CORPORATE

GOVERNANCE
Nguyen Thu Tram, MA
Faculty of Business Administration
Banking Academy of Vietnam
 CORPORATE GOVERNANCE

v Instructor: Nguyen Thu Tram

v Email address: tramnguyen2203@gmail.com
v Tel. 036 8742 498
v Office hours: Wed, 8.00 am – 11.00 am
Room 401, A2 building
 CORPORATE GOVERNANCE
v Learning outcomes
Upon completion of this course, students are expected to be
able to:
• Distinguish the difference between management and
governance and understand the principles of corporate
governance
• Identify the roles and responsibilities of stakeholders in a
company
• Understand the risks governance in a company
• Practice corporate governance in company.
 CORPORATE GOVERNANCE
v Course assessment

- Classroom attendance & participation 10%

- 01 midterm test 20 %

- 01 presentation 20 %

- Final examination 50%

 CORPORATE GOVERNANCE
v Text book
- Bob Tricker, Corporate Governance Principles,
Policies and Practices, 4th Edition, Oxford, 2019
v Supplementary
- Rao Vallabhaneni, Corporate Management
Governance, And Ethics Best Practices, 1st Edition,
Wiley Publisher, 2008
- Materials supplemented
by lecturer
 CORPORATE GOVERNANCE
CONTENT

Part 1: Principles and policies

§ Chapter 1: Introduction to corporate governance
§ Chapter 2: Legal framework of corporate governance
§ Chapter 3: The governance of corporate risks
 CORPORATE GOVERNANCE
CONTENT

Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board leadership
§ Chapter 6: The Board activities
§ Chapter 7: Board assessment
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: Legal framework of corporate governance
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
Chapter 1. Introduction to corporate governance

1.1. Definition of Corporate Governance

1.2. CG vs. Management

1.3. Roles and Objectives of CG

1.4. Evolution of Corporate Governance

 Chapter 1. Introduction to CG

A. Corporate entity B. Strategy formulation C. Policies

D. Accountability E. Performance F. Conformance
 Chapter 1. Introduction to CG
1. the action or process of carrying out or accomplishing an action,
task, or function.
2. is the process of generating and reviewing alternative longer-term
directions for the company that lead towards the achievement of its
purposes.
3. Certification or confirmation that a good, service, or conduct meets
the requirements of legislation, accepted practices, prescribed rules
and regulations, specified standards, or terms of a contract.
4. Director's obligation to inform about their (past or future) actions
and decisions, to justify them, and to suffer punishment in the case
of eventual misconduct.
5. the rules, systems, and procedures that are laid down by the board
to guide and constrain executive management.
6. is formed whenever a group of members organizes a company,
institution, society, association, or other entity to serve their purpose
 Chapter 1. Introduction to CG

WHAT WOULD YOU DO WITH 3 BILLION VND?

 1.1. Definition of corporate governance

Corporate governance is concerned with the exercise of

power over corporate entities.
- Professor Tom Clarke (Australia) 2004

1. An operation 2. A relationship 3. A stakeholder

perspective perspective perspective

4. A financial
5. A societal
economics
perspective
perspective
 1.1. Definition of corporate governance

1. An operation
perspective

Corporate Governance is

- "the system by which companies are directed and controlled" (1)

- "about the procedures and processes according to which

an organization is directed and controlled" (2)

Focus on: shareholders, the board, the management

(1) Sir Adrian Cadbury's Report on the financial aspects of corporate governance (1992)
(2) Organization for economic co-operation and development (2001)
 1.1. Definition of corporate governance

2. A relationship
perspective

"The corporate governance structure specifies the distribution

of rights and responsibilities among participants in the
organization - such as the board, managers, shareholders, and
other stakeholders - and lay down the rules and procedures
for decision - making"
 1.1. Definition of corporate governance

3. A stakeholder
perspective

"Corporate governance is about the activities of the board and

its relationship with the shareholders or members, and with
those managing the enterprise, as well as with the external
auditors, regulators, and other legitimate stakeholders".
 1.1. Definition of corporate governance

4. A financial economics
perspective

"Corporate governance deals with the way suppliers of

finance assure themselves of getting a return on their
investment" - Shleifer and Wishny (1997).
 1.1. Definition of corporate governance

5. A societal perspective

"Corporate governance is concerned with holding the balance

between economic and social goals and between individual
and communal goals" - Sir Adrian Cadbury (2000).
v The scope of Corporate Governance
Market
intermediaries
Government
Stock and other
markets corporate
Shareholders
regulators

External Board of
auditors directors Media

Management
Societal
influences
Contractual and other
stakeholders stakeholders
1.2. Corporate Governance vs. Management

GOVERNANCE
vs.
MANAGEMENT?
Chapter 1. Introduction to CG

Activity:

Who are Chairman?

Who are CEO?
 Chapter 1. Introduction to CG

Microsoft, Apple, Mc Donald’s, Coca Cola, Vinamilk, DOJI

Group, FPT Group, Vingroup, Hoang Anh Gia Lai

Jame Quincey, Steve Easter Brook, Đỗ Minh Phú, Doug Mc

Million, Trương Gia Bình, Lê Thị Băng Tâm, John
W.Thompson, Arthur D. Levinson, Phạm Nhật Vượng, Võ
Trường Sơn, Jame Quincey, Bùi Quang Ngọc, Đoàn Nguyên
Đức, , Dương Thị Mai Hoa, Đỗ Minh Phú, Mai Kiều Liên,
Steve Easter Brook, Tim Cook, Satya Nadella
 1.2. Corporate Governance vs. Management

The board ensures Governance:

that it is being well the work
run and run in the The board of the board of
right direction directors or other
governing body

Management:
Managers run the work
the business of the executive
Management management team
 1.2. Corporate Governance vs. Management

Who are managers?

President, managing director, chief

operating officer or chief executive
officer

Regional manager, project manager or

division manager

Supervisor, shift manager, department

managers or office managers

Level of management
 1.2. Corporate Governance vs. Management

What do managers do?

Gather all the
resources needed
to be successful Hire, train and
Develop plans for reward people
every aspect of
the business

Supervise
Monitor progress effectively and
and make changes become a leader
if needed
 1.2. Corporate Governance vs. Management

What do the board do?

Outward -
looking
Accountability Strategy formulation

Supervising executive Policymaking

Inward -
activities
looking
Past and present - Future - focused
focused
 1.2. Corporate Governance vs. Management

What do the board do?

