Southern Taiwan University
International Master of Business Administration
(IMBA) Program
FINAL REPORT
STUDENT’S NAME: NGUYEN PHAN ANH HUY (阮潘英輝)
STUDENT’S ID NUMBER: M987Z264
Tainan , June 2010
How global is good corporate governance?
Corporate governance describes the framework by which companies are directed and
controlled i.e. the setting of corporate objectives and the monitoring of performance against these
objectives. Good corporate governance aims to provide incentives for the board and management
to pursue the objectives that are in the interests of the company and its shareholders.
This framework encompasses structural and behavioural components. Structural
components include whether the roles of Chairman and CEO are separated and how many
independent directors are on the board. Behavioural components include the level of directors’
attendance at board meetings, disclosure of directors’ remuneration and remuneration policy.
Increasingly, the issues of board diversity and a company’s code of ethics are also considered
when assessing the effectiveness of a company’s. decision making. While not traditional
elements they are viewed as indicators of independent and accountable decision-making.
Corporate governance defines a set of relationships between a company’s
management, its board, its shareholders and other stakeholders. It is the process by which
directors and auditors manage their responsibilities towards shareholders and wider company
stakeholders. For shareholders it can provide increased confidence of an equitable return on their
investment. For company stakeholders it can provide an assurance that the company manages its
impact on the environment and society in a responsible manner. Corporate governance
encompasses the combination of laws, regulations, listing rules and voluntary private sector
practices that enable the company to attract capital, perform efficiently, generate profit and meet
other legal obligations and general societal expectations.
Recent history is littered with high profile examples of corporate governance scandals
and failures. The result is loss of investor confidence in financial markets and fall in market
value. Below we take a closer look at high profile examples of scandals that played key roles
forming the corporate governance landscape.
Maxwell Corporation (1991), The Maxwell ‘empire’ was largely comprised of two
publicly quoted companies – Maxwell Communication Corporation and Mirror Group
Newspapers. Heavy borrowing to finance the expansion of his publishing and media empires led
to unsustainable levels of debt. Following the presumed suicide of Robert Maxwell, the group’s
financial problems were exposed. Debts of GBP 4 billion and a GBP 441 million sized hole in its
pension funds were eventually revealed. Subsequent analysis highlighted a number of corporate
governance deficiencies. Robert Maxwell held the positions of both chairman and chief
executive. The lack of separation of these roles led to the concentration of power which
facilitated the fraudulent activities. The effectiveness of the non-executive directors and pension
trustees was also questioned although the Serious Fraud Office brought no charges against them.
The Maxwell scandal has been described as the greatest fraud of the 20th Century, forcing the
issue of corporate governance firmly into the public, business and political arena.
Parmalat (2003), So soon after the Enron scandal many assumed that no similar
financial collapse could take place in Europe. However Parmalat, one of Italy’s largest publicly
quoted companies, was declared insolvent in December 2003. The scandal was similar to Enron
in that the auditors apparently failed to pick up on fraud. Forged documents showed cash
holdings at a subsidiary, Bonalat, which simply did not exist. This scandal again highlighted the
role of the auditor and need for an effective whistle-blowing system. An investigation found that
while a number of employees suspected wrong-doing, no-one came forward. The company’s
board and ownership structure also raised questions over corporate governance best practice.
While publicly quoted, the company was still 51% owned by the Parma based family of its
founder Calisto Tanzi. Further, Tanzi held the role of both Chairman and CEO and the board was
far from independent, comprising a number of family members.
Against the backdrop of corporate scandals and fraudulent accounting practices,
governments and regulators have sought to introduce stronger legislation and regulation to guard
against similar collapses in the future and restore investor confidence in financial markets. In
some countries legislation and codes addressing corporate governance have been in existence for
decades, in others governments are just embarking on the development of such codes. Below are
some of the key legislative developments that form the corporate governance landscape in their
respective countries and have influenced governance codes around the world.
