Journal of Electrical and Electronics Engineering

155

Corporate Governance: Principles and Regulations

PACAL Anca
Department of Control Systems Engineering and Management University of Qradea, Faculty of Electrical Engineering and Information Tehnology 1 Universittii street, 410087, Qradea, Romania, ancapacala@yahoo.com

Abstract Corporate governance is only part of the broader economic context in which firms operate and includes, for example, macroeconomic policies, competition, or the markets of production factors. Contemporary debate on corporate governance refers in particular to the principles mentioned in three papers ptiblished after 1990: the UK Cadbury Report (1992), OECD Principles of Corporate Governance (1998 and 2004), and the Sarbanes-Oxley Law in the U.S. (2002). Cadbury and the OECD reports present general principles around which a firm must operate in order to ensure good governance, while the Sarbanes-Oxley Law is more ike a request of U.S. government authorities to regulate several principles of good governance, including many of the principles recommended in the Cadbury and OECD reports. Corporate governance affects firm performance in a variety of channels such as monitoring and control of the owners, concentration degre of ownership, independence of the Board and its separation from executive management, company characteristics and operating environment, the behavior of shareholders, market mechanisms (acquisition or merger) or the incentives granted to managers or to the Board. Keywords: corporate principles, regulations. goernance, essential

I. INTRODUCTION Corporate governance is a relatively new concept in the economic theory, and its senses rely to both the term corporation and the term governance. Corporate governance has become the activity and organization as a company that can and must be reconciled interests, sometimes conflicting, between shareholders and managers, between majority and minority shareholders or, fmally, yhaat are involved and other stakeholders in development goals company. However, strict observance of precise objectives, but limited, such as profit maximization, financial performance or, conversely employment goals too large, dangerous to the survival of the firm, is as sterile, and may overshadow the measures and correlations between different actions and entities inside and outside the companyable to provide for her overall performance, growth and long-term stability. We are now presenting several interpretations associated with the term "corporate governance" (see also Badulescu and Badulescu 2008): - Shleifer and Vishny (1997: 737-783) define the field of corporate governance, as the study of the processes by which the resources suppliers - reduced to

the only financial investors guarantee the profitability of their investment - Charreaux (1997: 421-469) considers that the corporate governance system covers all the mechanisms that govern the managers' behavior and delineate their discretionary latitude. This broader definition covers the preceding one and presents the advantage of giving the manager the role of central actor (but non-single) in the value creation process - Michel Albert considers that corporate governance is about giving to the managers a unique objective: maximizing the profits and dividends, corporate governance is, thus, the end of the managers' era. (Albert, 1994). The term corporate governance took on different ways of understanding, often confusing, including theobject of analysis and li-mits its applicability. In the nanow sense of its definition (so called Shareholders model),corporate governance is understood as a formalized system of higher level of management accountability to shareholders and in its roader meaning (stakeholders model), term corporate governance can be used to describe formal and informal network of relationships involved in the operation of corporations (Mahler and Andersson, 1999). Although different at first glance, the two approaches have many common points and the theory and practice in recent years emphasizes the contribution the stakeholders can havelong-term performance of the company and thereby increase shareholder value (Badulescu and Badulescu 2008). One of the most popular definitions of corporate governance ( Cadbury Committee) refers to "the system by which companies are directed and controlled", so understanding how they balanced the various interests of partiesinvolved in a company (Cadburry Commitee, 1992). In the view of IFC, corporate governance refers yo structures and processes that determine direction and control of the company, or more precisely to "a set of relations between top executives, board of directors, major shareholders (who own the company) minority shareholders and other stakeholders [...], a structurethat establish business goals, the means to achieve these objectives and the way performances are monitored" (OECD, 2004). Note that whatever vision promoted (shareholders vs. stakeholders) debates on corporate governance focuses on the status of the owners (shareholders), gradually remove the tacit or explicit, in decisionmaking and management trends and use in their own interest, overlapping of powers (often discretionary) within the company. Concentration, almQst excessive, on both the above-mentioned coordinates, thus revealing an adversarial relationship between management and