Ensure the business Ensure the business

is well run is run in the right
direction
Outward -
looking

Inward -
Conformance Performance
looking
Past and present - Future - focused
focused
 1.2. Corporate Governance vs. Management

Board delegation to management

Outward -
looking Accountability Strategy formulation

Approve and work

with and through the
CEO
Supervising executive Policymaking
Inward -
activities
looking
Past and present - Future - focused
focused
v Strategy formulation:
- Strategy formulation is the process of generating and
reviewing alternative longer-term directions for the
company that lead towards the achievement of its
purposes.
- Boards vary in their involvement in the strategy
formulation process.
McDonald’s vision is to be the world’s best quick service
restaurant experience. Being the best means providing
outstanding quality, service, cleanliness, and value, so
that we make every customer in every restaurant smile.
Guided by its pioneering aspirations as well as a
sustainable investment - development strategy,
VINGROUP has been striving to become Vietnam’s and
the regions’ leading multi-sectoral business group,
which aims to become a Group of international stature
and standards.
VINGROUP aspires to establish its Vietnamese brand,
demonstrating Vietnamese intellectual prominence and
pride in the international arena.
v Strategy formulation: Case study 7.1 pg. 179
v Policymaking
- Policies can be thought of as the rules, systems, and
procedures that are laid down by the board to guide and
constrain executive management.
- To make strategies operational, companies need
policies, procedures, plans, projects...
v Policymaking
v Supervising executive activities
- Primary means: financial measures and accounting
systems
- Regular reports from a budgetary control system
- Criteria beyond financial measures: customer satisfaction,
employee attitudes…
v Accountability
- Determined by the constitution of the organization, the
laws and demands of any regulating authority.
- Director's obligation to inform about their (past or future)
actions and decisions, to justify them, and to suffer
punishment in the case of eventual misconduct.
- To whom is a board accountable?
- What information to disclose?
Conformance or Performance?
How directors suggest boards How directors believe boards do
should balance their activities balance their activities
 Delegate to management or not?
Case study 6.2 pg. 182
v Policymaking
 1.2. Corporate Governance vs. Management

Board delegation to management

Outward -
looking Accountability Strategy formulation

Approve and work

with and through the
CEO
Supervising executive Policymaking
Inward -
activities
looking
Past and present - Future - focused
focused
1.3. Roles and objectives of corporate governance

Video: Enron scandal

1.3. Roles and Objectives of Corporate Governance

v Roles of Corporate Governance

a. Good board practices

b. Control environment
-Effective organization
c. Board commitment
-Harmonized interests
d. Transparent disclosure

e. Well defined shareholders

 Good Board Practices

• Clearly defined roles and authorities

• Duties and responsibilities of directors understood

• Board is well structured

• Plan appropriate board procedures

 Control Environment

• Risk management framework present

• Disaster recovery system in place

• Safety environment and media management techniques

in use
 Board Commitment

• Policies and procedures formalised and distributed to

relevant staff
• Create a corporate governance committee
• The board needs sufficient relevant skills and
understanding to review and challenge management
performance
 Transparent disclosure

• Financial and non financial info disclosed

• Financial prepared according to IFRS

• High-quality annual report published

• Web-based disclosure

• Companies Registry filings up to date

 Well defined shareholders

• Shareholder meeting conducted

• Shareholders rights formalised

• Clearly defined and explicit dividend policy

1.4. Evolution of Corporate Governance

Corporate entities always need governing

Corporate governance is necessary (whenever ownership

or membership is separated from management control)

- Old Chinese trade with the India

- 16th century sailing ship ventures

- 17/18th century trading company

- East India Company

- Hudson Bay Company

1.4. Evolution of Corporate Governance

The arrival of joint stock, limited liability company

19th century

Business run by sole traders and partners

If business failed- debtors prison

Problems of raising new investment

1.4. Evolution of Corporate Governance

Owners
(Shareholders)
(Members)

Board of Directors

Managers
Employees

Limited liability company

1.4. Evolution of Corporate Governance

The underlying concept of the company

Ownership is the basic of power

Directors appointed by shareholders

- Stewards of shareholders’ interests

- Fiduciary duty to act on their behalf

- Responsibility to be accountable
1.4. Evolution of Corporate Governance

From 1855- early 20th century

- Many companies formed: all public

Then family firms/sole traders incorporated

- To benefit from limited liability

Some companies merged

- New company formed original wound up

Then seen that companies could own others

- Beginnings of complex group

1.4. Evolution of Corporate Governance
1.4. Evolution of Corporate Governance

Problems of the 20th century

1930s- USA

Domination by top management

Berie and Means- separation

Securities and Exchange commission

1970s EU- two tier boards

UK- Bullock Report

Also 1970s- first stakeholders ideas

Watkinson (UK), Nader (US) Corporate report (UK)

1.4. Evolution of Corporate Governance

1980s corporate collapses

Maxwell (UK)

Bond (Australia)

Nomura (Japan)

Burnham Drexall/ Boesky (USA)

Carrian Investments (Hong Kong)

1.4. Evolution of Corporate Governance

ROBERT MAXWELL

Pergamon Press

Mirror Group Newspapers &MCC

1.4. Evolution of Corporate Governance

Developments in the 1990s: Corporate governance codes

arrive

UK codes: Cadbury (1992), Greenbury (1995),

Tyson (2003), UK combined Code (1998 and 2003))

Code of Australia (1993), Canada(1994),

Hollad(1997), Russia (2001)…

Code for international agency: OECD, World bank

(1999)
1.4. Evolution of Corporate Governance

Developments early in the 21st century: reaction to more

corporate collapses

Enron (USA)

HIH Insurance (Australia)

Independent Insurance (UK)

Tyco (USA)

Tomkins (UK)
1.4. Evolution of Corporate Governance
Some key questions remain:

Should the CEO also be chairman of the board?

Should a retiring CEO also be chairman of the board?

Can outside directors be genuinely independent?

How should directors’ remuneration be determined?

Should shareholders be able to nominate directors?

Should institutional investors exercise more power?

Are external auditors really independent?

1.4. Evolution of Corporate Governance
Some key questions remain:

How should complex, dynamic and often global

corporate entities be governed?

Are governance processes around the world

converging?

Are rules for governance of listed companies

appropriate to family companies, small firms, partnerships, or
not- for- profit entities?
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: Legal framework of corporate governance
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
Chapter 2. Legal framework of CG
1. Legal framework of corporate governance

v International level

v National level

v Company level

2. OECD's corporate governance principles

3.Business Roundtable's corporate governance

principles
Chapter 2.1. Legal framework of CG

International
level National level

Company level
2.2. OECD's Corporate Governance principles
 2.2. OECD's Corporate Governance principles
Brief about OECD
• OECD = Organisation for Economic Co-operation and
Development
• Established in 1948 as OEEC (Organisation for European
Economic Co-operation ) by Robert Marjolin to revive EU
economy after WW II.
• 1961, changed name to OECD, headquatered in Paris with 30
members.
• 1999, OECD set up Principles of Corporate Governance - an
international benchmark for policy makers, investors,
corporations, and other stakeholders
 2.2. OECD's Corporate Governance principles

PRINCIPLE I: ENSURING THE BASIS FOR AN EFFECTIVE

CORPORATE GOVERNANCE FRAMEWORK

The corporate governance framework should promote

transparent and efficient markets, be consistent with the
rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory
and enforcement authorities.
 2.2. OECD's Corporate Governance principles

PRINCIPLE I: ENSURING THE BASIS FOR AN EFFECTIVE

CORPORATE GOVERNANCE FRAMEWORK

A. Framework should be developed with a view to its impact on

overall economic performance, market integrity, promotion of
transparent and efficient markets.
B. The legal and regulatory should be consistent with the rule of
law, transparent, and enforceable.
C. Responsibilities of different authorities must be clearly
articulated .
D. Supervisory, regulatory, and enforcement authorities should
have the authority, integrity, and resources to fullfill their duties in
a professional and objective manner.
 2.2. OECD's Corporate Governance principles

