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Agenda
Purpose: To explain the concept and processes of corporate governance
Outline:
1. 2. 3. 4. Introduction, definition for corporate governance, OECD Principles of Corporate Governance Forms of Business Ownership Separation of Ownership and Control: The Principal-Agent Dilemma Benefits of Good Corporate Governance Mongolian CG Environment Duties of the Board: Risk Management 2 Summary and Conclusions Corporate Governance
5. 6. 7. 8.
Learning Objectives
Understand what is corporate governance and why it matters Understand the relationship between shareholders, management and the board Understand why corporate governance is necessary to incentivize good business practices Appreciate how to go about implementing corporate governance in the most effective way The relevance of good CG practices for Mongolian Companies
Corporate Governance 3
Good corporate governance practice ensures the shareholders a fair rate of return.
Corporate Governance 5
Other Stakeholders
Managers Employees Customers Suppliers Community at large Government Financial Markets Environmentalists 6
Corporate Governance
Ethics
Risk Mgmt
Corporate Governance
Corporate Form
The nature of governance implies that when an entity adopts the legal form of a corporation it has shareholders, a board, and a separate management.
Broad Application
The term corporate governance is applicable to include all types and sizes of enterprises so long as they have owners, managers, and a business interest. Corporate Governance 10
Owners liability
Easy access to capital market? Is management and ownership separate? Are business owners exposed to double taxation?
Limited
No No
Unlimited
No No
Limited
No Yes
Limited
Yes Yes
No
No
Yes
Yes
Corporate Governance
11
Conflict of Interests:
The heart of the matter in corporate governance The Principal Agent Dilemma
Shareholders Interests
Managers Interests
The Board is responsible for resolving the conflict of interest issue between shareholders and managers
Corporate Governance 13
Corporate Governance
14
Divergence
Management fails to maximize SH wealth Actual results deviate from expected annual results
Monitoring
Developing and implementing monitoring and control structures reduce cash flow to SH
Incentives
Share Holders need to remunerate management with extra incentives that reduce wealth
The main role of corporate governance is to reduce total Corporate Governance agency costs in order to maximize shareholder value.15
TRANSPARENCY
Ensures timely, material & accurate information is available Info on Finance, Performance, Ownership, Governance Prevents Information asymmetries
ACCOUNTABILITY
RESPONSIBILITY Recognize the legal rights of all SHs Encourage cooperation between company and stakeholders
FAIR TREATMENT Protect SH rights Treat all SHs and minorities equitably Provide for effective redress for violations
Corporate Governance
16
Shareholders
Board
Represents SH
Executive Management
Helps formulate and Execute Strategy
Monitors CEO
Corporate Governance
The main role of the board is to monitor the management in order to reduce total agency costs, and ensure the Corporate Governance 18 maximization of SHs wealth
Trophy Board
?
19
Passive
Certifying
Engaged
Intervening
Operating
Certifies to SH that CEO meets expectations Takes corrective action Understands role of independent directors
Provides insight & Support Understands its monitoring role Guides and judges the CEO Has the right skills mix
Intensely involved in decision making on key issues Frequent and intense meetingson short notice
Makes key decision, and management implements Fills gaps in management experience.
