Corporate governance
Learning Objective
• Discuss developments in Anglo-American corporate
governance since the ‘90s
• Review international standards for corporate responsibility
and accounting.
• Discuss corporate accountability in relation to bribery and
corruption
Introduction
• Organizations are run by managers not shareholders.
• Corporate governance – systems put in place to monitor
the managers and ensure that the organizations
obligations are met.
• Since 1990’s increasing attention on CG due to scandals
such as Enron.
• Corporate governance is also an issue for government
companies and public private partnerships.
Introduction
• The agency effect assumes that people are at heart
untrustworthy. The managers of a company have a duty to
work for the owners benefit. Managers have control over
information and can use this for their own advantage e.g.
large pay packages.
Reasons for corporate governance
• Failure of large corporations harm society. E.g RBS,
Olympus.
• Positive organizational ethics VS psychopaths (no
conscience, empathy or concern for others)
• Improving organizational performance.
Question
• To check the corporate governance performance of a
company. Go to
http://finance.yahoo.com/q/pr?s=MSFT
Here you can see the corporate governance score for
Microsoft on the right of the page. To understand the
score click on the link below or go to.
http://issgovernance.com/quickscore
Choose a company that you are interested in and find their
corporate governance score by typing its name into the
"get profile for" search box near the top of the page.
Table 7.1
Organisational principles and human behaviour
Table 7.2
A selection of studies analysing corporate governance and corporate performance (Continued)
Table 7.2
A selection of studies analysing corporate governance and corporate performance (Continued)
Table 7.2
A selection of studies analysing corporate governance and corporate performance (Continued)
Figure 7.1
Significant recent reports and developments in corporate governance
Developments in corporate governance
• Cadbury committee – increased use of non executive
directors to counter the agency effect and splitting the roles
of the CEO and chairperson.
• Greenbury committee – failed to deal with the issue of
executive pay. Stock options for executives misused.
• Hampel committee – ‘combined code’ for listing on London
stock exchange. Board of directors responsibility for
relations with stakeholders but responsible directly to
shareholders.
Developments in corporate governance
• Sarbanes-Oxley Act – Specific responsibilities on CEO and
CFO on signing accounts. Limiting auditors “other
accounting services”
• Myners’ committee – Institutional investors should be more
active.
• OECD principles – Similar to UK combined codes.
• Higgs and Smith committee – Non-executive
directors(NED) and Audit committees.
As yet unanswered questions about NEDs
• 1. The majority of Enron's board were NED’S so is that
really effective?
• 2. NEDs spend less time than executive directors, does
that not mean more power for executive directors?
• 3. The vast majority of NED’s are executive directors at
other companies. Are they trustworthy?
• Generally developments in CG have been mainly focused
on disregard for shareholders with little reform.
Table 7.3
Average increases in the remuneration of the directors of the FTSE 100 companies for 2000–2
compared with movements in the FTSE 100 share index over the same period
Figure 7.2
Other interesting developments in corporate governance that have not impacted upon UK and USA
stock exchange listing requirements.
Table 7.5
.
Fatalities as a result of injuries at work in the UK
The King report on CG- South Africa
• “Corporate governance is concerned with holding the
balance between the economic and social goals and
between individual and community goals.. The aim is to
align as nearly as possible the interests of individuals,
corporations and society. “
International standards in CG
• Standards set a minimum benchmark of behavior against
which organizations can be compared and judged.
• Organizations often receive a badge.
• Organizations need to show their customers that they
behave in a corporately responsible way.
International standards
• Global Reporting Initiative- Economic, Social,
Environmental Factors.
• Accountability 1000 - quality assurance standard bases on
systems e.g. planning and auditing.
• Social Accountabilty 8000 – recent standard for corporate
behavior.
• Ethics compliance management system – a code of ethics
and a code of conduct- process orientated.
Shareholder activism
• CG needs to be driven by active shareholders who hold
their company to account.
• Many investors with small shareholdings = little influence.
• Issues like executive remuneration, board elections,
environmental issues have attracted shareholder activism.
• Resolutions at general meetings or voting against
initiatives or talking to the media.
• Institutional investors – issues with interest and executive
networks
Governance, Bribery and corruption
• How to judge how bad a bribe is
1. Does the briber gain an unfair advantage?
2. Is the amount of the bribe greater than what is customary
for gifts etc?
3. Is it illegal?
4. Does it cause a loss of trust in society?
Reducing bribery
• Demand side approach – Change the climate in countires
where bribery is widespread so that people do not ask for
bribes.
• Supply-side – Encourage companies to act with integrity
and refuse to pay bribes. This approach is more popular.
• UK bribery act 2010 – all companies operating in the UK
which pay bribes are subject to prosecution. Failing to
prevent an agent from bribing is also an offence.
‘Facilitation payments’ also banned. Hospitality allowed.
Corporate Manslaughter
• Corporate manslaughter act 2007 –
– Special offence of corporate killing
– Only when corporations conduct fell below what was ‘reasonably
expected’
– Caused by ‘Management failure’
– Individuals can still be liable for killing.
Corporate manslaughter
• Corporate mens rea – not that any individual in the
company could have foreseen the harm but rather that in a
properly structured and organized company the risk should
have been obvious.
• Health and safety – Work accidents.
• Council of Europe proposal – assumes guilt of the accused
and the accused should show evidence of its due diligence.
Questions
• What is the main difference between anglo-american
corporate governance and South African?
• Compare 2 international standards of corporate
governance.
• What are the strengths and weakness of the Corporate
manslaughter act, the council of Europe proposals and the
application of ‘mens rea’?
Internet tasks
•
•
•
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Visit the following webpages and read the recent news
http://www.ecgi.org/
www.icgn.org
http://www.bbc.com/capital/story/20140416-cowardlycorporate-lions