PRINCIPLE II: THE RIGHTS OF SHAREHOLDERS

AND KEY OWNERSHIP FUNCTIONS

The corporate governance framework should protect and

facilitate the exercise of shareholders' rights
 2.2. OECD's Corporate Governance principles
PRINCIPLE II: THE RIGHTS OF SHAREHOLDERS AND KEY
OWNERSHIP FUNCTIONS
A. Basic shareholder rights
B. Shareholders should have the right to be sufficiently informed on,
decisions concerning fundamental corporate changes
C. Shareholders should have the opportunity to participate in general
shareholder meetings
D. Capital structures that enable certain shareholders to obtain a degree of
control disproportionate to their equity ownership should be disclosed.
E. Markets for corporate control should be allowed to function in an efficient
and transparent manner.
F. The exercise of ownership rights by all shareholders should be facilitated.
G. Shareholders should be allowed to consult with each other on issues
concerning their basic shareholder rights.`
2.2. OECD's Corporate Governance principles

PRINCIPLE III: THE EQUITABLE TREATMENT OF

SHAREHOLDERS

The corporate governance framework should ensure the

equitable treatment of all shareholders, including
minority and foreign shareholders. All shareholders
should have the opportunity to obtain effective redress
for violation of their rights.
 2.2. OECD's Corporate Governance principles

PRINCIPLE III: THE EQUITABLE TREATMENT OF

SHAREHOLDERS

A. All shareholders of the same series of a class should be

treated equally
B. Insider trading and abusive self-dealing should be
prohibited.
C. Members of the board and key executives should be
required to disclose to the board whether they, directly,
indirectly or on behalf of the third parties, have a material
interest in any transaction or matter directly affecting the
corporation.
.
 2.2. OECD's Corporate Governance principles

PRINCIPLE IV: ROLES OF STAKEHOLDERS IN

CORPORATE GOVERNANCE

The corporate governance framework should

recognize the right of stakeholders established by
law or through mutual agreements and encourage
active co-operation between corporations and
stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
.
 2.2. OECD's Corporate Governance principles

PRINCIPLE IV: ROLES OF STAKEHOLDERS IN

CORPORATE GOVERNANCE
A. The rights of stakeholders are to be respected.
B. Performance-enhancing mechanisms for employee participation
should be permitted to develop.
C. Stakeholders should have access to relevant, sufficient, and
reliable information on a timely and regular basis.
D. Stakeholders should be able to freely communicate their
concerns about illegal or unethical practices to the board
E. Stakeholders should be able freely communicate their concerns
about illegal or unethical practices to the board.
F. The corporate governance framework should be complemented
by an effective, efficient insolvency framework and effective
enforcement of creditor rights.
2.2. OECD's Corporate Governance principles

PRINCIPLE V: DISCLOSURE AND TRANSPARENCY

The corporate governance framework should ensure that

timely and accurate disclosure is made on all material
matters regarding the corporation, including the financial
situation, performance, ownership and governance of the
company.
 2.2. OECD's Corporate Governance principles

PRINCIPLE V: DISCLOSURE AND TRANSPARENCY

A. Disclosure should include, but not be limited to, material

on ( )
B. Information should be prepared and disclosed in
accordance with high quality standards of accounting and
financial and non-financial disclosure.
C. An annual audit should be conducted by an independent
auditor
D. External auditors should be accountable to the
shareholders
E. Channels for disseminating information should be timely
and cost-efficient
2.2. OECD's Corporate Governance principles

PRINCIPLE VI: RESPONSIBILITES OF THE BOARD

The corporate governance framework should ensure the

strategic guidance of the company, the effective
monitoring of management by the board, and the
board's accountability to the company and the
shareholders.
 2.2. OECD's Corporate Governance principles

PRINCIPLE VI: RESPONSIBILITES OF THE BOARD

A. Board members should act on a fully informed basis, in

good faith, with due diligence and care, and in the best
interest of the company and the shareholders.
B. The board should treat all shareholders fairly.
C. The board should apply high ethical standards
D. The board should fullfill certain key functions
E. The board should be able to exercise objective independent
judgment on corporate affairs

.
2.3. Business Roundtable's CG principles

Board members should act on a fully informed basis,

in good faith, with due diligence and care, and in the
best interest of the company and the shareholders.
The board should treat all shareholders fairly.
The board should apply high ethical standards
The board should fullfill certain key functions
The board should be able to exercise objective
independent judgment on corporate affairs
2.3. Business Roundtable's CG principles

Business Roundtable continues to believe that corporate governance

should be enhanced through conscientious and forward-looking action
by a business community that focuses on generating long-term
shareholder value with the highest degree of integrity.
The principles discussed here are intended to assist corporate boards
of directors and management in their individual efforts to implement
best practices of corporate governance, as well as to serve as
guideposts for the public dialogue on evolving governance standards.
As noted above, there is no "one size fits all" approach that will be
suitable for all corporations. However, to the extent that a corporation
follows governance practices that diverge from common practice, it
should consider disclosing the reasons for this and why its practices
are appropriate for it, consistent with its size, industry, culture and
other relevant factors.
2.3. Business Roundtable's CG principles

First, the paramount duty of the board of directors of a public

corporation is to select a chief executive officer and to oversee the
CEO and senior management in the competent and ethical operation
of the corporation on a day-to-day basis.
Second, it is the responsibility of management, under the oversight of
the board, to operate the corporation in an effective and ethical
manner to produce long-term value for shareholders. The board of
directors, the CEO and senior management should set a "tone at the
top" that establishes a culture of legal compliance and integrity.
Directors and management should never put personal interests ahead
of or in conflict with the interests of the corporation.
2.3. Business Roundtable's CG principles

Third, it is the responsibility of management, under the oversight of

the board, to develop and implement the corporation's strategic plans,
and to identify, evaluate and manage the risks inherent in the
corporation's strategy. The board of directors should understand the
corporation's strategic plans, the associated risks, and the steps that
management is taking to monitor and manage those risks. The board
and senior management should agree on the appropriate risk profile
for the corporation, and they should be comfortable that the strategic
plans are consistent with that risk profile.
Fourth, it is the responsibility of management, under the oversight of
the audit committee and the board, to produce financial statements
that fairly present the financial condition and results of operations of
thecorporation and to make the timely disclosures investors need to
assess the financial and business soundness and risks of the
corporation.
2.3. Business Roundtable's CG principles

Fifth, it is the responsibility of the board, through its audit committee,

to engage an independent accounting firm to audit the financial
statements prepared by management and issue an opinion that
those statements are fairly stated in accordance with Generally
Accepted Accounting Principles, as well as to oversee the
corporation's relationship with the outside auditor.
Sixth, it is the responsibility of the board, through its corporate
governance committee, to play a leadership role in shaping the
corporate governance of the corporation and the composition and
leadership of the board. The corporate governance committee should
regularly assess the backgrounds, skills and experience of the board
and its members and engage in succession planning for the board.
2.3. Business Roundtable's CG principles

Seventh, it is the responsibility of the board, through its compensation

committee, to adopt and oversee the implementation of compensation
policies, establish goals for performance-based compensation, and
determine the compensation of the CEO and senior management.
Compensation policies and goals should be aligned with the
corporation's long-term strategy, and they should create incentives to
innovate and produce long-term value for shareholders without
excessive risk. These policies and the resulting compensation should
be communicated clearly to shareholders.
Eighth, it is the responsibility of the corporation to engage with long-
term shareholders in a meaningful way on issues and concerns that are
of widespread interest to long-term shareholders, with appropriate
involvement from the board of directors and management
2.3. Business Roundtable's CG principles

Ninth, it is the responsibility of the corporation to deal with its

employees, customers, suppliers and other constituencies in a fair and
equitable manner and to exemplify the highest standards of corporate
c i t i z e n s h i p .
These responsibilities and others are critical to the functioning of the
modern public corporation and the integrity of the public markets. No
law or regulation can be a substitute for the voluntary adherence to
these principles by corporate directors and management in a manner
that fits the needs of their individual corporations.
2.3. Business Roundtable's CG principles

Ninth, it is the responsibility of the corporation to deal with its

employees, customers, suppliers and other constituencies in a fair and
equitable manner and to exemplify the highest standards of corporate
c i t i z e n s h i p .
These responsibilities and others are critical to the functioning of the
modern public corporation and the integrity of the public markets. No
law or regulation can be a substitute for the voluntary adherence to
these principles by corporate directors and management in a manner
that fits the needs of their individual corporations.
 Legal framework of CG

Case study: Vinamilk articles of association and

guidelines on corporate governance
 DEFINITION OF STAKEHOLDERS

A stakeholder is anybody who has interests in a company.

