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GOVERNANCE AND RESPONSIBILITY
List the driving forces for the development of governance codes: • • • • • • Increasing internationalisation and globalisation Bias treatment of domestic and foreign investors Excessive influence of majority shareholders Erosion of shareholders confidence in financial reporting The need for greater transparency High profile corporate scandals
What are the characteristics of a principles-‐based approach? • • • • • Focuses on objectives rather than the means by which these objectives will be achieved Principles-‐based approach can deal with those areas of corporate governance where rules cannot easily be applied e.g. internal control Can be applied across different legal jurisdictions Companies can deviate from a principle on a comply or explain basis Principles-‐based approaches have often been adopted in jurisdictions where the governing bodies of stock markets have had the prime role in setting standards for companies to follow Principle-‐based approach has greater flexibility than if it was underpinned by legal requirements
What are the characteristics of a rules-‐based approach? • • • • • • • Rules-‐based place more emphasis on definite achievements rather than underlying objectives Rules-‐based approaches allow no leeway. Compliance is mandatory. In theory it should be easy to see whether there has been compliance with the rules or not Rules-‐based approach have difficulties in dealing with questionable situation that are not covered sufficiently in the rulebook Rules-‐based approach focuses greatly on obeying the letter of the law rather than the spirit Regulators and auditors enforce rules-‐based approach. Rules-‐based approaches to corporate governance tend to be found in legal jurisdictions and cultures.
What are the advantages of a principles-‐based approach? • • • • • It avoids the need for inflexible legislation that companies have to comply with even though the legislation is not appropriate It is less burdensome in terms of time and expenditure It allows companies to develop their own approach to corporate governance that is appropriate for their circumstances Enforcement on a comply or explain basis provides the means that businesses can explain why they have departed from the specific provisions It accompanied by disclosure requirements puts the emphasis on investors making up their own minds about what businesses are doing
What are the advantages of outsider systems? • • • Separation of ownership and management leads to a healthy development of governance to protect shareholders Shareholders have voting rights that they can use to exercise control Hostile takeovers are far more frequent. and there is the manager-‐ownership separation. Codes may state that they are not prescriptive but codes effectively become rules once they are adopted but the local stock exchange and companies must comply in order to retain their listing Some companies may perceive a principles-‐based approach as non-‐binding and fail to comply without giving an adequate explanation (a rules-‐based approach backed by criminal sanctions may give shareholders more confidence that the company and its directors are complying) • Describe the insider model (insider system) of ownership? This is where most companies listed on the stock exchange are owned and controlled by a small number of major shareholders. therefore. the government or members of the companies founding families.What are the criticisms of a principles-‐based approach? • • • Principles are so broad that they are of very little use as a guide to best corporate governance practice Investors cannot be confident of consistency of approach. Clear rules mean that the same standards apply to all directors Principals-‐based approach may cause confusion over what is compulsory and what isn’t. focusing on the long-‐term view of the organisation What are the disadvantages of insider systems? • • • • • • • Discrimination against minority shareholders Tends not to be monitored effectively Insider system often do not develop more formal governance structures until they need to Reluctance to employ outsiders in influential positions and may be unwilling to recruit independent non-‐executive directors Investors who are on their own of such size that they can influence share prices Shares may be seen as speculative Succession issues Describe the outsider model (outsider system) of ownership? Outsider systems are ones where shareholding is more widely dispersed. other companies. and the threat of these acts as a disciplining mechanism on company management . What are the advantages of insider systems? • • • • It is easier to establish ties between owners and managers Agency problem and agency costs of monitoring are reduced if the owners are also involved in management Easier to influence company management A smaller base of shareholders may be more flexible about when profits are made. Examples include banks.
THE END. It also accepts that there are guidelines that will normally be appropriate but also accepts that there are valid reasons for exceptions. How has the King report impacted on the development of corporate governance? The King report differs in emphasis from other guidance by advocating an integrated approach to corporate governance in the interest of a wide range of stakeholders embracing the social environmental and economic aspects of a company’s activities. The shareholders or their advisers would only be interested in whether the letter of the rule has been complied with. . (Stockholder theory) How has the Singapore code impacted on the development of corporate governance? It take a similar approach to the UK Corporate Governance Code with the emphasis being on companies giving a detailed description of their governance practices and explaining and deviation from the code. is in favour of relaxing the regulatory burden on companies but also discouraging the treatment of corporate governance codes as sets of rules i.What are the disadvantages of outsider systems? • • Agency problem and significant costs of agency Larger shareholders in these regimes often have short-‐term priorities and would rather sell their shares than pressurise the directors to change strategies What are some of the provisions of the Cadbury report? • • • • • • • The board should meet on a regular basis Certain matters such as major acquisitions or disposals of assets should be referred automatically to the board No one person should have complete power to dominate the board There should be at least three non-‐executive directors independent of management Provisions for the length of directors’ service contracts and disclosure of remuneration Audit committee should liaise with internal and external auditors and provide a forum for both to express their concerns Audit committee should also review half yearly annual statements How has the Greenbury code impacted on the development on corporate governance? The Greenbury code went beyond the Cadbury code. therefore. It recommends that the remuneration committee should determine executive directors’ remuneration and that this committee should be comprised solely of non-‐executive directors and that directors’ service contract should be limited to one year. How has the Hampel report impacted on the development of corporate governance? Too often companies would treat the codes as sets of prescribed rules. judging companies on whether they have complied or not (box-‐ticking). The substance of the “Hampel Report”.e.
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