 Are
managers acting within organisational values
 Conduct
 Look
staff attitude survey
at rates of absenteeism, sick leave and retention rates
Assessing the CEO
88

Agree performance indicators and their objectives
 Are
they related to remuneration?
 Should
 Mix
be related to strategic plan
of quantitative indicators and qualitative indicators
 Qualitative
 Heavy
indicators not easily be measured
emphasis on annual financial indicators – short
termism
Assessing the CEO
89

Chair or committee carry out the assessment

Informal discussions or written questionnaire

Companies with resources engage outside
consultants to facilitate corporate governance
Assessing the Board and Individual
Directors
90




Can be a sensitive issue
In addition to usual methods (co performance) formal
performance appraisal should be used
Review of board and individual directors should be
annual, gaps identified previously form basis of
following year review
Review entire board and its mix of skills, diversity
Are there regular meetings?
 Reports sent on time so members can read?
 Minutes kept?

Review of individual directors
91

Questions to be asked:
 ‘Do
the directors understand the company business and
strategy?
 Do they stay abreast of current issues and trends in the
industry?
 Do they attend all board and committee meetings?
 Are they well prepared and do they actively
contribute?
 Do they challenge management when necessary?
 Do they effectively enquire into major performance
deficiencies?’
AICD, Appraisal of Board and Individual Directors: Director Q&A (2013)
Effective board monitoring
92
Exercise 4