Stakeholders may refer to individuals, groups or
organizations that can affect or are affected by activities
of the company.
( Business Dictionary – Cambrigde University, 2012)
 DEFINITION OF STAKEHOLDERS

Question 1 :

Who are stakeholders of a company?

DEFINITION OF STAKEHOLDERS

BOD
 DEFINITION OF STAKEHOLDERS

Question 2 :

What are their interests and concerns?

 DEFINITION OF STAKEHOLDERS

Investors, shareholders: Return on investment,

income, profitability, transparency, full disclosure
 DEFINITION OF STAKEHOLDERS

Directors, managers : remuneration, power, respect

 DEFINITION OF STAKEHOLDERS

Employees: Rates of pay, job security, equality,

(prestige, recognition...)
 DEFINITION OF STAKEHOLDERS

Suppliers: Price, date of payment, packaging, equitable

business opportunities
 DEFINITION OF STAKEHOLDERS

Customers : Price, quality, customer care, ethical

products.
 DEFINITION OF STAKEHOLDERS

Community: Jobs, environmental protection, CSR

 DEFINITION OF STAKEHOLDERS

Government: Taxation, VAT, regulation and law compliance,

employment, truthful reporting
 DEFINITION OF STAKEHOLDERS

Question 3:

Why do company analyze stakeholders'

concerns and interests?
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: Legal framework of corporate governance
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
RISKS ALWAYS EXIST AROUND YOU,
YOUR ORGANIZATION!

HOW TO DEAL WITH RISK?

3. GOVERNANCE OF CORPORATE RISK

3.1. Definition of risk

3.2. Levels of risk

3.3. Risk management

3.4. Governance of corporate risk

 3.1. Risk - Definition

RISK:
- An uncertain future event or condition which if
happens affects the mission objective.
- It could have a positive or negative effect.
Scope

Quality

Cost Time
What risks a company may face?
3. GOVERNANCE OF CORPORATE RISK

3.1. Definition of risk

3.2. Levels of risk

3.3. Risk management

3.4. Governance of corporate risk

 3.2. Levels of risk

Risk arises at various levels:

- Corporate strategic risks: Exposure to threats from
outside the organization
- Management - level risks: Exposure to risk arising from
the firm's activities
- Operational risks: Exposure to hazard within the
enterprise
 3.2. Levels of risk
Operational risks:
- Fire, explosion, flood
- Loss of power (e.g. inability to carry out trades)
- IT systems malfunction
- Shortages of staff (e.g. staff turnover, illness, strike...)
- Errors in trades (unintentional mistakes)
- Fraud
- Theft
-Misuse of company information, equipment, systems or software
 3.2. Levels of risk
Managerial risks:
- Product liability
- Third - party risk
- Local pollution
- Management weaknesses, inability
- Shortages of skilled, experienced staff
 3.2. Levels of risk
v Enron
v BP oil rig disaster
v Toyota supply chain failure
v Northern Rock
=> Strategic risks:
Key question for every director:
What is our corporate strategic exposure?
or The crucial question should be …what if ?
 3.3. Levels of risk

v What if competitors:
- Launched new product or service
- Changed manufacturing technology
- New pricing or distribution strategy
- Changed ownership
- Expanded into new markets
- New entrants into significant products or markets
 3.2. Levels of risk
v What if customers:
- Adopted substitute product or service
- Major customer became bankrupt and collapsed
- Changed ownership
- Legal actions for damages
- Catastrophic failure of our product in use
- Alleged patent, trademark or copyright infringement
 3.2. Levels of risk

v What if major suppliers:

- Could not deliver because of a physical disaster
- Failed to deliver through bankruptcy or takeover
- Corruptly lowered product specifications
- Used trade secrets to their advantage
- Manufactured for your competitors
 3.2. Levels of risk

v What if government introduced:

- New regulation of our industry

- Tariff barriers, protectionism, border controls
- New environmental or hazard limitation laws
- Monopoly, anti-trust or pricing inquiries
- Cost-cutting by government
- Political threats in overseas countries
 3.2. Levels of risk
v What if, in the information technology area:

- Failure of overall IT system

- Hacking of our systems for fraud, spying, or
mischief
- Loss of e-links with customers, suppliers
or shareholders
- Effect of terrorism, criminal activity, political
activity
 3.2. Levels of risk

v What if in financial field:

- Currency or interest rates shifted dramatically
- Predators made hostile approach
- Sources of finance recalled debt
- Share price collapse following media revelations
- Reputational loss following an adverse law case
- Errors in trades (unintentional or deliberate)
 3.2. Levels of risk

=> Information to recognize risks:

v PESTLE
v M. Porter's five forces

WHO SHOULD BE RESPONSIBLE FOR RISK

IN A COMPANY?
3. GOVERNANCE OF CORPORATE RISK

3.1. Definition of risk

3.2. Levels of risk

3.3. Risk management

3.4. Governance of corporate risk

 3.3. Risk management
"Risk management is the process whereby an
organization anticipates the potential for adverse
events that may lead to injury or loss and acts to
avoid those events before they occur and/or to
ameliorate them after they occur"
 3.3. Risk management
"Enterprise risk management is a process effected
by the entity's board of directors, management
and other personnel, applied in strategy setting
and across the enterprise, designed to identify
potential events that may effect the entity, and
manage risk so that it is within the risk appetite,
to provide reasonable assurance regarding the
achievement of objectives. The challenge facing
Boards is a way that balance managing risks while
adding value to the organization. An entity's
board of directors plays a critical role in overseeing
an enterprise - wide approach to risk management"
- COSO ERM
 3.3.Risk management
v Role of risk management
Sound governance and risk management brings:
- Greater likelihood of achieving objectives
- Higher share price in the long term
- Greater likelihood of successful change initiatives
- Lower cost of capital
- Early movement into new business areas
- Improved use of insurance
-Reduction in the cost of remedial work and
"firefighting"
- Achievement of competitive advantage
- Less business interruption
- Achievement of compliance/regulatory targets
 3.3.Risk management
v Risk analysis and management process

Risk recognition Risk monitoring

and reporting
Identify risks, threats and hazards
Review ongoing
insurance
Risk assessment coverage and
claims
Likely effects on business. Consider
value, sensitivity and criticality Routine board
supervision to
ensure policies
Risk evaluation
applied

Decide the risk management policy Revision of policies

as situations
Board policy approval change
 3.3.1. Risk recognition and assessment
Corporate culture!!!
v A number of tools are available to conduct a risk
assessment
• A simple tabular approach
• Mind mapping
• A questionnaire designed to identify risks and hazards
• Software programs developed to provide on-line
identification and reporting of risks
 3.3.1. Risk recognition and assessment
v A simple tabular approach
- Organisation is divided into a series of risk analysis
centres
- Risk analysis centre executive constructs following chart

Nature of risk Likely effects Likelihood of Risk

or hazard and outcome event occurring management
policy response

- Strong points: risk analysis conducted in each part of the

organization and at every level. Trigger further ideas
and insights, which improve the subsequent risk
assessment.
- Weak points: A managerial focus might fail to identify
strategic risks
 3.3.1. Risk recognition and assessment
v A questionnaire designed to identify risks and
hazards
- Include multiple - choice responses and invite a
narrative description
- Used throughout the organization, insights into risk
can be generated in every part of an organization and
at every level.
- S t a n d a rd i z a t i o n o f re s p o n s e s t h r o u g h o u t t h e
organization
Example: Risk assessment questionnaire
 3.3.1. Risk recognition and assessment
v Mind mapping
- Visual approach to recognizing risk factors, their
interrelationships, deriving possible implications
- Users require some training and skills in the
methodology
- Benefit: appreciation of the relationships btw risks and
identification of different risk element from those
generated by tabulation or questionnaire
 3.3.1. Risk recognition and assessment

Software programs and systems

- provide online access to the identification and reporting
of risks
- Link risk recognition and assessment, risk evaluation,
and enterprise risk management policies
- Built in-house or by consulting firms
 3.3.1. Risk recognition and assessment
v Critical success factors
- Sponsorship and oversight at board level
- Top management commitment
- Involvement throughout management and in all parts of the
enterprise
- Company-wide definition of procedures, documentation and
reporting
- Identification of risk management centres throughout the
organization
- Definition of responsibilities for identifying and
recommending risk responses
 3.3.1. Risk recognition and assessment
v Critical success factors (cont.)
- Risk management centres are given appropriate responsibility
- Areas of risk are carefully defined and bounded, each one limited in
scope
- Involvement of experts with relevant risk assessment experience
- Document at all stages, regularly up-dated and building on experience
- Define authentication and approval, confidentiality levels, access
control, availability, audit and overall administration responsibilities
- The creation of a risk awareness, not risk avoidance, throughout
organization
- Ensuring participation by identifying ‘risk 'ownership' throughout the
organization
- Board level leadership and approval of risk management policies is
vital
 3.3.2. Risk evaluation

The extent of any risk (R) is a function of the magnitude

of the potential cost or loss (L) and the probability (p)
that the uncertain future event will occur

Specific risk Ri = Li p(L)i

Total risk exposure R(total) = L i p(L i)
 3.3.2. Risk recognition and assessment
v Example
 3.3.3. Risk management and policy

High
II I
Mitigate the impact, Share risk through financial
assume the risk, or insure instruments, external
Loss insurance

IV to mitigate
- Staff training III
adverse effects -Take defensive action
- Control systems to reflect to limit the impact
the situation -Carry any further costs itself
Low High
Probability
 3.3.3. Risk management and policy
• Both extent of loss and probability of occurrence can
be difficult to assess
• A risk with high loss but low chance of occurring,
should be treated differently than one with a lower cost
but greater probability
• Need to identify the risk or hazard and face up to the
reality of the situation.
 3.3.3. Risk management policy
4 possible responses to risks:

1. Avoid the risk

2. Mitigate the risk

3. Transfer the risk

4. Retain (Accept) the risk

3. GOVERNANCE OF CORPORATE RISK

3.1. Definition of risk

3.2. Levels of risk

3.3. Risk management

3.4. Governance of corporate risk

3.4. Roles of board of directors
in risk governance
3.4. Roles of board of directors
in risk governance
v Risk Management Committee
• Standing Committee of main board or sub-
committee of Audit Committee

Chair
man
External
CEO
expert

Profit RMC
unit CFO
head

CRO INEDS
v Risk Management Committee

• Responsible for risk management policies, procedures

and plans
• Produces risk management plan for main board
approval
• Meets 3 or 4 times a year or when facing exceptional
risks
• Linked with internal and external audit
v Risk Management Officer or Chief Risk Officer

• A senior executive
• Reporting to CEO or CFO
• Responsible for working with the board Risk
Management Committee or Audit Committee
• Develops risk management policies, assessment
methodologies, and infrastructure
• Oversees risk assessment and management procedures
• Produces risk management reports
• Liaises with insurers
• Keeps in touch with external risk management
developments
 3.4. Roles of board of directors
in risk governance
COSO Framework highlights 04 areas for board oversight
of ERM
- Understand the entity’s risk philosophy and concur with the
entity’s risk appetite
- Know the extent to which management has established
effective enterprise risk management of the organization

- Review the entity’s portfolio of risk and

consider it against the entity’s risk
appetite
- Be apprised of the most significant risks
and whether management is responding
a p p r o p r i a t e l y
 US COSO framework for ERM

Corporate governance codes require systems to

assess and manage corporate risk
– Turnbull Report UK governance codes 1999
– Sarbanes-Oxley Act US 2002
– Basel ll agreement for the financial world
2003
 3.4. Roles of board of directors
in risk governance
OECD recognize board’s responsibility for defining strategy
and risk appetite needed to be extended
Risk management system was not compatible with
company’s strategy and risk appetite
Building on OECD Principles, 2010 report proposed
• The risk management function to report to the board
• The risk management function to consider any risks arising
directly from the compensation and incentive systems in
place
• The effectiveness of the risk assessment and management
process to be monitored and the results disclosed
 3.4. Roles of board of directors
in risk governance
2010 International Corporate Governance Network enhanced
its Global Corporate Governance Principles with a set of
Corporate Risk Oversight Guidelines, emphasizing:
• The risk oversight process begins with the board
• Corporate management is responsible for developing and
executing an enterprise’s strategic and routine operational
risk programme
• Shareholders, directly or through designated agents, have a
responsibility to asses and monitor the effectiveness of
boards in overseeing risk at the companies in which they
invest.
 3.4. Roles of board of directors
in risk governance
The 2010 Aon Global ERM Survey
v Uncertainty from global economy increased
v Awareness of the need to manage risk never been higher
v Hallmarks of advanced ERM include the importance of:
– Board-level commitment to ERM as a critical framework
for successful decision making and for driving value
– The engagement of all stakeholders in the development
of risk management strategy and policy setting
– A move from focusing on risk avoidance and mitigation to
leveraging risk and risk management options to extract
business value
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: Legal framework of corporate governance
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
 4. The board memberships: director
appointment and remuneration
4.1. Director's appointment
v The appointment of directors
vTypes of directors
v Desirable attributes in a director
v Core competencies of a director
4.2. Director's remuneration
vRemuneration committee
v How to determine the reward
 4. The board memberships: director
appointment and remuneration
4.1. Director's appointment
v The appointment of directors
vTypes of directors
v Desirable attributes in a director
v Core competencies of a director
4.2. Director's remuneration
vRemuneration committee
v How to determine the reward
 4.1. The appointment of directors

When does the appointment of directors arise?