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Volume 5, Number 1, May 2012 take into accotint participants to the process and existing market practices (OECD Ad Hoc Task Force on Corporate Governance, OECD Principles of Corporate Governance, Paris, 1999). Principles are evolutionary in nature and should be reviewed periodically in the light of significant changes in circumstances. To stay competitive in a changing world, corporations must innovate and adapt their corporate governance practices so that they can meet new demands and opportunities. Similarly, governments have an important responsibility to develop an efficient and flexible regulatory framework to allow markets function effectively and respond to shareholders and other stakeholders. : Contemporary debate on corporate governance refers in particular to the principles mentioned in three papers published after 1990: the UK Cadbur>' Report (1992), OECD Principles of Corporate Governance (1998 and 2004), and the Sarbanes-Oxley Law in the U.S. (2002). Cadbur}' and the OECD reports present general principles around which a finn must operate in order to ensure good governance, while the Sarbanes-Oxley Law is more like a request of U.S. government authorities to regulate several principles of good governance, including many of the principles lecominended in the Cadbury and OECD reports. The most important principles from the documents mentioned above can be summarized as follows: a. Ensuring the rights of all shaieholders and their fair treatment. Organizations must respect the rights of shaieholders and assist them to exercise diese rights through a transparent and efficient communication of information and encourage shareholders to attend general meetings (The UK Cadbury Report, 1992, available at http://www.ecgi.org/codes/documents/cadburv.pdf. the Sarbanes-Oxley Law from 2002 in the USA, available at http://www.soxlaw.coiny. OECD Principles of Corporate ; Governance (OECD Principles), available at: http://www.oecd.Org/document/49/0.3746.en 2649 348 I 13 31530865 1 1 1 l.OO.html). b. The interests of other stakeholders. Organizations must recognize that their legal, contractual, social and market obligations, as well as those relating to nonshai-eholders, namely employees, investors, creditors, suppliers, local communities, customers and policy makers (OECD Principles of Corporate Governance (OECD Principles). c . The statutory role and the responsibilities of the Board of Directors. People included in the Board of Directors need relevant skills and the ability to review and improve systems of ensuring the performance of management. To these one may add the necessity to ensui'e an appropriate dimension and level of independence and commitment, appropriate so as to fulfill responsibilities and obligations (OECD-Principles of Corporate Governance (OECD Principles), op. cit. and Cadbury Report, op. cit.) d. Integrity and ethical behavior. Integrity should be a fundamental requirement in electing the

investors, and an attitude of mutual suspicion that has led many authorities or institutions to draw up codes of corporate governance are laid down in detail how they should conduct relations between management, shareholders and other interested partiesbased on the transparency, consistency and a clear definition of strategic objectives (long-term) policy toward employees, the environment and the community, customers and vendors, the observance and implementation of the legal framework, professional and business conduct, etc. Remember the Cadbury Report instance to the United Kingdom in 1992, the SarbanesOxley Act of 2002 in the USA, the OECD Principles of Corporate Governance (OECD Principles), International Corporate Governance Network (ICGN) Corporate Governance Principles, The EU Transparency Directive in 2007, Report on Corporate Governance for South Africa (King II) in 2002. II. ESSENTIAL PRINCIPLES OF CORPORATE GOVERNANCE Corporate governance is only part of the broader economic context in which firms operate and includes, for example, macroeconomic policies, competition, or the maikets of production factors. Coiporate governance framework also depends of legal, institutional and environmental regulations. In addition, factors such as business ethics and the degree of awareness as regards the corporative, social and environmental interests of social communities in which a company operates can also have an impact on its reputation and long-term success. At first sight, the principles of corporate governance focus on governance issues arising from the separation of ownership -om control, but nevertheless, it is recognized tliat the meaning of these principles go beyond the relationship between shareholders and management, although it remains their core element. Corporate governance principles also fulfil a complementary role in the process of checking and enstiring a balance in the company, so as to improve relevant decisions as regards anti-corruption, or other ethical issues. As shown in OECD documents, there is no single model of corporate governance. However, research in both OECD and non-OECD countries identified some common elements underlying good corporate governance and the principles based on these common elements are formulated so as to encompass as much of the various models existing on the market (OECD Ad Hoc Task Force on Corporate Governance, OECD Principles of Corporate Governance, Paris, 1999). Principles are not binding and are not intended as amendments to national legislation; instead they seek to identif)' objectives and suggest various means for achieving them, serving as a reference point. They can be used by policy makers in analyzing and developing legal and regulatoiy frameworks for corporate governance, specific to given circumstances of economic, social, legal and cultural nature, which also

