Associate Professor Mak Yuen Teen
NUS Business School
National University of Singapore
Outline
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• What is corporate governance?
• Some misconceptions about corporate
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governance
Why is corporate governance important?
Global trends impacting corporate governance
Key foundations of good corporate governance
Shareholder and stakeholder perspectives of
corporate governance
What is Corporate Governance? A Definition
Corporate governance is about having the
appropriate people, structure, systems and
processes to direct and manage the
organisation, in order to ensure its long-term
success, through enhancing performance,
accountability and risk management.
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What is Corporate Governance? Key Drivers,
Objectives and Outcomes
People
Values
Culture
Rules
Corporate
Governance
Environment
Structures/systems
Performance
Accountability
Processes
Risk Management
Long-Term Success
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Three Misconceptions about Corporate
Governance
• Myth 1: Corporate Governance Stifles
Leadership/Entrepreneurship
• Myth 2: Corporate Governance is (Only) About
Control and Compliance
• Myth 3: Corporate Governance Is Only Important
for Corporations with Public Shareholders
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Why is Corporate Governance Important?
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• Critical to development of capital markets
• Key to building trust of investors and other
stakeholders in the organisation
• Valued by certain investors who may only invest in
well-governed companies or who are prepared to pay
a premium for such companies (especially long-term
institutional investors)
• Ensures long-term value creation, performance and
sustainability of organisations
• Poor corporate governance can destroy organisations
Corporate Governance and Capital Market
Development
• Many studies have shown that good corporate
governance is related to corporate performance and
development of capital markets, e.g.,:
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Studies by GovernanceMetrics International (GMI) found that
their governance ratings of companies worldwide are correlated to
firm performance over 3, 5 and 10-year periods.
La Porta et al. (1997) studied 49 countries and that found those
with weaker investor protection tends to be have more
concentrated share ownership, and another of their studies on
these countries found that weaker legal rules and enforcement of
these rules were associated with smaller and narrower debt and
equity markets.
Corporate Governance and Stock Premiums:
McKinsey Global Investor Opinion Survey
2002
Corporate Governance and Stock Premiums:
McKinsey Global Investor Opinion Survey
2002
Poor Corporate Governance and Value
Destruction
Global Trends Impacting Corporate
Governance
• Greater corporate governance regulation in reaction to
corporate scandals and financial crises
• Increase in shareholder engagement and governance focus
by institutional investors, fund managers and other
intermediaries
• Increased focus on governance, compliance and ethics of
entities within the group and throughout the supply chain by
global companies
Key Foundations of Good Corporate
Governance
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1.
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3.
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6.
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8.
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10.
Robust Regulatory Framework and Enforcement
Strong Shareholder Rights and Equitable Treatment of All
Shareholders
Strong Regard for the Interests of Other Stakeholders
Highly Ethical Culture
Effective Board of Directors (Board Composition and Practices)
Effective CEO
Balanced and Constructive Board-Management Relationship
Properly Designed and Implemented Remuneration Schemes
Effective Internal Controls, Risk Management, Internal and
External Audit
High Standards of Disclosure and Transparency
Adapted from OECD Principles and
CG Codes
Key People and the 3 C’s
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• Key People Who Drive The Quality of Corporate
Governance in an Organisation and Set the Tone
at the Top:
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Controlling shareholder
Board of Directors (especially the Board Chairman)
CEO
• 3 C’s:
• Character
• Competence
• Commitment
The 3 C’s
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"Somebody once said that in looking for people to
hire, you should look for three qualities:
integrity, intelligence, and energy. And if they
don't have the first, the other two will kill you.
You think about it; it's true. If you hire somebody
without the first, you really want them to be
dumb and lazy."
Warren Buffett
Role of the Board
Source: UK Corporate Governance Code
(September 2014)
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Profile of an Effective Board
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Determinants of Board Effectiveness
Importance of a Balanced and Constructive
Board-Management Relationship
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• Need for clarity of roles and responsibilities and
appropriate division of responsibilities between
board and management
• Corporate governance is not about centralising
control with the board and having the board
make all the key decisions
• An open and trusting relationship with mutual
respect between the board and management is
critical
Importance of a Balanced and Constructive
Board-Management Relationship
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“In my family, my husband makes all the major
decisions. So far, there have been no major
decisions.”
Anonymous
This is not a good way to govern and manage an
organisation!
Importance of a Balanced and Constructive
Board-Management Relationship
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Drugmaker Sanofi Fired Its CEO And The Stock Is
Tanking
The move appears to come after a clash of styles…
Sanofi Chairman Serge Weinberg said Mr.