- on the initial incorporation of a company
- on reappointment at the expire of a director's term
of office
- to fill a vacancy
- on the creation of an additional directorship
 4.1. The appointment of directors
v The size of boards
- An ideal number?
- Corporate or real person?
- Single or multiple?

v The rotation of directors

- A staggered board: fixed proportion retired and could be
elected each year
+ preserves experience
+ provides stability
+ produces a longer term strategic horizon
- Calls for annual re-election of entire board
 4.1. The appointment of directors
v Retirement, disqualification , removal of directors
Ø Retirement
- Some company law provides age limit
Often 70 unless shareholders agree
- Some company law provides lower limit
Frequently 18
 4.1. The appointment of directors
v Retirement, disqualification , removal of directors
Ø Disqualification
Company law has provisions for director
disqualification
– bankruptcy
– mental illness
– disqualification by courts
• offences against companies law
• failure to file official returns
• corrupt business behaviour
 4.1. The appointment of directors
v Retirement, disqualification , removal of directors
Ø Removal
- In principle, the shareholders of a company have
the right to appoint and to remove their directors.
- In practice, this can prove to be difficult.
4.1. The appointment of directors
 4.1. The appointment of directors

The board ensures Governance:

that it is being well the work
run and run in the The board of the board of
right direction directors or other
governing body

Management:
Managers run the work
the business of the executive
Management management team
 4.1. The appointment of directors
v What are types of directors in a company?
- Executive director / Managing director
- Non - executive director (NED)
+ Independent non - executive director (INED)
+ Affiliated / connected non - executive directors
(CNED)
(Case study 4.3 pg.98) (Vietnam code of CG)
- Outside director (US)
- Alternate director
- Nominee director
- Employee/worker director (Europe)
- Associate director
FPT: Board of director

156
FPT: Board of management

157
 4.1. The appointment of directors
v Desirable attributes in a director
üIntegrity
üIntellectual
üCharacter traits
– Independently minded, objective, impartial, task
oriented…
üDesirable personality
– Interact positive with other: openness, flexibility,
sensitiveness, persuasive…
– Sound listener, good communicators, politically
sensitive
 4.1. The appointment of directors
v Core competencies of a director

Experienc
Skill e

Knowledge
(company,
financial,
business)

Every board needs to have a mix of capabilities that provide

a balanced and well-qualified team relevant to that board
and that company
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: The roles and responsibilities of stakeholders
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
 5. Board Leadership: The Reality of the
Boardroom

1. What is leadership?

2. The chairman’s leadership role

3. Sources of governance power

4. Games that directors play

5. Board styles and the culture of the board

 • Why the company needs leadership?

"Outside directors never know enough about the

business to be useful and inside directors always know
too much to be independent"
5.1. What Is Leadership?

Leadership
is the process of
influencing other to work
willingly towards goals, to
the best, of their capabilities,
perhaps in a manner
different to that which they
would otherwise have
chosen
 Good leaders…

§Make people believe in him § Are accountable

§Motivate people §Can cope with failure

§Criticize when neccessary § Are determined to succeed

§Take criticism §Can cope with pressure

§Share the organization’s vision §Are approachable

§Can make quick decision §Can prioritize work

§Can take risk §Can delegate and empower…

Good leaders… are made not born

If you have the desire and willpower, you can

become an effective leader. Good leaders develop
through a never ending process of self-study,
education, training, and experience.
• Vision sees what • Vision is clarity
must be tomorrow, • Vision is a worthy
beyond what is today commitment
• Customers help you • Vision generates
see the vision supportive actions
• Vision inspires
• The right vision attracts commitment and
energizes people.
• The right vision creates meaning in workers’
lives.
• The right vision establishes a standard of
excellence.
• The right vision bridges the present and the
future.
• Is there evidence of confusion about purpose?
• Do employees complain about insufficient challenge?
• Do employees say they are not having fun any more?
• Is the organization losing market share or reputation for
innovation?
• Are there signs of declines of pride in your
organization?
• Is there excessive risk avoidance?
• Is there an absence of sharing?
• Is there a strong rumor (loi don) mill?
 Different between leader and manager

• Management
– Planning, organizing, coordinating ,controlling
– Logic, structure, control
– Producing predictable results, on time
– Authority by virtue of position
• Leadership
– Create a vision – something different from the status quo
– Communicate the vision – credibly, meeting needs of the people
– Energize, inspire, and motivate others to fulfill the vision
– Create the culture to support fulfillment
• Shared language, myths, rituals, beliefs, etc.
– Inspiration and motivation. 169
Different between leader and manager (con’t)
LEADERS:

You can be appointed as a manager, but you aren’t a

leader till people chose to follow you”
Benefit of effective leader

v Energise and support change

v Secure commitment, mobilise the ideas, experience

and motivation employee

v Set direction, helping teams and organizations to

understand their purpose, goals and value to
organization

v Support, challenge and developing people,

maximize their contribution to organization
v Creating company culture
5.2. The chairmans’ leadership role

• The significance of the chairman

– The chairman of the board of directors
• not of the company
– Subject to the constitution, chairman is
chosen by directors from among the board
members
 5.2. The chairman’s leadership role

• The chairman
– In many companies: The chairman is an
independent non-executive directors serving
on a part-time basic
– In any case: the chairman is not a member of
management
 5.2. The chairman’s leadership role

• The chairman’s role

– Leadership of the board
– Management of meetings
– Strategic leadership
– Linking the board with management
– Arbitration between board members and others
– Being the public face of the company
 5.2. The chairman’s leadership role

• Chairman and Chief Executive

– Should they ever be the same person?
• the arguments for and against
• what the codes say
• the practice in the USA
 5.3. Source of governance power
• The fundamental legal power of the board derives from the
shareholder members who have delegated the running of
the company to their directors.
 Can be influenced by:
 Pressure from a dominant or group of shareholders
 The threat of potential takeover
 Prospect of litigation
 Auditor
 The effect of legislation and regulation
 Media pressure and other external exhortation
 The risk of damage to personal reputation
 A dominant or charismatic leader
 Changing business circumstances
 In addition to external source of power over a company
and the decisions of its boards, individual directors can
also derives from a variety of sources:

• Personal power  Organizational power

• Knowledge power  Net working power
• Sanction power  Societal power
• Political power  Ownership power
• Interpersonal power  Representative power
 5.4. Games that directors play
• Alliances  Lobbying
• Coalitions and cabals  Log rolling
• Conspiracy of silence  Personal agendas
• Cronyism  Propaganda
• Deal- making  Rival camps
• Dereliction of duty  Scaremongering
• Divide and rule  Snowing
• Empire building  Spinning
• Group- think  Sponsorship
• Half- truths  Sub optimization
• Hidden agendas  Window dressing
5.5. Board style and culture
 5.5. Board style and culture

Discussion question:

What determines board style?

 5.5. Board style and culture
Board style can be affected by:

• Board tradition  Adaptability

• Corporate vision  Collaboration
• Innovation
 Conflict
• Control
 Relationship
• Decision making
• Leadership  Communication
• Commitment  Status
 Conformity
 Trust
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: The legal framework of corporate governance
§ Chapter 3: The governance of corporate risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
 6. Board activities: CG in practice

1. Committees of the board

2. The audit committee

3. Board effectiveness - building a better board

 6.1. Committees of the board
vWhy unitary boards create subcommittees?
– To enable independent directors to meet
separately from the board as a whole, in order to
fulfill their oversight roles

– To delegate board activities to reduce the burden

on the board as a whole
 6.1. Committees of the board
v What is a subcommittee of the board?
– Established for specific purposes

– Has a charter or former terms of reference

– Composed of entirely or mainly of outside, non -

executive directors

– Provides independent and objective corporate

governance supervision, avoiding executive
domination of board deliberations
 6.1. Committees of the board
v Standing committees of the main board
– The three committees required in the codes
• Audit committee
• Remuneration Committee
• Nomination Committee
– Other board committees
• Finance committee
• Compliance or corporate governance committee
• Risk governance committee
• Ad hoc committee
 6.1. Committees of the board
v Remuneration committee
- Subcommittee of the main board

- Wholly or mainly independent outside directors

- Recommend the remuneration packages of executive directors

and members of top management.
 6.1. Committees of the board
v Nomination committee
- Made up wholly or mainly of independent outside
directors

- Make recommendations on replacement or additional

members of the board

- Offer a check - and - balance mechanism

- Difficulties of the committee?