Journal of Electrical and Electronics Engineering representatives and members of the Board. Organizations should develop a code of conduct for executives and managers to promote ethical and responsible decisions (The UK Cadbury Report, Great Britain, op. cit. and Sarbanes-Oxley Law from 2002 in the USA, op. cit.) e. Ensuring communication and transparency. Organizations should clarify' and publicize the duties and responsibilities of the Board and provide stakeholders with clear, transparent and accountable information. They should also implement procedures to independently verify and safeguard the integrity of the company's financial reporting, to ensure that all investors have access to useil, clear and balanced information. (OECD Principles of Corporate Governance (OECD Principles), op. cit. and Cadbury Report, op. cit.) For example, we present below the principles of corporate governance established in the Stock Exchange of Australia. Thus, according to the document of principles and best practices established at this institution, a company should (Australian Stock Exchange Corporate Governance Council, (2003), Principles of Good Corporate Governance and Be.st Practice Recommendations, pp.9-11): a. Build solid foundations for tbe management and supervision of activities, to accept and make public the duties and responsibilities of the Board and senior executives. b. Ensure that tbe Board will generate value, and it u'ould have a composition, size and commitment able to properly fulfill required responsibilities and obligations. c. Actively promote decision-making processes in an ethical and responsible manner d. Ensure integrity in financial reporting, create structures of independent verification and protect the integrity of the company's financial reports. e. Ensure regular and balanced publication of all significant aspects concerning the company. f Respect tbe rights of shareholders and facilitate the effective exercise of tliese rights. g. Identifj' and manage risks, establish a sound system of supervision, risk management and internal conti^ol. li. Encourage the improvement of performance, honestly and efficiently. i. Remunerate fairly and responsibly; the level and structure of remuneration should be sufficient and reasonable, and the relationship to corporate and individual performance should be better defined. j . Recognize and respect the legitimate interests of stakeholders III. REGULATIONS Contemporary references on corporate governance generally use the material contained in three important regulations or codes published after 1990, namely the UK Cadbury Report (1992), OECD - Principles of Corporate Governance (1998 and 2004), and Sarbanes-

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Oxley Law from 2002 in the U.S. Wliile Cadbury and the OECD reports present and pi-omote a series of general principles around which the company must be organized in order to ensure good governance in achieving objectives, Sarbanes-Oxley Law is an attempt by U.S. federal authorities to legalize most of the principles recommended by Cadburj' and OECD reports. Besides these we find corporate governance codes in most countries, of which we remind tliose of: Country/
iriterhatip
. .

, Issuer ..
. '

. Name of . code/regulation .

nai.
organiza tioti .'

'

Date of issue (last modi fica^ti

on)
Germany Govemment Commission A.F.E.P.Association Franaise des Entreprises Prives Institute of Directors Corporate Govemance Code Corporate Govemance Code of Listed Corporations amme nded 2010 amme nded 2010

France

Great Britain

The United States of America

Financial Reporting Council The Business Roundtable, An Association of Chief Executive Officers Committed to Improving Public Policy National Association of Corporate Directors

Corporate Govemance Guidance and Principles for Unlisted Companies in the UK The Uk Corporate Govemance Code Principles Corporate Govemance of

2010

2010

2002

Russia

China

Japan

The Coordination Council for Corporate Governance China Securities Regulatory Commission Tokyo Stock Exchange

Key Agreed Principles to Strengthen Corporate Govemance for U.S. Publicly Traded Companies The Russian Code of Corporate Conduct

2008

2002

Australia

Australian Stock Exchange

The Code of 2001 Corporate Govemance for Listed Companies n China Principles of 2010 Corporate Govemance for Listed Companies Principles of Good Amme nded Corporate Govemance and Best 2010

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Country/. Internati Issuer.:.
,. . ;

Volume 5, Number 1, May 2012 ate pf .. issue (last modi :. ficati on) consideration of other elements, directly or indirectly related performance such as encouraging investment, innovation and enterprise, increase company reputation, promote corporate social responsibility and ethical behavior of business, the availability and transparency of information, good behaviour the community.

Name of

code/regulation

nal
organiza ; tioh !

Romania

Corporate Govemance Council Intemational Center for Entrepreneuri al Studies, University of Bucharest Bucharest Stock Exchange

Practice Recommendations

REFERENCES
[1]. Badulescu, Daniel and Badulescu, Alina, Theoretical Background of Corporate Governance (I), Annals of the Oradea University. Fascicle of Management and Technological Engineering, Volume VII (XVII), 2008 [2]. Shleifer, A. and Vishny, R.W. (1997), "A Survey of Corporate Govemance", Journal of Finance, 52/1997 [3]. Charreaux, G. (1997), "Vers une thorie du gouvemement des enterprises" in G. Charreaux (d.). Le gouvernement des entreprises, Paris, Econmica, 1997 r [4]. Albert, M. (1994), "L'irruption du corporate :, govemance". Revue d'conomie fmanciere, no. 31 /1994 j [5]. OECD Ad Hoc Task Force on Corporate Govemance, : OECD Principles of Corporate Governance, Paris, 1999 [6]. The UK Cadbury Report, Great Britain, 1992, available athttp://\vww.ccgi.ore/codes/documcnts/cadbur>'.Ddf [7]. Sarbanes-Oxley Law from 2002 in the USA available at http://www.soxlaw.com/. [8]. OECD Principles of Corporate Govemance (OECD Principles), available at http://www.oecd.Org/document/49/0.3746.en 2649 34813 31 530865 1 1 1 l.OO.html [9]. Australian Stock Exchange Corporate Govemance Council, (2003), Principles of Good Corporate Governance and Best Practice Recommendations, pp.9-11 [10]. European Corporate Governance Institute, Codes & Principles, available at http://www.ccgi,org/codes/aH codcs.php [11]. Bucharest Stock Exchange, available at ^ htto://bvb,ro/Reeulations/Regulamente.aspx?t=2 (pentru [ Romania') [12]. *** EU Transparency Directive (2007), http://www.pwc.com/gx/en/ifrsreporting/pdf/transparencv.pdf. [13]. *** Intemational Corporate Govemance Network (ICGN) Corporate Govemance Principles (2009), www.ecgi.org/codes/. [14]. ** OECD Corporate Govemance Principles, (2004), Applied Corporate Govemance. httD://www.applied-comorategovemance.com/definition-of-corporate-govemance.html [15], ** Report of the Committee on the Financial Aspects of Corporate Govemance (Cadbury Committee), (1992), Pl4, http://vvww.ccgi.org/codes/documents/cadburv.pdf [16]. *** Report on Corporate Govemance for South Africa (King II) (2002), hUp://www.ecgi.org/codes/documents/executive sumniar\',Ddf

United Nations Organiza tion OECD

"Corporate 000 Govemance Initiative for Economic Democracy m Romania", Corporate Govemance Code The Corporate 2008 Govemance Code of Bucharest Stock Exchange Guidance on Good 2006 United Practices in Corporate Nations Conference on Govemance Trade and Disclosure,
Development

OECD Guidelines on 2005 Corporate Govemance of StateOwned Enterprises OECD Principles of 2004 Corporate Govemance Source: European Corporate Govemance Institute, Codes & Principles, available at http://www.ecgi.org/codes/all codes.php. Bucharest Stock Exchange, available at http://bvb.ro/Regulations/Regulamente.aspx?t=2 (pentm Romania), IV. CONCLUSIONS How corporate govemance can affect firm performance is different and this influence is through many channels, not just those associated with the degree of monitoring and control which they exercise ownership, but also by other factors, such as the concentration property, Board independence and separation from the executive management, company features and operating environment, the behaviour of shareholders and using market mechanisms, and finally by the incentives of managers, the Management Board. Also understand how to achieve business objectives and achieve a satisfactory financial and economic performance for shareholders (and for other stakeholders - stakeholders) requires

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