Corporate Governanceand

Accountability

December 4th, 2013

Content• Introduction: Definitions and Role of

Business• Trends in CG: Red Flags and Best Practices• Diversity and Group-Think• Independence and Compliance• Strategic Role and Value Creation• Risk Management• Social Media and IT Governance• Disclosure and CG Rating• Summary and Way Forward

Introduction

The relationship between the governance structure of corporations within the region and mechanisms to ensure compliance and sustainability should be examined and strengthened

Definition • Rules and regulation that govern the relationship between

the managers and shareholders of companies as well as stakeholders like employees and creditors.’ OECD (2004)

• “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.” OECD (2010)

Definitions• Cadbury (1992) states that “Corporate Governance is

the system by which companies are directed and controlled.”

• Fahy et al (2006) states that “corporate governance is the systems and processes put in place to direct and control an organisation in order to increase performance and achieve sustainable shareholder value.”

• The firm has a particular governance structure to enable it to balance the rights and responsibilities of varying stakeholders.

Role of Business

• Research indicate that the country environment or political-economic climate affect corporate performance, Shleifer and Vishny (1997), Doidge et al (2007), Aggarwal et al (2009).

  Country Environment

Country Environment

Stakeholder Theory ModelFigure 1. Adopted from Letza, Sun, Kirkbride (2004)

Trends in CG

• Corporate Governance (CG) trends is not a question about whether your board will be affected, the question is when and how.

Areas of focus and change

• Explicit documentation• Best practices: customization (right-fit) and

proportionality• Independence, competence and behavior• Transparency and disclosure• Commitment of resources• Assurance: internal and external

CG red flags and best practices

• Captured / owned board member (trips, gifts, donations, favors etc); independence compromised (perception vs objectivity)

• Legacy, over-tenured or ‘zombie’ boards• Lack of board member expertise (skills,

knowledge, experience, education, training)• Boilerplate, inadequate, biography puffery

CG red flags and best practices

• Lack of women and diversity

• CEO / director succession planning (40% don’t have any)

• Board member competencies and performance evaluation

Diversity and Group-think

• Component: age, gender and ethnicity

• No diversity definition, plan, policy, report or method

• Deliberate non-transparency of director recruitment

• Boards in denial to world around them

Independence and competences

• Tenure limits of board members (up to 9yrs for directors, up for yearly elections)

• Rigorous assessment of directors and auditors (self-evaluation, peer reviews, 360 evaluations, rotation of external auditors)

• Independence of mind / duty of care• Performed by trusted member (not chair)

• Feedback (council non performing directors, plan to improve deficiencies)

• Assessment can be used to review performance and removal of poor CEO/members

• Mentoring, leadership / executive sessions

• Training in areas of poor competencies

• Budget and plan for improvement

• Edu. / training: Presentations to board, seminars

• Major areas: legal, risk, strategy, competition

• Staggered orientation of new members

• Board composition assessment (2yrs)

• Start small and build-out; be flexible

Strategic concerns• A board incapable of directing or controlling

underperforming, ineffective CEO• Undue influence of CEO/major shareholder• Self enrichment and conflict of interest• Conflicted or legacy service providers (law,

audit)• Compensation not performance based,

should be linked to risk

Strategic concerns

• Inexperienced, incapable, no credibility

• No value maximization plan; dysfunctional board culture

• Engaged, focused, results-oriented and disciplined

Board Value Creation

• Value maximization plan – key timelines, milestones, targets, individual accountability for each component and specific results

• Reporting format – info flow direct to board/committees, adjust as necessary

• Quick to address variances, accountability: by who and when

Board Value Creation

• Primacy role of chair

• Deep dive into operation, highly engaged, shift to value creation

• 50% of time on strategy; 50% on compliance

• Robust debate on strategy; at least one presentation from key personnel below exec

Value Creation

• KPIs linked to value creation; include non financial matrices – customer, employee, community (75% of value is now non-financial, e.g. brand, reputation, IP, knowledge)

• KPI include qualitative health of firm

• Pay for performance – exec comp, clawback vs malus

Risk Management

• Health and safety of employees, customers

• List of 12-15 major risk factors (competitor risk, gov’t policy risk, leadership risk, operational risks, reputational erosion, labor risks, security, IT)

• Provide internal controls for listed risks and assurances for these controls

Internal audit and control

• Linked to audit committee• Work plan review• Reduction of residual business risks• Test design and effectiveness of all internal

controls• Risks are known to board and mgmt• Compensation linked to risk mgmt

• Risk adjusted compensation – lag, comp spread over period due to risk

• Board committee to oversee non-financial risk – health, safety, environmental (vs audit committee)

• Documentation of risks, with accountabilities, dynamic, integrated

• Oversight outside business units – board committee, 3rd party

• Crisis, contingency, scenario planning by board

Risk management

• Is there an internal audit function?• Are internal controls adequate?• Does the board fully understand business

risks?• Is there an effective whistle blowing

process?• Is corporate culture aligned with explicit

risk appetite?

Social Media and Governance

• Use of IT devices by members during meetings (ipad, smartphones, BYOD)

• Paperless board room• Remote plug in – teleconferencing • SM policy (twitter, fb, linkedin, tumblr) –

brand, reputation• Communication policy

• Concerns: accuracy of info, micro-mgmt, reliance on mgmt, SM admin (seniority), IT security

• Passwords, code of conduct on SM

• Crisis and response planning

• SM is two way

Disclosure

• Related parties (source of potential fraud – seek service based on value and quality of service; bidding process)

• Local business practices, culture• Controls, whistle-blowing, due diligence,

potential bribery• No boiler-plate disclosure (deep dive)• Sanctions in cases of non-compliance

CG Ratings

• Varying interests, incentives and rights of the stakeholders make it difficult to design and measure a suitable rubric across corporations and countries.

• The fact that the institutional setting varies and the country context are different make comparative analysis a challenge

• 3rd party ratings e.g. • Investor Responsibility Research Center

(IRRC) G-Index of 24 matrices; • Governance Matrix International

(GMIRatings) uses 600 matrices; • Institutional Shareholder Services (ISS) CGQ

of 60 matrices;

• Most matrices are more quantitative based, need qualitative aspect to address CG

• Need to develop more appropriate CG measures esp. regionally….?!?!

• CG should be implement not because of regulation but because it is good for business

Summary and Way Forward

• Start small, build out, 3-5 year process• Formal documentation (integrity code, role

of CEO, chair, board, committees)• Performance evaluation (exec and board)• Succession planning• Board should focus on strategy, risks,

compliance and assurance

Possibilities

• Two tier board (one similar to exec mgmt with employee rep., alliance / strategic partners)

• Pseudo – board as starting point (act as advisory council, less formalized but convertible when appropriate)

• Flexibility in adaptation of best practices

The Hallmark of Excellence!!!

Thank youComments / Questions?