Viehbacher was ousted because of his management
style and relationship with the company’s
board…. The move comes after Viehbachher wrote the
board a letter telling them why changing CEOs would
be a bad idea…In the letter, Viehbacher wrote that “it
has come to my attention, first through rumor, that
the chairman of the board is actively seeking a
successor to me as chief executive officer.
Business Insider, October 29, 2014
Shareholders Versus Stakeholders
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A company/organisation can have many different
stakeholders:
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Shareholders/members
Creditors
Management
Employees
Customers
Suppliers
Government
Community
Some countries follow a stakeholder model of
corporate governance while others follow a
shareholder model – but the two models are
converging to some extent
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Shareholders Versus Stakeholders
• The interests of different stakeholders may diverge
• Even shareholders may not have the same
interests, e.g.,:
• controlling shareholders versus minority
shareholders
• long-term shareholders versus short-term
shareholders
• institutional shareholders versus retail shareholders
• The board’s role is to consider what is in the best
interests of the organisation in light of these
competing interests
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“Corporate governance is an
ongoing journey with no fixed
destination”
Source: Well-known corporate leader in Singapore
CPAA/VCPAA Seminar, August 2007
Thank you
Q&A
Email: bizmakyt@nus.edu.sg
Website: governanceforstakeholders.com
For Reference Only
What is Corporate Governance? Some
Definitions
Corporate governance involves a set of relationships between a
company’s management, its board, its shareholders and other
stakeholders. Corporate governance also provides the structure
through which the objectives of the company are set, and the means of
attaining those objectives and monitoring performance are
determined. Good corporate governance should provide proper
incentives for the board and management to pursue objectives that
are in the interests of the company and its shareholders and should
facilitate effective monitoring.
OECD Principles of Corporate Governance, 2004
We can think of corporate governance as dealing with the allocation of
the powers of the company amongst shareholders, the board of directors,
management and other stakeholders, the relationships between them,
and how the exercise of these powers and relationships are governed by
various structures, processes, incentives and other mechanisms.
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What is Corporate Governance? Some
Definitions
At its broadest, the governance of corporate entities comprehends the
framework of rules, relationships, systems and processes within and by which
authority is exercised and controlled in corporations. It includes the practices
by which that exercise and control of authority is in fact effected.
The relevant rules include applicable laws of the land as well as the internal
rules of a corporation. The relationships include those between the shareholders
or owners and the directors who oversee the affairs of the corporation on their
behalf, between the directors and those who manage the affairs of the
corporation and carry out its business, and within the ranks of management, as
well as between the corporation and others to whom it must account, such as
regulators. The systems and processes may be formal or informal and may deal
with such matters as delegations of authority, performance measures,
assurance mechanisms, reporting requirements and accountabilities.
HIH Royal Commission Report, 2003 (Australia)
Corporate governance is affected by laws, regulations, listing rules,
codes, constitutive documents of companies, etc.
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What is Corporate Governance? Some
Definitions
Corporate governance refers to the processes and structure by
which the business and affairs of the company are directed and
managed, in order to enhance long term shareholder value
through enhancing corporate performance and accountability,
whilst taking into account the interests of other stakeholders.
Report of the Committee and the Code of Corporate Governance
(Singapore, 2001) – based on UK Cadbury Committee
Corporate governance is about enhancing long-term value of the
company to shareholders/other stakeholders
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What is Corporate Governance? Some
Definitions
Corporate governance is “the framework of rules, relationships,
systems and processes within and by which authority is exercised and
controlled in corporations.” It encompasses the mechanisms by which
companies, and those in control, are held to account. Corporate
governance influences how the objectives of the company are set and
achieved, how risk is monitored and assessed, and how performance
is optimised. Effective corporate governance structures encourage
companies to create value, through entrepreneurialism, innovation,
development and exploration, and provide accountability and control
systems commensurate with the risks involved.
ASX Principles and Recommendations (2010, Australia)
Risk governance and management is an important part of corporate
governance
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Legal Duties of Directors
Directors’
duties
Fiduciary
duty
Act in good
faith
Care,
diligence,
skill
Use powers
for proper
purpose
Avoid
conflicts of
interest
Exercise
discretion
properly
Not to misuse
information,
corporate
opportunity
or position
Related party
transactions
Disclosure of
and voting on
matters of
material
personal
interest
Of a
reasonable
person,
subject to
business
judgment
rule
Comply with
legislation
and listing
rules