Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance: A Review
Prof. Igor Filatotchev
Veolia Imperial Pathfinder (VIP) Programme
A Quick Quiz
•
•
•
•
•
If I have the word ‘director’ on my business card but am not a statutory member
of the board of my organisation, do I have the same liabilities as a board member?
Do non-executive (independent) directors have fewer responsibilities than
executive directors?
In a limited liability company, is the prime duty of a director to the shareholders?
If you are advising and working with a board, either as a senior manager or a
consultant, how do you avoid directoral liability?
Are directors of state-owned organisations, including agencies and parastatals,
exempt from normal directoral responsibilities?
Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance: Current Issues
• Corporate failures and regulatory initiatives have placed corporate
governance systems under closer scrutiny than ever:
• Enron; Worldcom (USA)
• Maxwell Group (UK)
• Parmalat (Italy)
• VW (Germany)
• Hyundai (Korea) etc.
Veolia Imperial Pathfinder (VIP) Programme
Areas of Concern

Concentration of power in small number of executive directors

Lack of balance in Board composition: “an executive capture of
Boards”

Deficiencies in accountability and audit

Over-generous remuneration of the executives: “a reward for
failure”
Veolia Imperial Pathfinder (VIP) Programme
Why is Corporate Governance so
Important?
• “Good Corporate Governance” leads to better accountability and
transparency
• “Good Corporate Governance” prevents managers from making
“wrong” strategic decisions
• “Good Corporate Governance” facilitates the successful
implementation of important strategies
Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance
• “Corporate governance deals with the agency problem: the
separation of management and finance. The fundamental question
of corporate governance is how to assure financiers that they get a
return on their financial investment.”
Shleifer, Andrei and Robert W. Vishny (1997) 'A Survey of Corporate
Governance', Journal of Finance 52, 737-783.
Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance
• “ …the system by which companies are directed and
controlled. Boards of directors are responsible for the
governance of their companies… responsibilities of the Board
include setting the company’s strategic aims, providing the
leadership to put them into effect, and supervising the
management of the business and reporting to shareholders
on their stewardship…”
The UK Department of Trade and Industry, 2005
Veolia Imperial Pathfinder (VIP) Programme
The Regulator’s Response: UK
•
•
•
•
•
•
•
1992
1994
1998
1998
1999
2003
2010
Cadbury Code
Greenbury Report
Hempel Report
Stock Exchange Combined Code
Turnbull Report
Higgs and Smith Reports
Walker Report
Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance in the USA: 2002
Sarbanes-Oxley Legislation
• Increase in directorial independence
• Constraints on non-audit services of audit firms; rotation of auditors
• “Section 404”
- directors report on the effectiveness of internal controls
- auditors report on management’s assessment of the
controls
- potentially unlimited legal liability
• Disclosure of voting records by institutions
Veolia Imperial Pathfinder (VIP) Programme
SEC Rule of Proxy Access 2010
Under the new rule shareholders seeking access to corporate proxy
materials would:
•have to own at least 3% of the total voting power entitled to vote at the
meeting.
•be able to aggregate holdings to meet the 3% requirement.
•be required to have held their shares for at least three years.
•not be able to use the new rule "if they are holding the securities for
the purpose of changing control of the company.“
•be able to include one nominee or a number up to 25% of the board,
whichever is greater.
Veolia Imperial Pathfinder (VIP) Programme
“Shareholder Activism” and the Role
of Boards
•
Shareholder activism - shareholders take an active role in the firm’s operations
and attempt to secure drastic changes in the organisation when performance
declined.
•
Annual General Meeting of Shareholders
•
Board of Directors that include the representatives of the owners and has the
responsibility to oversee the direction of the organisation chosen by the CEOs
•
Internal control is the process by which the Board oversees the management of a
corporation
•
Incentive clauses in managers’ contracts (ESOs; LTIPs)
Veolia Imperial Pathfinder (VIP) Programme
Principles of “Good Corporate
Governance“
• Separate the roles of Chairman and Chief Executive Officer.
• Not less than one half of the Board should be Non Executive
(Independent) Directors, and their independence and effectiveness
should be strengthened.
• Establish committee dominated by Non Executive Directors and
independent of management (e.g., nomination, audit and
remuneration committees).
• Short-term contracts for executive directors, etc.
Veolia Imperial Pathfinder (VIP) Programme
The UK Companies Act 2006:
Section 171 (“the Seven Non-Exhaustive Duties”)
•
•
•
•
•
•
•
To act within their powers – the company’s constitution
To promote the success of the company
To exercise independent judgement
To exercise reasonable care, skill and diligence
To avoid conflicts of interest
Not to accept benefits from third parties
To declare interests in proposed transactions
Veolia Imperial Pathfinder (VIP) Programme
Role and Scope of Remuneration
Committee
• Set overall policy and framework for remuneration of Chairman,
CEO, other EDs and Company Secretary
• Appoint remuneration consultants to provide specialist advice, and
set their TOR
• Determine appropriate market comparators, and target relative
position for total remuneration and all elements
• Devise and recommend appropriate incentive schemes, both cash
and share-based
• Set performance conditions and targets for all incentive schemes
Veolia Imperial Pathfinder (VIP) Programme
The UK 2011 Stewardship Code
Shareholder Engagement to ensure good practice standards of
Corporate Responsibility & Corporate Governance
– The process through which investors seek to improve a
company’s corporate governance (in its widest sense) and
therefore performance
– Dialogue with companies, exercising voting rights to enhance or
protect shareholder value
– Does not reduce investment universe
Veolia Imperial Pathfinder (VIP) Programme
UK Stewardship Code
1.
2.
3.
4.
5.
6.
7.
Institutional Investors (IIs) should disclose their stewardship policy
IIs should have a robust policy on managing conflicts of interests in
relation to stewardship
IIs should monitor their investee companies.
IIs should have clear guidelines on when and how they will escalate their
activities.
IIs should be willing to act collectively with other investors.
IIs should have a clear policy on voting and disclosure on voting activity
IIs should report periodically on their stewardship and voting activities
Veolia Imperial Pathfinder (VIP) Programme
New Perspectives on Corporate
Governance
• Monitoring and
control
• Strategy/Service
Monitoring and control
Strategy/Service
Resources and ‘legitimacy’
• Resources and
‘legitimacy’
Veolia Imperial Pathfinder (VIP) Programme
Corporate Governance and
‘Entrepreneurial Leadership’
• “Wealth protection” and “wealth creation” roles of corporate governance
• Resource and strategy roles of corporate boards
• Boards as a “knowledge pool”
• The new roles of non-executive directors
• Individual entrepreneurship, corporate venturing and innovation
Veolia Imperial Pathfinder (VIP) Programme
Stakeholder Model of Governance
• The roles of stakeholders in the governance
process
• “Responsible” corporate behaviour
• Business ethics
• Sustainability as a longer-term governance
objective
Veolia Imperial Pathfinder (VIP) Programme
Corporate Stakeholders
•
•
•
•
•
•
•
•
Shareholders
Managers
Employees
Banks and other lenders
State
Customers
Suppliers
Local community ...
Veolia Imperial Pathfinder (VIP) Programme
Stakeholder Model of Corporate
Governance
• Although top managers are technically stakeholders, their primary
role is one of contracting on behalf of the firm (directly or indirectly)
with other stakeholders as well as with themselves.
• Top managers are at the centre of a ‘hub and spoke’ stakeholder
model because they contract with all other stakeholders.
• Corporate Governance is the means by which other stakeholders
control the decisions of a firm’s senior managers.
Veolia Imperial Pathfinder (VIP) Programme
Corporate-level Response
Corporate Social Responsibility debates prompted a number of
corporate responses:
•“Ethical CSR” -compliance with the firm’s economic, legal and ethical
functions.
•“Altruistic CSR” - philanthropy that have no position within the domain of
business.
•“Strategic SCR” - the potential to increase the social performance of
business by translating the identified social needs into a business case.
Veolia Imperial Pathfinder (VIP) Programme
Business Ethics and Corporate “Code
of Conduct”
• Organisational level - the role of business in the
national and international organisation of society.
• Individual level- the behaviour and actions of
individuals within the organisation, in particular the
role of managers in the strategic management process.
Veolia Imperial Pathfinder (VIP) Programme
Corporate Response
The heads of McDonald ’ s, Diageo, UBS, Merk and other blue-chip
companies are among those who develop specific measures and targets
for their leadership teams on CSR and business ethics. Assessment targets
include:
•Employee safety and diversity
•“Corporate citizenship”
•Company’s reputation
•“Triple bottom line”
These criteria are often incorporated in formal governance systems
Veolia Imperial Pathfinder (VIP) Programme
International Patterns of Corporate
Governance
• UK/USA models of “shareholder activism”
• “Relationship Governance” in Germany and Japan
• South-East model of family control
• Governance in transition and emerging market
economies
Veolia Imperial Pathfinder (VIP) Programme
Questions?