OutlineDefinitionsRecent DevelopmentsStakeholdersElements of Corporate GovernanceModels of Corporate GovernanceRole and Responsibilities of DirectorsDistinguishing Factors between Directors and Managers

Definitions - Corporate GovernanceDefinitions - Corporate Governance“Corporate Governance is the system by which companies are directed and controlled. Boards of directors are responsible are for the governance of their companies. The shareholders’ role in governance is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place. The responsibilities of the directors include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship. The Board’s actions are subject to laws, regulations and the shareholders in general meeting.”The Financial Aspects of Corporate Governance – a report by a The Financial Aspects of Corporate Governance – a report by a

committee chaired by Sir Adrian Cadbury (UK-1992)committee chaired by Sir Adrian Cadbury (UK-1992)

Definitions Definitions Cont’d… Cont’d…“Corporate governance is the relationship between corporate managers, directors and providers of equity , and institutions who save and invest their capital to earn a return. It ensures that the Board of directors is accountable for the pursuit of corporate objectives and that the corporation itself conforms to the law and regulations.”

International Chamber of CommerceInternational Chamber of Commerce

Definitions Definitions Cont’d… Cont’d…“Corporate governance is one key element in improving economic efficiency and growth as well as enhancing investor confidence. Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined. Good corporate governance should provide proper incentives for the board and management to pursue objectives that are in the interests of the company and its shareholders and should facilitate effective monitoring. The presence of an effective corporate governance system, within an individual company and across an economy as a whole, helps to provide a degree of confidence that is necessary for the proper functioning of a market economy. As a result, the cost of capital is lower and firms are encouraged to use resources more efficiently, thereby underpinning growth.”

Preamble to the OECD Principles of Corporate Governance, 2004 Preamble to the OECD Principles of Corporate Governance, 2004

Definitions Definitions Cont’d… Cont’d…“In its most comprehensive sense, ‘corporate governance’ includes every force that bears on the decision-making of the firm. That would encompass not only the control rights of stockholders, but also the contractual covenants and insolvency powers of debt holders, the commitments entered into with employees and customers and suppliers, the regulations issued by governmental agencies, and the statutes enacted by parliamentary bodies. In addition, the firm’s decisions are powerfully affected by competitive conditions in the various markets in which it operates. One could go still further, to bring in the social and cultural norms of the society. All are relevant, but the analysis would become so diffuse that it risks becoming unhelpful as well as unbounded.”

Professor Kenneth Scott of Stanford Law School (1999)Professor Kenneth Scott of Stanford Law School (1999)

Recent DevelopmentsRecent DevelopmentsInternal Control-Integrated Framework; The Committee

of Sponsoring Organizations of the Treadway Commission (COSO) – 1992

Enterprise Risk Management - Integrated Framework; The Committee of Sponsoring Organizations of the Treadway Commission (COSO) – 2004

The OECD Principles of Corporate Governance, The Organization for Economic Cooperation and Development (OECD) – 2004

The Corporate Governance Lessons from the Financial Crisis – OECD – Feb. 2009

The Turner Review: A regulatory response to the global banking crisis – FSA – March 2009

The Walker Review – Sir David Walker (June 2009)

StakeholdersStakeholders

Customers / Depositors / BorrowersCustomers / Depositors / Borrowers

Creditors / Suppliers Creditors / Suppliers

EmployeesEmployees

ShareholdersShareholders

Stock ExchangesStock Exchanges

CommunityCommunity

Regulators and GovernmentRegulators and Government

Elements of Corporate GovernanceElements of Corporate GovernanceRole, Powers, and skills of the Board

Board appointments and Independence

Strategy setting

Monitoring the Board performance

Role and Responsibilities of Board Committees

Financial and Operational reporting Management environment (objectives, framework,

processes, responsibility and accountability)

Code of Conduct

Legislation

Models of Corporate Governance Models of Corporate Governance The Outsider Model – Anglo-Saxon (UK, USA) - also characterized as market-based system

