Sei sulla pagina 1di 36

Chapter 7

Corporate
Governance
PowerPoint Presentation
by Matthew Tilling
2012 John Wiley & Sons Australia Ltd

THE GROWING INTEREST IN


CORPORATE GOVERNANCE
Interest in corporate governance
appears to be driven by
Highly publicised corporate misconduct
Agency problems
Realisation of other benefits

Problems with the


Management of Corporations
Management self interest
Fraud
Perquisites

Anti-social corporate behaviour


Hiding or falsifying information
Perceived gap between performance
and remuneration

Problems with the


Management of Corporations
These problems, real or perceived,
can have wider ramifications.
Poor governance is linked to
Poorer firm performance
Increased regulation for all companies
Decreased consumer confidence
Reduced economic growth
It has even been implicated in a number
of national and global financial crises

Advantages of Good
Corporate Governance
In a globalised and competitive
environment good governance can be
a significant advantage.
Good governance can
Reduce the cost of capital
Increase shareholder base
Manage increased scrutiny
Increase consumer confidence
Facilitate economic growth

WHAT IS
CORPORATE GOVERNANCE?
The procedures and processes according to
which an organisation is directed and
controlled.
The corporate governance structure specifies
the distribution of rights and responsibilities
among the different participants in the
organisation such as the board, managers,
shareholders and other stakeholders and
lays down the rules and procedures for
decision-making.

WHAT IS
CORPORATE GOVERNANCE?
By doing this, it also provides the
structure through which the company
objectives are set, and the means of
attaining those objectives and
monitoring performance

Corporate Governance
Stakeholders
Whose interests are to be protected
and what are appropriate objectives
of the corporation?
Traditional or Anglo-Saxon Model
The key role for corporate governance is
enabling the efficient use of resources by
helping financial markets to work properly
and gives priority to shareholder value

Corporate Governance
Stakeholders
Summarised by Milton Friedman:
Corporate governance is to conduct the
business in accordance with the owner or
shareholders desires, which generally will
be to make as much money as possible
while conforming to the basic rules of the
society embodied in law and local
customs.

Corporate Governance
Stakeholders
Alternatives to the traditional view
suggest that corporate governance
must go beyond the narrow interests
of shareholders and should be
extended to a wider group of
stakeholders.
European Models
Multiple stakeholders

THE NEED FOR CORPORATE


GOVERNANCE SYSTEMS
The corporate structure requires
governance
Separation between capital contributors and
management

Under the best circumstances managers


should act as though they had contributed
the capital
It would appear this does not happen and
managers may bias or distort the
financial statements

Positive Accounting Theory


and its Relationship with
Corporate Governance
Positive accounting theory explains that for
efficiency reasons companies are formed and
can be viewed as a network of contracts or
agreements that determine the relationships
with and among the various parties involved.
One important agency relationship that
arises from this nexus is that between the
managers and the capital contributors who
authorise the managers to make the key
business decisions.

Overview of the Shareholder


Manager Relationship in
Agency Theory

CORPORATE GOVERNANCE
GUIDELINES AND PRACTICES
It is generally acknowledged that
there is no one system of corporate
governance.
The practices and procedures
required or desired will be affected
by:
The nature of the particular corporation
and its activities.
The environment in which the
corporation operates.

Elements of
Corporate Governance
Review Table 7.1 in the text.
Key elements
Controlling and directing the directors (and senior
management)
ensure that the key managers make appropriate decisions

Role of shareholders (and other stakeholders)


ensure that shareholders have the ability to protect their
interests in the corporation

Transparency and accountability


ensure that the stakeholders (including shareholders) are
sufficiently informed about the activities of the company
and its management

Elements of
Corporate Governance
Summary of ASX 8 Principles of Corporate
Governance
1. Lay solid foundations for management and
oversight
2. Structure the board to add value
3. Promote ethical and responsible decision making
4. Safeguard integrity in financial reporting
5. Make timely and balanced disclosure
6. Respect the rights of shareholders
7. Recognise and manage risk
8. Remunerate fairly and responsibly

APPROACHES TO
CORPORATE GOVERNANCE
The Rules-Based Approach to
Corporate Governance
Prescribe precise practices that are
required or recommended to ensure
good corporate governance.
Associated with enforcement by
legislation or listing rules, with
imposition of penalties if the rules are
not followed.

The Rules-Based Approach to


Corporate Governance
Advantages
Provides a set of minimum corporate
governance practices that must be
followed by all corporations.
Aids enforcement and clarifies potential
liability.

Disadvantages
Lowest common denominator approach
Encourages form over substance
Focus on legal liability not stakeholder
interests

The Principles-Based Approach


to Corporate Governance
Identifies general principles or
objectives for the corporate
governance system to aim to
achieve.
Responsibility is placed on the
managers to consider which
practices are appropriate, given their
circumstances.

The Principles-Based Approach


to Corporate Governance
Advantages
Places a higher level of duty on directors to
determine which corporate governance practices
are required.
Its flexibility means that practices can be adapted
for the particular circumstances and environment
of the entity.

