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How Global is Good Corp Gov 05

How Global is Good Corp Gov 05

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07/01/2010

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© EIRIS
1/20
 
Research briefing August 2005
How global is goodcorporate governance?
Stephanie Maier
 
Overview
High profile corporate governancescandals and increased shareholderactivism are driving better governancepractice. As governments andregulators respond to these challengeswith the adoption or revision of newcorporate governance codes we areseeing an emerging consensus of accepted best practice and this trend islikely to continue. As codes convergeand standards improve investors arelooking beyond straightforwardcompliance to seek out factors thatcontribute to the creation of long termvalue. However, despite this promisingtrend important geographical variationin governance practices remains and asEIRIS’ analysis shows some companiesand countries still have a long way togo:
 
Only 25% of US companies separatethe roles of chairman and CEOcompared with at least 50% forcompanies in other developedeconomies
 
Swiss boards have the highestpercentage of independent directors(81%) – Germany, Austria and Japanall have less than 10%
 
Only 4% of companies in Japan haveaudit committees comprising amajority of independent directorscompared to over 95% in the USA,Canada, the Netherlands,Luxembourg, the UK and Ireland
 
Only 22% of companies in Singaporeand 25% of companies in Hong Konghave meaningful codes of ethics
Inside
What is corporategovernance?........................... 2Evolution of corporategovernance
– scandals andemerging code trends
.................2The role of investors .6Governance in practice
– boardstructure and size, independence,remuneration disclosure, boarddiversity
…………………………….7
 
How global is good corporate governance?
August 2005
 
© EIRIS
2/20
 
1.
 
What is corporategovernance?
Corporate governance describes theframework by which companies aredirected and controlled i.e. the settingof corporate objectives and themonitoring of performance againstthese objectives. Good corporategovernance aims to provide incentivesfor the board and management topursue the objectives that are in theinterests of the company and itsshareholders.This framework encompasses structuraland behavioural components. Structuralcomponents include whether the rolesof Chairman and CEO are separatedand how many independent directorsare on the board. Behaviouralcomponents include the level of directors’ attendance at boardmeetings, disclosure of directors’ remuneration and remuneration policy.Increasingly, the issues of boarddiversity and a company’s code of ethics are also considered whenassessing the effectiveness of acompany’s decision making. While nottraditional elements they are viewed asindicators of independent andaccountable decision-making.Corporate governance defines a set of relationships between a company’smanagement, its board, itsshareholders and other stakeholders. Itis the process by which directors andauditors manage their responsibilitiestowards shareholders and widercompany stakeholders. Forshareholders it can provide increasedconfidence of an equitable return ontheir investment. For companystakeholders it can provide anassurance that the company managesits impact on the environment andsociety in a responsible manner.Corporate governance encompasses thecombination of laws, regulations, listingrules and voluntary private sectorpractices that enable the company toattract capital, perform efficiently,generate profit and meet other legalobligations and general societalexpectations.
2.
 
The evolution of corporate governance
2.1.
 
The scandals
Recent history is littered with highprofile examples of corporategovernance scandals and failures. Theresult is loss of investor confidence infinancial markets and fall in marketvalue. Below we take a closer look athigh profile examples of scandals thatplayed key roles forming the corporategovernance landscape – companiesfrom opposite sides of the Atlanticoperating in different decades.
Maxwell Corporation (1991)
The Maxwell ‘empire’ was largelycomprised of two publicly quotedcompanies – Maxwell CommunicationCorporation and Mirror GroupNewspapers. Heavy borrowing tofinance the expansion of his publishingand media empires led to unsustainablelevels of debt. Following the presumedsuicide of Robert Maxwell, the group’sfinancial problems were exposed. Debtsof GBP 4 billion and a GBP 441 millionsized hole in its pension funds wereeventually revealed
1
.Subsequent analysis highlighted anumber of corporate governancedeficiencies. Robert Maxwell held thepositions of both chairman and chief executive. The lack of separation of these roles led to the concentration of power which facilitated the fraudulentactivities. The effectiveness of the non-
 
How global is good corporate governance?
August 2005
 
© EIRIS
3/20
 
executive directors and pensiontrustees was also questioned althoughthe Serious Fraud Office brought nocharges against them.The Maxwell scandal has beendescribed as the greatest fraud of the20th Century, forcing the issue of corporate governance firmly into thepublic, business and political arena.
Enron (2001)
The name Enron is now synonymouswith corporate scandal. Previouslyranked in the US’ Fortune Top 10companies based on turnover, it endedits days as one of the largestbankruptcies in US history and wasinstrumental in the collapse of Anderson, one of the “big five” globalaccounting firms.Enron, operating in the energy market,set up a series of ‘special purposeentities’ (SPEs) or off-balance sheetentities to enhance its earnings andconceal its debts from the market
2
.Subsequent investigation focused onthe role of the auditor and, in this case,their apparent failure to ask sufficientlyprobing questions of the directors. Italso highlighted the need for directorsto act with honesty and integrity andthe need for non-executive directorswith sufficient experience to overseethe decisions of executive directors.In the aftermath of this scandal, the USgovernment was quick to implementcorporate governance reforms togetherwith revisions of the New York StockExchange’s (NYSE) listingrequirements. Most notably, companiesare now required to have an auditcommittee wholly comprised of independent directors and to publish acode of ethics for senior financialofficers.
Parmalat (2003)
So soon after the Enron scandal manyassumed that no similar financialcollapse could take place in Europe.However Parmalat, one of Italy’slargest publicly quoted companies, wasdeclared insolvent in December 2003.The scandal was similar to Enron in thatthe auditors apparently failed to pick upon fraud
3
. Forged documents showedcash holdings at a subsidiary, Bonalat,which simply did not exist.This scandal again highlighted the roleof the auditor and need for an effectivewhistle-blowing system. Aninvestigation found that while a numberof employees suspected wrong-doing,no-one came forward.The company’s board and ownershipstructure also raised questions overcorporate governance best practice.While publicly quoted, the companywas still 51% owned by the Parmabased family of its founder CalistoTanzi. Further, Tanzi held the role of both Chairman and CEO and the boardwas far from independent, comprising anumber of family members.
2.2.
 
The development of codesaround the world
Against the backdrop of corporatescandals and fraudulent accountingpractices, governments and regulatorshave sought to introduce strongerlegislation and regulation to guardagainst similar collapses in the futureand restore investor confidence infinancial markets. In some countrieslegislation and codes addressingcorporate governance have been inexistence for decades, in othersgovernments are just embarking on thedevelopment of such codes. Below aresome of the key legislativedevelopments that form the corporategovernance landscape in their

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