 6.1. Committees of the board
v Audit committee
– Become a fundamental component of CG
– With members drawn from shareholders, non-
management directors, at least one is current
financial expertise.
– to provide a bridge between
§ the external auditor
§ and the main board
Case study: Box 13.1 Microsoft Cop. Audit
Committee Charter (pg. 361)
 6.2. The audit committee
v Roles and responsibilities of the audit committee
- Liaising with the external auditors and reporting to the
board on the audit process and on any audit issues
- Oversight of the internal audit
-Reviewing financial information to be provided to
shareholders and others
- Advising the board on matters of board accountability
- Oversight of enterprise risk management
- Corporate governance compliance
-Advising the board on the company's system of internal
management control
v The role of EXTERNAL AUDIT in corporate

governance
- Have access to all of the books and records of the company,
and reported to the shareholders that the financial statements
provided to it by the directors gave true and fair view of the
state of the company's financial affairs
- Obtain reasonable assurance that effective internal control
over financial reporting has been maintained;
- Assess the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal
control based on the assessed risk
- Perform such other procedures as are considered necessary
in the circumstances.
v The role of INTERNAL AUDIT in corporate governance
In many cases, boards, and in particular their audit committees, look to
the internal audit function to provide them with:
● An ongoing analysis of business processes and the associated control
systems
● An evaluation of the extent and effectiveness of these control systems
● Regular reviews of operational and financial performance
● Assessments of the achievement corporate mission, policies, and
objectives
● Identification of areas for more efficient use of resources
● Confirmation of the existence and value of the company’s assets
● Ad hoc inquiries into possible irregularities and frauds
● An evaluation of the risk assessment and review systems
● Regular evaluation of risk at all levels in the organization
● Ad hoc reviews of unacceptable levels of risk.
 v WHY DO THE BOARD OF DIRECTORS

HAVE TO BE RESPONSIBLE FOR EXTERNAL AND

INTERNAL AUDIT?
 5.2. The audit committee

Question: - What is the main reason for the failure of AA

and Enron?
- Solutions?
 6.3. Board effectives- building better boards

HOW TO MAKE AN EFFECTIVE BOARD?

 v Directors' liabilities and indemnity

• Unlike shareholders, directors’ liability is not limited

• Suits against directors can come from shareholders,
employees, creditors, customers, suppliers, regulatory bodies,
or liquidators
• In listed companies, investor-led proceedings are most likely
• In private companies customers, clients, or, employees are
more likely to sue
• Directors can be held legally accountable in their personal
capacity
• Statute law may impose duties on directors under company,
health and safety, environment, anti-corruption, consumer
protection, employment or creditor protection laws
Class actions and contingency fees
• Legal actions can be brought against the company,
the board, and/or individual directors
• Directors' personal assets can be at risk
• Directors can be held legally accountable in their
personal capacity, but also for the actions of other
members of the board or top management
• Claims can be for unlimited amounts
v Directors' liabilities and indemnity
Directors' liabilities and indemnity
 Directors and officers insurance
Provides some protection to directors company and company
officers and senior managers, if they are sued as the result of
decisions taken whilst governing or managing the business
• Some investors, such as venture capitalists, insist on D&O
insurance before providing funds to a company
• D&O insurance should not be confused with E&O errors and
omissions liability
• Directors should first look to their company for
indemnification
• Directors cannot be indemnified for acts which are contrary to
companies' legislation
 Directors and officers insurance
D&O pays for actual or alleged wrong decisions, (not
"wrongful acts”)
• Policy cover, conditions, and cost/benefit need to be
evaluated against perceived risks. The policy needs to cover
claims from all possible suitors
• Most D&O policies provide cover against the cost of legal
fees and civil damages in defending a claim, subject to limits
• D&O is not available for all who seek it.
• Successful, long-established companies are more likely to be
able to obtain cover than companies in riskier situations
 EXAMPLES

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v Director training and development

• The importance of professional education and training

with continuous updating has become apparent, given
the:

– Ever-changing aspects of global business life

– Rapid acceleration of new regulations, codes and

legal requirements

– Litigious society that exists in many parts of the

world
 v Director training and development
Ø Formal external training courses
– In-house board development programmes
– Updating and briefing sessions for the board, or
individual directors
– Relevant higher degree courses
– Experiential sponsorship programmes
– Mentoring
– Self directed learning and continuous self-
development
– Board experience
 Contents
Part 1: Principles and policies
§ Chapter 1: Introduction to corporate governance
§ Chapter 2: The legal framework of corporate governance
§ Chapter 3: The Governance of Corporate Risks
Part 2: Practices
§ Chapter 4: The Board membership
§ Chapter 5: The Board Leadership
§ Chapter 6: The Board Activities
§ Chapter 7: Board Assessment
 7. BOARD ASSESSMENT
7.1. Assessing board and board committees

7.2. Assessing individual director's performance

7.3. Corporate governance rating system for companies

7.4. Corporate governance assessment system for

countries
7.1. Assessing board and board committees

New York Stock Exchange rules require boards of

listed companies to conduct a self-evaluation at
least annually to determine whether the board and
its committees are functioning effectively
7.1. Assessing board and board committees

UK CG Code requires boards to:

• Undertake a formal and rigorous annual
evaluation of its own performance and that of its
committees and individual directors
• State in the annual report how the performance
evaluation of the board, its committees, and its
individual directors has been conducted
• Have the review conducted independently at
least every third year
7.1. Assessing board and board committees

How in Vietnam?

Principle 5. Vietnam Corporate governance Code

7.1. Assessing board and board committees
A regular board performance review can:
• Check directors' knowledge of the business and its strategic
situation
• Assess balance of the board’s skills, knowledge and
experience
• Identify director weaknesses
• Review current board and board committee practices
• Review the effectiveness of the board's strategic thinking
and decision making
• Challenge attitudes of long-serving directors
• Create the climate for a change of chairmanship
• Provide information for the board's corporate governance
report and respond to questions
7.1. Assessing board and board committees

A board review:
• Holds a mirror to the board, its behaviour and its
performance
• Should take a strategic perspective, considering
the directors ability to handle long-tem issues as
well reflecting on recent experience
• Is as important for well performing boards and
poorly performing
7.1. Assessing board and board committees

As part of this monitoring, institutional investors

should:
• Be satisfied that board and committee structures are
effective and that independent directors provide
adequate oversight
• Maintain a clear audit trail, on their share voting
• Attend the general meetings
• Consider explanations given for departure from the
CG Code, giving a timely explanation to the
company, in writing where appropriate
• Be prepared to enter a dialogue
UK Stewardship Code (2010)
7.1. Assessing board and board committees

Sir Bryan Nicholson, c hair man of the UK's,

Financial Reporting Council commented:
• "...the evaluation process is particularly important. It
provides the opportunity for companies to create a
virtuous circle of sustained improvement in board
effectiveness based on regular objective assessment
of past performance and the company's changing
needs and circumstances. It introduces a new
dynamic which companies can use to improve the
quality of their corporate governance and secure
competitive advantage."
7.1. Assessing board and board committees

Who should initiate the board assessment?