Disadvantages
Directors must interpret these principles and
decide which corporate governance practices are
needed.
It relies on their honesty, integrity and
commitment to good governance.

Practical
Considerations
In most countries, corporate
governance involves various
combinations of both the rules and
principles-based approaches.
Specific legislation that requires certain
corporate governance practices to be
followed by law.
Codes of corporate governance practice
issued by government or industry groups
and also by stock exchanges.

DEVELOPMENTS AND ISSUES IN


CORPORATE GOVERNANCE
The global financial crisis has provided an
impetus for regulators, corporations
themselves and other organisations to
reconsider aspects of corporate
governance.
An OECD review concluded that while the
espoused principles of corporate
governance were sound, there was a gap
between the principles and their
implementation.

Increased Focus on
Risk Management
The failure of many corporations to manage
and control risk has been identified as a
cause of the financial crisis.
Risk management deficiencies noted include:
Risk was not managed or monitored at the entity
level, but rather at individual activity level.
Information about risks were not reaching the
board.
Organisational culture encouraged risk taking
Disconnect between the corporations overall risk
strategy and related procedures

Increased Focus on
Risk Management
Risk management in many codes of corporate
governance is not given prominence.
Many corporations are now endeavouring to
introduce more formal and comprehensive
risk management policies and procedures
and integrate these into their existing
corporate governance frameworks.
The task of business risk management is
now often delegated to the audit committee.

Elements of the Effective


Governance Model

Executive
Remuneration
This is a contentious issue regularly
scrutinised by public and the media.
Concerns have been raised about
The size of executive remuneration.
The apparent disconnect between
performance and pay.
The use of public (bail-out) money to pay
bonuses.
The connection between remuneration
packages and rewarding short-term focus

Executive
Remuneration
In response to the financial crises and
concern about remuneration there have
been a variety of legislative responses.
In the US, the Dodd-Frank legislation includes:
Claw back provisions if it is found that compensation
paid was based on inaccurate financial statements

In Australia, recent legislation includes


Increased disclosure
A two-strikes rule where if more than 25% of
shareholders vote against the remuneration report for
two consecutive years, the board itself can be put up
for re-election.

ROLE OF ACCOUNTING AND


FINANCIAL REPORTING IN
CORPORATE GOVERNANCE
Accounting clearly has a central role in
directing and controlling a corporation.
Management accounting provides a signi
cant part of the information on which
company operations will be decided.
Financial accounting provides the means
for outsiders to monitor the corporation and
to assess how well those responsible for
managing the corporation have performed.

Deterring, Preventing and


Encouraging Certain Actions
and Decisions
There are two key ways in which
accounting is used to direct and
control the managers of a
corporation.
Encourage appropriate decisions
Linking managers performance to rewards

Transparency and disclosure


Requiring specific disclosure about areas
relevant to corporate governance. E.g.
AASB 124 Related Party Disclosures
AASB 2 Share-based Payment

Informing Shareholders
and Stakeholders
The key role for financial reporting in corporate
governance is to provide the information
needed to assess the performance of the
corporation and its managers.
To be useful the financial statements provided
must be transparent, unbiased and complete.
Financial statements are a crucial link enabling
shareholders to monitor directors actions and
to assist in identifying any deficiencies in the
effectiveness of corporate governance

Financial reporting
problems
Historically and recently there are
many examples of financial reporting
failures.
The choices of accounting policy may
not be neutral or unbiased.
Two key drivers are
Maximising remuneration bonuses
Meeting market expectations

Also instances of outright fraud

THE ROLE OF ETHICS


At the core of good governance is
doing the right thing by acting with
honesty, impartiality, integrity,
trustworthiness, respect for the law
and due process. A commitment to
ethical values is fundamental
Peter Achterstraat,
Auditor-General in New South Wales

THE ROLE OF ETHICS


Good corporate governance cannot exist without
ethics.
The SarbanesOxley Act in the United States requires
disclosure of whether or not there is a code of ethics
for senior financial officers.
CPA Australia argues that implementation of a
corporate governance structure is not sufficient and
will only work if the culture of the corporation supports
good governance.
The Hong Kong Institute of Certified Public Accountants
guidelines for public bodies places emphasis on the
personal qualities of individuals as the foundation for
good corporate governance.

INTERNATIONAL PERSPECTIVES
AND DEVELOPMENTS
The Anglo-Saxon model placing emphasis
on shareholders interest dominates in the
United States, Australia, Canada and the
United Kingdom.
Asia is increasingly adopting the AngloSaxon shareholder model.
In Europe, there is more direct recognition
of alternative stakeholders (such as
employees in France and creditors in
Germany).

INTERNATIONAL PERSPECTIVES
AND DEVELOPMENTS
It is likely that corporate governance
will increasingly consider broader
stakeholders.
The principles-based approach
prevails at the moment, backed by
legislation for particular practices.
Future crises, collapses and financial
reporting failures will influence future
directions and approaches.

36