TÍTULO

Governance, Risk Management, Compliances and Ethics

Subtítulo
 Learning Objectives
On successful completion of this lesson, you will be able to:

● LR 1: Understand laws and practices in a national and

international context.
o Understand the conceptual framework of the corporate
governance
o Identify national and international laws and practices.
o Evaluate the practical application of the legal framework from
both a national and international perspective.

2
Lecture Outline
● Corporate governance structure
● Codes of corporate governance
● The importance of corporate governance
● OECD Principles of Corporate Governance
● Principles of the Code of Best Practice on Corporate Governance
Codes of corporate governance
• Corporate governance is the system by which companies are directed and
controlled.
• Good corporate governance is important because the owners of a company
and the people who manage the company are not always the same.
• Corporate governance is a holistic approach to the whole issue of the role of
the organization (because it can no longer be confined to companies) in
society, its responsibilities to the society within which it operates, its
responsibilities to all its stakeholders including its employees and their
dependants and the ethical underpinning that has to be in place for any form
of honest reporting. It will look not simply at the organization as a reporting
entity complying with a set of rules or nebulous concepts but as a functioning
part of the business environment.
The importance of corporate governance
• Corporate governance is the system by which companies are directed and
controlled. Cadbury Committee 1992
• The various parties interested in the accounts of a company are
sometimes referred to as stakeholders. They will each judge the accounts
by different criteria.
The importance of corporate governance

• Directors are accountable to shareholders.

• Directors act as stewards of the shareholders' investments. They are
agents of the shareholders.
The importance of corporate governance

• Accountability is the quality or state of being accountable; that is, being

required or expected to justify actions and decisions. It suggests an
obligation or willingness to accept responsibility for one's actions.
• Stewardship refers to the duties and obligations of a person who
manages another person's property.
• Agents are people employed or used to provide a particular service. In
the case of a company, the people being used to provide the service of
managing the business also have the second role of trying to maximize
their personal wealth in their own right.
The importance of corporate governance
The importance of corporate governance

Agency theory
• Agency theory defines the relationship between principals, the
shareholders of the company and agents, the directors.
• The theory sets out that the shareholders of the company appoint the
agents and delegate the work of running the business to the directors,
who are agents of the shareholders.
• The theory prescribes that directors and the management of a company
are held accountable in their tasks and responsibilities
Accountability
The importance of corporate governance
• These issues are discussed under the umbrella title 'corporate
governance', which does bring about accountability.
• 'Governance' indicates the management (governing) role of the directors,
and 'corporate' indicates that the issue relates to companies (bodies
corporate).
• It is necessary for structures to be in place to ensure that every
stakeholder in the company is not disadvantaged. As it is the directors
that manage the company, the burden of good corporate governance falls
on them.
• It is important that they manage the company in the best way for the
shareholders, employees and other parties.
Conformance and performance
• Good corporate governance should lead to both performance and
conformance.
• Conformance is concerned with compliance with laws and following
acceptable and reasonable governance standards. Performance relates to
the achievement of corporate objectives and with strategic activities that
maximize the benefits to shareholders and other stakeholders.
• Maximizing benefits to all stakeholders is consistent with stakeholder
theory. Stakeholder theory is based on the assumption that businesses
will only be successful when they deliver value to the majority of their
stakeholders.
Corporate governance can and should

• Provide better access to capital

• Aid economic growth
• Have a positive impact on stock prices
• Have a positive impact on performance
• Ensure that the business is fair and transparent
• Ensure that companies can be held accountable
• Lead to sustainability
Framework for analyzing board activities
(Source: Hilmer F. and R.I. Tricker (1991))
OECD Principles of Corporate Governance

• The Organization for Economic Co-operation and Development (OECD) is

an international organization that works to establish social, economic and
environmental policies of best practice that can be followed worldwide.
• The OECD Principles of Corporate Governance set out the rights of
shareholders, the importance of disclosure and transparency and the
responsibilities of the board of directors.
OECD definition of corporate governance

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.

OECD 2015
Structure and content of the Code
• The Code is structured into a set of broad principles and more specific
provisions which seek to apply those principles.
• Companies are only required to apply the principles and are permitted to
depart from the specific provisions.
• If they do depart from the specific provisions then they must explain why
they have done this. This is known as the 'comply or explain' basis,
according to which a board must either comply with the specific
provisions, or explain why they have not.
Principles of the Code of Best Practice on
Corporate Governance
• A: Directors
• B: Directors Remuneration
• C: Relations With Shareholders
• D: Accountability And Audit
• E: Institutional Investors
• F: Other Investors
• G: Internet Of Things And Cybersecurity
• H: Environment, Society And Governance (ESG)
Code Of Best Practice On Corporate Governance (2017)
Directors
• The directors of a company should set company policy, including risk
policy, and are responsible for the company's systems and controls.
• This links in to Tricker’s Framework under supervising and monitoring.
They should make sure they set enough time aside, and that they have
the necessary experience and skill, to do this effectively.
Board leadership
• The board is responsible for the company's strategy. It must therefore
assess the basis on which the company generates and preserves value
over the long-term, making various statements in the annual report
regarding the opportunities and risks for the company
• The Code states that the Board's role is to provide entrepreneurial
leadership of the Company with a framework of prudent and effective
controls which enables risk to be assessed and managed.
• It should ensure the formulation of and implementation of a sound
business strategy.
Chair and CEO
• The Code requires that there is clear division of responsibility at the head
of a company between the chair and the chief executive. The chair and
the chief executive should not be the same individual. Any decision to
combine the posts should be justified and highlighted in the Annual
report.
• The Chairman should be responsible for the leadership of the board and
overall board effectiveness. It is also the chairman's role to ensure
effective communication with the shareholders and to chair meetings.
Chair and CEO
• The Chief Executive is responsible for the day to day management of the
business, in line with the strategy and long-term objectives approved by
the Board.
• He or she may make decisions in all matters affecting the operations,
performance and strategy of the Group's businesses, with the exception
of those matters reserved for the Board or specifically delegated by the
Board to its Committees, executive committees or subsidiary company
boards.
Systems, controls and monitoring
• An important element of setting strategies is determining and managing
risks.
• Directors are responsible for the systems put in place to achieve the
company policies and the controls put in place to mitigate risks.
• Under the Code, boards are required to have an internal audit function to
assist with this and to require the audit committee to carry out reviews of
the risk management and internal control processes.
• The directors are also responsible for monitoring the effectiveness of
systems and controls. Internal auditors have an important role in this
area. Under the Code (para. D.2.3), boards are required to have an
internal audit function and to require the Audit Committee to carry out
reviews of the risk management and internal control processes.
Board Balance
• It is important that he board contains some nonexecutive directors
(NEDs) to ensure that it exercises objective judgments. The Code states
that the number of NEDs should be the higher of three or one third of the
total board members. If the Chairman and CEO are the same person, the
rules are stricter, and the majority of the board should be NEDs.
• NEDs may have a particular role in some sensitive areas, such as company
reporting, nomination of directors and remuneration of executive
directors. It is important, therefore, that they have the appropriate mix of
skills, commitment, experience and independence to carry out their roles
effectively.
Board Balance
• Independent non-executive director (sometimes shortened to simply
‘independent director’) is differentiated from other non-executive
directors.
• To be deemed 'independent' they should be independent of
management and free of any business or other relationship that could
materially interfere with or could reasonably be perceived to materially
interfere with the exercise of their unfettered and independent
judgment.
Principles of the Code of Best Practice on
Corporate Governance
• A: Directors
• B: Directors Remuneration
• C: Relations With Shareholders
• D: Accountability And Audit
• E: Institutional Investors
• F: Other Investors
• G: Internet Of Things And Cybersecurity
• H: Environment, Society And Governance (ESG)
Code Of Best Practice On Corporate Governance (2017)
Committees
The Code sets out four committees that should be established to assist the
entity in acting in the best interests of the stakeholders.
1. The Audit Committee
2. The Remuneration Committee
3. The Nomination Committee, in order to make recommendations to the
board on all new board appointments
4. The Related Party Transactions Review Committee, consisting of only
nonexecutive directors. The committee should ensure that any related
party transactions are captured and properly disclosed.
Audit committees
• An audit committee can help a company maintain objectivity with regard
to financial reporting and the audit of financial statements.
• The board should establish an audit committee exclusively of non-
executive directors with a minimum of three non-executive directors of
whom at least two should be independent.
• If there are more non-executive directors the majority should be
independent. The committee should be chaired by an independent non-
executive director.
• The board should satisfy itself that at least one member of the audit
committee has recent and relevant experience in financial reporting and
control.
• The committee should have a written terms of reference dealing with its
authority and duties.
The Remuneration Committee
• A Remuneration committee must be established, made up of at least
three independent NEDs. Executive directors do not sit on the
remuneration committee.
• The Chairman (Chair) of the committee should be independent.
• The remuneration committee should be responsible for:
• Setting remuneration for:
– The Chair
– Executive directors
– Senior management
The Nomination committee
• Nomination committee is responsible for recommending the
appointments of new directors to the board.

The Risk committee

Risk committee is responsible for overseeing the organisation's risk
response and management strategies
Principles of the Code of Best Practice on
Corporate Governance
• A: Directors
• B: Directors Remuneration
• C: Relations With Shareholders
• D: Accountability And Audit
• E: Institutional Investors
• F: Other Investors
• G: Internet Of Things And Cybersecurity
• H: Environment, Society And Governance (ESG)
Code Of Best Practice On Corporate Governance (2017)
Principles of the Code of Best Practice on
Corporate Governance
• A: Directors
• B: Directors Remuneration
• C: Relations With Shareholders
• D: Accountability And Audit
• E: Institutional Investors
• F: Other Investors
• G: Internet Of Things And Cybersecurity
• H: Environment, Society And Governance (ESG)
Code Of Best Practice On Corporate Governance (2017)
Next Lecture

● Date:
● Time: 8.30 am
● Topic:
● Prerequisite (if any):