Low
High
20
Corporate Governance
21
Role of Stakeholders
Stakeholders cannot have claims on the firms except those specified by laws
Firms have a social responsibility to fulfill so they must act in the broad interests of the society at large
Corporate Governance 22
Corporate Governance
23
Shareholders
Financial returns
Community
Political corruption
Government
Regulatory compliance
Environmental Groups
Pollution
Management
Financial returns
Customers Suppliers
Product safety (for people and the environment) Customer satisfaction
Local employment
Biodiversity
Stock options
Workforce diversity
Living environment/
Regulatory compliance
Executive remuneration
Product performance
Environmental standards
Employment
Sustainability
Responsible advertising practices Product environmental impact Regulatory compliance Safety standards
Discrimination
Human rights
New technology
24
BENEFITS OF GOOD CG
Corporate Governance
25
Good corporate governance helps improve access to capital investment and finance with better terms and lowers cost of capital for good firms
Corporate Governance
26
27
SH rights protected
Efficiency
ROE
Improving ROE Increase profitability Improves the chances that SHs will receive sustainable dividends
Profitability improves share price performance Firms gets better recognition as a good performing stock Attracts investor confidence, and new capital
Corporate Governance 29
Lowering the cost of capital and raising the value of the firm
73% would consider a premium for better governed firms-depending on region
Average premium of investors are ready to pay for well-governed companies, in %
13
Germany
14
USA
23
Poland
24
Brazil
25
China
39
Russia
10
Corporate Governance
20
30
40
50
30
Average premium investors would be willing to pay differs by country and regions
Turkey
24%
Argentina
Columbia 19%
Philippines 23%
Thailand Taiwan 13% 12%
Poland
Italy Germany 19% 14% Mexico USA Canada
South Africa
18% 10
Chile
E Europe/Africa
Latin America
Asia
Western Europe
Northern America
Source: McKinsey Global Investor Opinion Survey on Corporate Governance, 2002 Corporate Governance 31
Open Market
Rule of Law
Investor Confiden ce
Corporate Governance
X
X X
Corporate Governance *Types of policy instruments: A = Administrative; L= Legal; O= Direct market operations ** Management control aspects of each of the fours functional areas could also be affected Source: J.E. Austin Associates. Managing in Developing Countries, 1990
36
Macroeconomic Initiatives
Monetary Policy
Inflation Under Control (Stability & Predictability) Interest Rates
Fiscal Policy
Effective tax policy Budget Deficits Restrained
Foreign Trade
Balance of Payments Tariffs Coming Down Greater Convertibility of Currency 37
Microeconomic Initiatives
Privatization Financial Sector Restructuring Rule of Law, Commercial Law/Judicial Recourse/Arbitration Anti-Corruption Trade and Investment Promotion Small Business Facilitation Civil Service Reform Education Reforms Workforce Development Industrial Parks/EPZs/ Techno/Knowledge Parks Labor Laws, Practices and Mediation Mechanisms Private Provision of Infrastructure Standards Bureaus Telecom, IT and E-commerce Readiness Intellectual Property Rights Efficient Provision of Key Services Sector-Specific Initiatives
38
Corporate Governance
Capital
Rule of law
Economic Growth
Corporate Governance
39
Corporate Governance
40
Proper legal and regulatory frameworks will provide an equilibrium between the shareholders, other stakeholders and the firm that is sustainable over time.
Corporate Governance 41
Corporate Governance
43
1. Ensuring the Basis for an Effective Corporate Governance Framework 2. The Rights of Shareholders and Key Ownership Functions 3. The Equitable Treatment of Shareholders 4. The Role of Stakeholders 5. Disclosure and transparency 6. The responsibilities of the board
Corporate Governance 44
Corporate Governance
45
CG ENVIRONMENT IN MONGOLIA
Corporate Governance 46
1- Principles of corporate governance 2- Meetings of shareholders 3- The role of the board of directors 4-The role of the executive management 5- Open and transparent information 6- The Stakeholders -- Participating entities 7- Supervision of operations 8- Dividend Policy Corporate Governance 9- Settlement of disputes
48
Corporate Governance
50
Transparency
Corporate Governance 51
What is Risk?
The English word Risk derives from the Latin Periclum that infers taking daring actions. In this sense, risk represents a conscientious choices made by a firm,
as the consequence of the actions taken or strategies pursued, rather than fate that befalls upon an entity by an act of nature that was unanticipated even though that is also a possibility in life.
Corporate Governance
53
Corporate Governance
54
Types of Risk
EXTERNAL FACTOR RISKS INTERNAL FACTOR RISKS LEGAL & REGULATORY RISK MARKET RISK PROCESS RISKS COMPLIANCE RISKS PEOPLE RISKS
STRATE-GIC RISKS
OPERATIONS RISKS
FINANCE RISKS
TREASURY RISKS CREDIT RISKS TRADING RISKS TAX RISK
INFORMATION RISKS
FINANCIAL RISKS OPERATIONAL RISKS TECHNOLOGY RISKS
Corporate Governance
56
Review and guide corporate strategy, plans of action, risk policy, budget & business plans.
BOD shall be a unit defining the strategic policy of corporate activities and imposing supervision on activities of the executive management.
Source Corporate : Mongolian Governance Code of Corporate Governance, December 2007 57
Risk Tolerance
The willingness of the board to take risk
in order to achieve a predefined objective
Risk Appetite
The amount of risk an entity is willing to accept in pursuit of shareholder value creation
Corporate Governance 58
Strategy
Market Risk Credit Risk Operational Risk What if Scenarios
Capital at Risk
Internal Constraints
Risk Appetite
Corporate Governance 59
Board Commitment
Board Leadership
61
Corporate Governance
64
Corporate Governance
65
Corporate Governance
66