Bob Tricker Corporate Governance – Principles, Policies and Practices 3 e Chapter 4 The
governance partnership © Bob Tricker, 2015. All rights reserved.
The governance partnership - In which we consider: - shareholder rights shareholder stewardship
and activism shareholder information different types of directors’ legal duties and rights the
board leadership role of the chairman the corporate officers. Tricker: Corporate Governance, 3 rd
edition
The governance partnership Shareholder rights • determined by company law and a company’s
articles of association, • share ownership typically gives the right – to receive notice, attend and
vote at shareholders’ meeting – to inspect the shareholder register and the register of directors
and officers – to regular information • But, having elected directors to govern the company,
shareholders do not have the right to be involved in the day to day management of the business,
nor to inspect company records or management accounts. Tricker: Corporate Governance, 3 rd
edition
The governance partnership Shareholder stewardship and activism • Advocates of shareholder
democracy equate rights of share ownership with responsibilities • Shareholders, particularly
institutional shareholders, they argue, have a duty to be a watchdog over corporate activities and
possible excesses, for example: – challenging excessive director remuneration – opposing
schemes to protect the company and the incumbent directors from predators – highlighting
unsatisfactory performance • Some corporate governance codes call for such a commitment.
Tricker: Corporate Governance, 3 rd edition
The governance partnership Shareholder information • Most company law and corporate
governance codes encourage transparency in corporate matters and require the reporting of
specific information • The OECD corporate governance principles call for timely and accurate
disclosure of – all material matters regarding the company – its financial situation, performance,
ownership and governance. • Such transparency requires – accurate accounting methods – full
and prompt disclosure of information regarding the company – disclosure of conflicts of interest
of directors or controlling shareholders. Tricker: Corporate Governance, 3 rd edition
The governance partnership • Under the UK CG Code (2008) companies have to: – explain the
company’s business model and overall financial strategy – to report on the company’s strategy,
risk management, and governance procedures. – show that remuneration incentives are
compatible with the companies risk profile • Companies do not need to follow a specific
template in their presentation. Their report should describe the company’s exposure to risk,
explain how they are identified, and outline the risk management systems in place. • Most listed
companies now use websites as well as hard-copy reports to convey shareholder information.
Tricker: Corporate Governance, 3 rd edition
The governance partnership • Some listed companies use road shows, conference calls, webcasts
and other internet opportunities to communicate with shareholders and the public • Some
companies have developed on-line tools for readers to build their own reports • An on-line stock
exchange announcement by a company can now trigger e-mail alerts, media feeds and possible
updating of Facebook, You. Tube and Twitter pages. Tricker: Corporate Governance, 3 rd
edition
The governance partnership Regularly updated standing information about the company, its
activities and personalities can be used to de-clutter and simplify the annual company report.
Tricker: Corporate Governance, 3 rd edition
The governance partnership Different types of ‘director’ and director appointment – – The
appointment of directors Cross-directorships The chairman and chief executive roles Board
committees. Tricker: Corporate Governance, 3 rd edition
Directors and board architecture Different uses of the title ‘director’ • Director – executive
director [ED] – non-executive director [NED] • Connected [CNED] • Independent [INED] •
Outside director • Managing Director • Shadow director • Nominee director • Governing Director
(Australia private company domination) • Worker or employee director • Associate director.
Tricker: Corporate Governance, 3 rd edition
Directors and board architecture • Independent NED – a non-executive director with no
relationship with the company, other than the directorship, that could affect the exercise of
independent judgement • Connected NED – a non-executive director with a connection to the
company. Tricker: Corporate Governance, 3 rd edition
Directors and board architecture • Connected NED - a non-executive director with a connection
to the company such as: – retired executive of that company – relative of the chairman or CEO –
nominee of a large shareholder – representative of a significant supplier, distributor or customer
– representative of a major financial partner – retired partner of the firm’s auditor - there could
be good reasons for appointing to board (experience, knowledge, contacts, but a connected NED
is not an independent NED). Tricker: Corporate Governance, 3 rd edition
Directors and board architecture • Cross-directorships Tricker: Corporate Governance, 3 rd
edition
Directors and board architecture • Chairman and Chief Executive • Should they ever be the same
person? – the arguments for and against – what the codes say – the practice in the USA Tricker:
Corporate Governance, 3 rd edition
Directors and board architecture • Board committees • Standing committees of the main board –
The three committees in the codes • Audit committee • Remuneration Committee • Nomination
Committee – Other board committees • Executive or General Purposes committee • Finance
committee • Compliance or corporate governance committee • Strategy committee. Tricker:
Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director Directors’
responsibilities derive from the nature of the joint stock limited liability company and are
enshrined in statute law, case law and regulation Details vary by jurisdiction, but the essential
duties are: • a duty of trust - to exercise a fiduciary responsibility to the shareholders • a duty of
care - to exercise reasonable care, diligence and skill. Tricker: Corporate Governance, 3 rd
edition
Directors’ Capabilities and Responsibilities The legal duties of a director The duty of trust – Act
honestly - for the benefit of members – Show independence of judgement – Avoid conflict of
interest – Act fairly Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The Nolan (UK) principles of public life 1.
Selflessness - holders of public office should serve the public interest, not seek gains for their
friends 2. Integrity – they should not place themselves under financial obligation to outsiders
who might influence their duties 3. Objectivity – they should award public appointments and
contracts on merit 4. Accountability –they should submit themselves to the appropriate scrutiny.
5. Openness – they should give reasons for their decisions. 6. Honesty – they should declare
conflicts of interest 7. Leadership – they should support these principles by personal example.
Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director Act honestly - for the
benefit of members Exercise powers honestly in line with the company’s constitution Exercise
powers in good faith, for the benefit of the members in the short and long term Recognise the
need to foster business, to see the impact of operations on communities and environment, and
maintain a reputation for good business conduct. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director Show independence of
judgement A director has a duty to exercise independence of judgement and not restrict his
thinking or action. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director Avoid conflict of
interest A director must disclose a personal interest in any company transaction and abide by the
board’s decision on that interest A director must not make a secret profit out of the company A
director must not use any property, information or opportunity from the company for his own
benefit unless allowed by the company’s constitution and disclosed. Tricker: Corporate
Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director Act fairly A director’s
duty is to act fairly between all the members of the company A director must recognise the
interests of minority Shareholders. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The legal duties of a director The duty of care
Exercise care, skill and diligence A director must exercise the care, skill and diligence which
would be exercised by a reasonably diligent person - with the knowledge, skill and experience
expected of a director - and the knowledge, skill and experience which that director has. Tricker:
Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities Codification of Directors’ Duties UK Company Act
2006 • • Duty to act within powers Duty to promote the success of the company Duty to exercise
independent judgement Duty to exercise reasonable care, skill, and diligence Duty to avoid
conflicts of interest Duty not to accept benefits from third parties Duty to declare interest in
proposed transaction or arrangement. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities A related party transaction is one between a
company and a party closely related to it, such as a director or a major shareholder – for
example, the purchase by the company of a property from one of its directors Related party
transactions provide good examples of the requirement to disclose personal interests The listing
rules of most stock exchanges and securities regulators require related party transactions to be
disclosed and, often, approved by the other shareholders. Tricker: Corporate Governance, 3 rd
edition
Directors’ Capabilities and Responsibilities Insider trading, that is trading in a listed company’s
shares on the basis of privileged, share-price sensitive insider information is a breach of a
director’s fiduciary duty It is also illegal in almost all countries Japan, Hong Kong and Germany
were among the last countries to make insider trading a criminal offence The United States has
the most severe penalties for insider dealing. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities • Directors have to be careful not to trade in their
company’s shares when they are in possession of inside or privileged information such as the
company results just prior to publication and before the stock market has that information • The
company secretary will often inform directors when the window of opportunity for trading in the
company’s shares is open and, more importantly, when it is closed. Tricker: Corporate
Governance, 3 rd edition
Directors’ Capabilities and Responsibilities s. 9(1) Securities (Insider Dealing) Ordinance Insider
Dealing Tribunal (Hong Kong) Insider trading takes place: When a person concerned with a
corporation who is in possession of information which he knows is relevant information in
relation to that corporation deals in any listed securities of that corporation or their derivatives
(or listed securities of related corporation) or counsels or procures another person to deal in such
listed securities knowing or having reasonable cause to believe that such persons would deal in
them. ” Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The US Sarbanes-Oxley Act 2002 (SOX) • To
strengthen corporate governance and restore investor confidence following Enron, World. Com
and others • SOX imposed new accountability standards, with criminal penalties, on directors. •
CEOs and CFOs must certify under oath that their financial statements neither contain an ‘untrue
statement’ nor omit any ‘material fact’. • Audit committees must be comprised totally of
independent outside directors. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The US Sarbanes-Oxley Act 2002 (SOX) • SOX also
established new independence standards for external auditors • Areas of lucrative non-audit work
by audit firms prohibited • A Public Company Accounting Oversight Board (PCAOB) created to
oversee public accounting (auditing) firms and to issue accounting standards • Rules regulated by
the SEC and apply to all companies quoted in the United States, including overseas companies
listed there • Sarbanes Oxley Act differentiated the United States from many other countries by
enshrining corporate governance practice in law rather than voluntary codes. Tricker: Corporate
Governance, 3 rd edition
Directors’ Capabilities and Responsibilities The US Sarbanes-Oxley Act 2002 (SOX) • SOX has
proved expensive to operate, particularly section 404 • Some overseas companies have
complained about the potential extra-territorial legislation • Others have withdrawn from listing
in the United States. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities UK Companies Act 2006 • Clarified directors' duties
for the first time in statute law • Made clear that directors have to act in the interests of
shareholders • But added that in acting in the shareholders' interests, they must pay regard to the
longer term interests of employees, suppliers, consumers, and the environment. Tricker:
Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities UK Companies Act 2006 • Encouraged narrative
reporting by companies calling for them to be forward-looking, identifying risks as well as
opportunities • Quoted companies have to provide information on environmental matters,
employees and social and community issues • This business review must include information on
any policies relating to these matters and their effectiveness, plus contractual and other
relationships essential to the business. Tricker: Corporate Governance, 3 rd edition
Directors’ Capabilities and Responsibilities UK Companies Act 2006 • Promotes shareholder
involvement in governance by enhancing the powers of proxies • Makes it easier for outside
investors to be informed and exercise governance rights in the company • Allows shareholders to
limit the auditors' liability to the company to what is fair and reasonable • Requires institutional
investors to disclose how they used their votes • Introduces a new offence for recklessly or
knowingly including misleading, false or deceptive matters in an audit report. Tricker: Corporate
Governance, 3 rd edition
The governance partnership We have considered: - shareholder rights - shareholder stewardship
and activism - shareholder information - different types of director - directors’ legal duties and
rights - the board leadership role of the chairman - the corporate officers. Tricker: Corporate
Governance, 3 rd edition