Large and dispersed body of investors

‘Disclosure-based’ system

Equities represent a high share of financial assets

Liquid stock markets and strict trading rules

Fragmentation of ownership

Potential agency problems

Models of Corporate Governance Models of Corporate Governance The Insider Model – (Continental Europe and Asia)Ownership and control held by identifiable and cohesive groupGroup of insiders include family interests, allied businesses/industrial concerns, banks, and holding CosLess institutionalization of wealth (little role of pension funds, mutual funds, and insurance companies)Selective exchange of information among insidersTo acquire control – corporate structure, shareholders agreements, cross-shareholdings, discriminatory voting rights, reduce participation of minority shareholders

Models of Corporate Governance Models of Corporate Governance The Family / State Model – ‘founding’ families of entrepreneurs and pervasive role of state (Korean Chaebols hold less than 15%, Sweden was traditionally family-dominated now ‘market-based’ and ‘insider system’)Families and allies exercise control over an extensive network of listed and non-listed companiesComplex web of cross shareholdingsSeparation between shareholders and corporationLarge state sectorFamily-based conglomerates acquire political weight by premium for sheer size, employment capacity, and political voiceOutside financing is overwhelmingly bank-based (Italy, Greece, Turkey)Deficient market exit arrangements, high entry barriers, hidden subsidies, obstacles to FDIStability of ownership, high degrees of reinvestment, long-term commitment, and firm-specific investment

Fiduciary Duties of DirectorsFiduciary Duties of Directors

Duty of CareDuty of CareThe duty of care refers to the obligation of directors to exercise care, caution and attention in their decision making process and in overseeing the operations of the firm. This requires directors to attend and participate in Board and committee meetings and further to satisfy themselves with the adequacy of management information and compliance systems of the firm.

Duty of loyalty Duty of loyalty The duty of loyalty requires Board members to act in the best interest of the firm and all its shareholders and not to the personal advantage of the director or the controlling shareholders of the firm.

Role and Responsibilities of DirectorsRole and Responsibilities of Directors Board members are next to the shareholders on

one side, and the managers of the entity on the other

Trustees for all shareholders

Loyalty and commitment to the company

Provide leadership, vision, and strategic direction

Objective, transparent, and independent judgment of the management

Accountable to all shareholders including minority

Responsibilities of DirectorsResponsibilities of DirectorsDirection involves:Formulate and review of company policies, strategies, plans, and policiesSet objectives and monitor performanceGuide on mergers and acquisitions, divestures, financial and legal compliance

Control Involves:Prescribe code of conductSupervise disclosure and communication processEnsure good control environment

Accountability involves:Create, protect, and enhance company wealth and resources Report timely and transparentlyShow corporate social responsibility without comprising wealth maximization objective

Distinguishing Factors between Directors Distinguishing Factors between Directors and Managersand Managers

Directors Managers

Leadership Provide leadership, direction, and formulate strategies

Implement the strategies and policies approved by the Board

Decision Making

Determine the future of the company and protect its assets and reputation considering the stakeholders’ perspective and regulatory framework

Delegation by the Board and implement decisions of the Board

Duties and Responsibiliti

es

Legal, contractual, and fiduciary duties

Mostly contractual obligations

Relationship with

shareholders

Shareholders may restrict the powers of directors and remove them

Accountable to the CEO or the Board in terms of their contract

Distinguishing Factors between Directors Distinguishing Factors between Directors and Managersand Managers

Directors Managers

Company Administratio

n

Entrusted with responsibility for the company’s assets and business. Answerable to the company and shareholders

Enjoy delegated responsibility thus not solely liable for mal-administration

Ethics and Values

Prescribe the code of conduct

Implement the ethics while performing their duties

Statutory Provisions

Directors may be held responsible for the affairs of the company, personal and criminal liability

Minimum civil and criminal liability

Wrap up