Again, following high profile scandals – this time Enron and WorldCom – the US
Congress working with the New York Stock Exchange (NYSE) agreed reforms to address
potential conflicts of interest and the close working relationship between companies and their
auditors. The result was The Accounting Industry Reform Act 2002, widely known as the
Sarbanes-Oxley Act (2002). The purpose of the act is to enforce the independence of external
auditors, reinforcing the duties of chief executive officers (CEOs) and chief financial officers
(CFOs) by imposing strict penalties for misrepresenting the financial position of their companies
in quarterly and annual reports. Penalties of personal fines up to USD 1 million or imprisonment
of up to 10 years, or both, are available for mis-declaration. Sarbanes-Oxley has had a profound
effect on corporate governance strategies within the US and further afield. The NYSE listing
requirements proscribe additional requirements including that listed companies must have a
majority of independent directors and must adopt and disclose a code of business conduct and
ethics for directors, officers and employees, and promptly disclose any waivers of the code for
directors or executive officers.
Emerging consensus of corporate governance standards: The global nature of financial
markets links companies and investors around the world. The impact of major corporate scandals
and subsequent regulatory and legislative responses from governments and regulators has
been felt in all major economies. It should therefore come as no surprise that the principles of
good corporate governance are converging, while variations in national company law and
practice remain. Below we summarise the governance principles developed by the OECD to
assist both OECD and non-OECD governments in their efforts to evaluate and improve the legal,
institutional and regulatory framework for corporate governance in their countries and look at
common principles in the corporate governance codes of 24 developed economies. The
Organisation for Economic Cooperation & Developments (OECD) first published its Principles
for Corporate Governance in 1999. These are widely used as a benchmark for policy makers,
investors, corporations and other stakeholders. The principles are nonbinding but represent
common corporate governance standards and good practice, intended to reflect and
inform the corporate governance debate internationally. The principles were revised in April
2004 and cover the following issues:
I - Ensuring the basis for an effective corporate governance framework
II - The rights of shareholders and key ownership functions
III - The equitable treatment of shareholders
IV - The role of stakeholders in corporate governance
V - Disclosure and transparency
VI - The responsibilities of the board
A fundamental corporate governance difference among countries, frequently embedded
in company law, relates to board structure and the use of a unitary versus a two-tier board. In the
majority of countries (three quarters) the unitary structure based on the Anglo-Saxon corporate
model is predominant. Elsewhere, notably in Germany and Austria, the two-tier structure
predominates. Variations of these structures include a unitary board with a separate board of
auditors (Italy) or unitary board which appoints a separate managing director (Finland).
In a number of countries minimum board size is determined by national law or listing
requirements. The ‘appropriate’ board size may be dependent upon company size and sector.
Corporate governance codes have tended to shy away from the complex and potentially
restrictive task of recommending a specific size, instead employing more general guidance.
A key principle in the majority of corporate governance codes is the clear division of the
responsibility for running the board and the executive responsibility for running the company’s
business. The idea is that no one individual should have unfettered powers of decision. The role
of the chairman in leading the board, ensuring its effectiveness through dissemination of accurate,
timely and clear information and communication with shareholders, is highlighted in a number of
codes. In some countries, such as Sweden, the legislation requires an executive managing
director separate from the non- executive board. Elsewhere, the two tier board structure ensures
the separation of roles.
All directors should take decisions objectively and in the best interests of the company.
Independent oversight of board decision-making is integral to the effective functioning of a
company, maintaining accountability and transparency. Recent developments in corporate
governance have focused on the proportion of independent directors on the board.
Designation of independence is, to a large extent, subjective, and depends on individual integrity
and judgment. However, there are certain relationships that are widely perceived to influence
an individual’s capacity for independent decision-making.
The role of the audit committee has come under close scrutiny, especially in the
aftermath of recent accounting scandals. The main responsibilities of the audit committee are to
monitor and review the integrity of the company’s financial statements, its internal financial
controls, the external auditor’s independence and objectivity and the effectiveness of the audit
process as a whole. Most large cap companies have a separate audit committee, though the
proportion of independent directors that is required for an effective audit committee varies
between countries.
This table show the majority independent audit committee: