A.

GOVERNANCE  AND  RESPONSIBILITY  

List  the  driving  forces  for  the  development  of  governance  codes:  

• Increasing  internationalisation  and  globalisation  

• Bias  treatment  of  domestic  and  foreign  investors  
• Excessive  influence  of  majority  shareholders  
• Erosion  of  shareholders  confidence  in  financial  reporting  
• The  need  for  greater  transparency  
• High  profile  corporate  scandals  

What  are  the  characteristics  of  a  principles-­‐based  approach?  

• Focuses  on  objectives  rather  than  the  means  by  which  these  objectives  will  be  
achieved  
• Principles-­‐based  approach  can  deal  with  those  areas  of  corporate  governance  
where  rules  cannot  easily  be  applied  e.g.  internal  control  
• Can  be  applied  across  different  legal  jurisdictions  
• Companies  can  deviate  from  a  principle  on  a  comply  or  explain  basis  
• Principles-­‐based  approaches  have  often  been  adopted  in  jurisdictions  where  
the  governing  bodies  of  stock  markets  have  had  the  prime  role  in  setting  
standards  for  companies  to  follow  
• Principle-­‐based  approach  has  greater  flexibility  than  if  it  was  underpinned  by  
legal  requirements  

What  are  the  characteristics  of  a  rules-­‐based  approach?  

• Rules-­‐based  place  more  emphasis  on  definite  achievements  rather  than  

underlying  objectives  
• Rules-­‐based  approaches  allow  no  leeway.  Compliance  is  mandatory.  
• In  theory  it  should  be  easy  to  see  whether  there  has  been  compliance  with  the  
rules  or  not  
• Rules-­‐based  approach  have  difficulties  in  dealing  with  questionable  situation  
that  are  not  covered  sufficiently  in  the  rulebook  
• Rules-­‐based  approach  focuses  greatly  on  obeying  the  letter  of  the  law  rather  
than  the  spirit  
• Regulators  and  auditors  enforce  rules-­‐based  approach.  
• Rules-­‐based  approaches  to  corporate  governance  tend  to  be  found  in  legal  
jurisdictions  and  cultures.  

What  are  the  advantages  of  a  principles-­‐based  approach?  

• It  avoids  the  need  for  inflexible  legislation  that  companies  have  to  comply  with  
even  though  the  legislation  is  not  appropriate  
• It  is  less  burdensome  in  terms  of  time  and  expenditure  
• It  allows  companies  to  develop  their  own  approach  to  corporate  governance  
that  is  appropriate  for  their  circumstances  
• Enforcement  on  a  comply  or  explain  basis  provides  the  means  that  businesses  
can  explain  why  they  have  departed  from  the  specific  provisions  
• It  accompanied  by  disclosure  requirements  puts  the  emphasis  on  investors  
making  up  their  own  minds  about  what  businesses  are  doing  
What  are  the  criticisms  of  a  principles-­‐based  approach?  

• Principles  are  so  broad  that  they  are  of  very  little  use  as  a  guide  to  best  
corporate  governance  practice  
• Investors  cannot  be  confident  of  consistency  of  approach.  Clear  rules  mean  that  
the  same  standards  apply  to  all  directors  
• Principals-­‐based  approach  may  cause  confusion  over  what  is  compulsory  and  
what  isn’t.  Codes  may  state  that  they  are  not  prescriptive  but  codes  effectively  
become  rules  once  they  are  adopted  but  the  local  stock  exchange  and  
companies  must  comply  in  order  to  retain  their  listing  
• Some  companies  may  perceive  a  principles-­‐based  approach  as  non-­‐binding  and  
fail  to  comply  without  giving  an  adequate  explanation  (a  rules-­‐based  approach  
backed  by  criminal  sanctions  may  give  shareholders  more  confidence  that  the  
company  and  its  directors  are  complying)  

Describe  the  insider  model  (insider  system)  of  ownership?  

This  is  where  most  companies  listed  on  the  stock  exchange  are  owned  and  controlled  by  
a  small  number  of  major  shareholders.  Examples  include  banks,  other  companies,  the  
government  or  members  of  the  companies  founding  families.  

What  are  the  advantages  of  insider  systems?  

• It  is  easier  to  establish  ties  between  owners  and  managers  

• Agency  problem  and  agency  costs  of  monitoring  are  reduced  if  the  owners  are  
also  involved  in  management  
• Easier  to  influence  company  management  
• A  smaller  base  of  shareholders  may  be  more  flexible  about  when  profits  are  
made,  therefore,  focusing  on  the  long-­‐term  view  of  the  organisation  

What  are  the  disadvantages  of  insider  systems?  

• Discrimination  against  minority  shareholders  

• Tends  not  to  be  monitored  effectively  
• Insider  system  often  do  not  develop  more  formal  governance  structures  until  
they  need  to  
• Reluctance  to  employ  outsiders  in  influential  positions  and  may  be  unwilling  to  
recruit  independent  non-­‐executive  directors  
• Investors  who  are  on  their  own  of  such  size  that  they  can  influence  share  prices  
• Shares  may  be  seen  as  speculative  
• Succession  issues  

Describe  the  outsider  model  (outsider  system)  of  ownership?  

Outsider  systems  are  ones  where  shareholding  is  more  widely  dispersed,  and  there  is  
the  manager-­‐ownership  separation.  

What  are  the  advantages  of  outsider  systems?  

• Separation  of  ownership  and  management  leads  to  a  healthy  development  of  
governance  to  protect  shareholders  
• Shareholders  have  voting  rights  that  they  can  use  to  exercise  control  
• Hostile  takeovers  are  far  more  frequent,  and  the  threat  of  these  acts  as  a  
disciplining  mechanism  on  company  management  
What  are  the  disadvantages  of  outsider  systems?  

• Agency  problem  and  significant  costs  of  agency  

• Larger  shareholders  in  these  regimes  often  have  short-­‐term  priorities  and  would  
rather  sell  their  shares  than  pressurise  the  directors  to  change  strategies  

What  are  some  of  the  provisions  of  the  Cadbury  report?  

• The  board  should  meet  on  a  regular  basis  

• Certain  matters  such  as  major  acquisitions  or  disposals  of  assets  should  be  
referred  automatically  to  the  board  
• No  one  person  should  have  complete  power  to  dominate  the  board  
• There  should  be  at  least  three  non-­‐executive  directors  independent  of  
management  
• Provisions  for  the  length  of  directors’  service  contracts  and  disclosure  of  
remuneration  
• Audit  committee  should  liaise  with  internal  and  external  auditors  and  provide  a  
forum  for  both  to  express  their  concerns  
• Audit  committee  should  also  review  half  yearly  annual  statements  

How  has  the  Greenbury  code  impacted  on  the  development  on  corporate  governance?  

The  Greenbury  code  went  beyond  the  Cadbury  code.  It  recommends  that  the  
remuneration  committee  should  determine  executive  directors’  remuneration  and  that  
this  committee  should  be  comprised  solely  of  non-­‐executive  directors  and  that  directors’  
service  contract  should  be  limited  to  one  year.  

How  has  the  Hampel  report  impacted  on  the  development  of  corporate  governance?  

Too  often  companies  would  treat  the  codes  as  sets  of  prescribed  rules.  The  shareholders  
or  their  advisers  would  only  be  interested  in  whether  the  letter  of  the  rule  has  been  
complied  with.  The  substance  of  the  “Hampel  Report”,  therefore,  is  in  favour  of  relaxing  
the  regulatory  burden  on  companies  but  also  discouraging  the  treatment  of  corporate  
governance  codes  as  sets  of  rules  i.e.  judging  companies  on  whether  they  have  complied  
or  not  (box-­‐ticking).  It  also  accepts  that  there  are  guidelines  that  will  normally  be  
appropriate  but  also  accepts  that  there  are  valid  reasons  for  exceptions.  

How  has  the  King  report  impacted  on  the  development  of  corporate  governance?  

The  King  report  differs  in  emphasis  from  other  guidance  by  advocating  an  integrated  
approach  to  corporate  governance  in  the  interest  of  a  wide  range  of  stakeholders  
embracing  the  social  environmental  and  economic  aspects  of  a  company’s  activities.  
(Stockholder  theory)  

How  has  the  Singapore  code  impacted  on  the  development  of  corporate  governance?  

It  take  a  similar  approach  to  the  UK  Corporate  Governance  Code  with  the  emphasis  
being  on  companies  giving  a  detailed  description  of  their  governance  practices  and  
explaining  and  deviation  from  the  code.  

THE  END.