– The board as a whole
– The board chairman
– The company secretary
– The expert
7.1. Assessing board and board committees

• Who should carry out the board assessment?

– The chairman: lacks the independence and
objectivity
– Independent director, past chairman
– Special board committee: audit committee
– Internal auditor
– Self-evaluation by boards
– External consultant
7.1. Assessing board and board committees
Benefits of an external review:
– objectivity and a fresh perspective
– wide ranging discussions with candour and insights
– uncomfortable issues can be addressed
– root causes of board-level problems diagnosed
– independent review of board papers
– objective interviews with key players
– observation of the dynamics of board meetings
– questionnaires based on industry experience
– professional board presentations and facilitation
– focuses the board on continuous improvement
7.1. Assessing board and board committees
• Outcome of board review
– Chairman’s initiative
– Board discussion
– Program of improvement
• Board committees
• Board and committee meetings, time, ideas
• Director information
– Strategy for board development
• Strategy seminar, board development sessions,
succession planning…
 7.1. Assessing board and board committees
• Board assessment involve
– Review the overall governance structure
– Review the board structure
– Profile board members
– Review board style, efficiency, and effectiveness
– Determining a strategy for board development
Figure 17.1. Elements of a board review (pg. 426)
7.1. Assessing board and board committees
• Review the overall governance structure
– Who controls the voting equity?
– Is there majority control?
– Do informal power blocks exist?
– What changes might occur over the strategic time
horizon?
 7.1. Assessing board and board committees

o Review the board structure

– Is the balance between
• executive directors - independent directors -
connected non-executive directors
– the size of the board
– The relationship between the chairman and the
CEO
7.1. Assessing board and board committees

 Profile board members

• The terms of appointment, the age,
education;
• Professional background, relevant
experience and skills,
• The roles played and contributions made
to the board and board committees,
• Personality characteristics
• Identify gaps and develop succession
7.1. Assessing board and board committees
 Review board style, efficiency, and effectiveness
– Use of directors’ time
– Consider the four functions of the board
– Use of board committee
– Quality of board information
7.1. Assessing board and board committees
Questions:
- Is the company’s corporate governance compliant with company
law, corporate governance codes, and listing rules?
- How does the company’s corporate governance performance
compare with the industry average and the industry leaders? Are
benchmarks available?
- Did the appraisal identify critical issues? Has anything been done
about them?
- Did the appraisal deal with ‘elephants in the room’ -that is, things
that everyone knows, but about which no one will speak?
– Have the objectives of the assessment been met?
– Has the assessment led to improved board effectiveness?
– Was the assessment well done, did it conform with best practice,
and how might it be improved?
7.1. Assessing board and board committees
Outcomes:
- Determining a strategy for board development
- Make action plans
- Allocate resources
7.1. Assessing board and board committees
o How to have information to assess the board?
- Analysis of board committee agenda, papers and
minutes
- Group discussion
- Director workshop
- Interviews
- Questionaires
Thinking board
7.1. Assessing board and board committees
Examples: VINAMILK CG
7.1. Assessing board and board committees
7.1. Assessing board and board committees
7.1. Assessing board and board committees
7.1. Assessing board and board committees
 7.2 Assessing individual director's
performance
• Previous rejection of individual director assessment
– appointment to the board meant experience and
skill
– board level activity is a collective effort.
– directors' contributions differ
• But governance codes and listing rules demand
performance assessment of individual directors
• Most directors now accept director-level appraisal
– just like management appraisal
 7.2 Assessing individual director's
performance
• Case:
– Fannie Mae Corporate Governance Guidelines
– P.431
– What is the process of assessment?
 7.2 Assessing individual director's
performance
• Process of assessment:

Each director
Formalised Report to
provide the
assessment chairman
assessment

Strategy for Discussion with

development chairman
 7.2 Assessing individual director's
performance
• Who is to lead the exercise?
– The board chairman take the initiative
– The senior independent director
– Institutes of directors
– Company secretary organizations
– Consultancies
– Independent consultant
– A firm specializing in board appraisal
 7.2 Assessing individual director's
performance
• Subject of director assessment
– The director attributes and core competencies
– The experience, skills, and knowledge expected
– Contributions to the company
– Awareness of critical success factors in the
business
– The business's exposure to risk
 7.2 Assessing individual director's
performance
• How?
– Informal by chairman
– Pressure to formalise
• Board policy needed
• Leading the exercise:
– board chairman instigates
– senior INED, a past-chairman, consultant, or
specialist firm
• Approach to the appraisal
 7.2 Assessing individual director's
performance
• Approach to the appraisal
– Data collection,
– Interview,
– Peer review 360 degree
 7.3 CG rating systems for companies
• Why to be need a rating systems?
– Interest in corporate governance post Enron
– Corporate governance now recognised as vital
– Need for comparison
– The risk evaluation of a company
 7.3 CG rating systems for companies
• Notes:
– Various systems have been developed
– they use different criteria
– the scores are not necessarily compatible
– their conclusions sometimes differ
 7.3 CG rating systems for companies
• Rating system:
– Standard and Poor’s (S&P): S&P’s GAMMA
– Fitch Ratings and Moody’s
– Institutional Shareholder Services (ISS)
– Governance Metrics International (GMI)
– The Thai Rating and Information Service (TRIS)
 7.3 CG rating systems for companies
• Rating system:
– The Investor Responsibility Research Center
(IRRC)
– The International Finance Corporation (IFC)
– CoreRatings
7.3 CG rating systems for companies

• S&P's GAMMA - Assessment base on:

– ownership structure and external influences
– shareholder rights and relations
– transparency, disclosure and audit
– board structure and effectiveness
 7.3 CG rating systems for companies
TRIS - Thai Rating and Information Service
Corporate
Process of review:
– company supplies information
– information analysis
– site visit
– rating committee consider and decide rating
– company accepts or rejects rating
– company considers disclosure TRIS publicises
– monitoring and review
Contents:
- Shareholders' rights
- Composition and roles of the board of directors
- Information disclosure
- Corporate governance culture
 7.3 CG rating systems for companies
TRIS - Thai Rating and Information Service
Corporate

TRIS ratings:
– 9 – 10 excellent
– 8 very good
– 7 good
– 5 - 6 moderate
– Less than 5 improvement recommended
 7.3 CG rating systems for companies
Corporate Governance Assessment for Listed Companies in China

An evaluation tool, involving Y/N answers to 194 questions. Based on

model of significant attributes of good corporate governance
©Ho and Chan 2006 HKBU

1. CG commitment and policy 10%

2. Ownership structure 5%
3. Shareholders’ rights and participation 15%
4. Controlling shareholders’ behaviour and activities 10%
5. Board of directors and supervisors 25%
6. Top mangers and pay 10%
7. Internal controls, risk management and audit 10%
8. Disclosure and transparency 15%
7.3 CG rating systems for companies

CoreRatings is a European based rating agency, providing

independent investment analysis of corporate
responsibility risks
– governance policy and business ethics
– risk management processes
– ownership structure and control
– financial reporting, audit, and verification
– board structure and management
– board executive compensation
– investor rights and relations
7.4. CG rating systems for countries
• The World Bank and International Monetary
Fund joint initiative
– Reports on the Observance of Standards and
Codes (ROSC) program
• The European Bank for Reconstruction and
Development (EBRD)
– EBRD tries to help governments, policy-
makers and all those promoting new legislation
for the development of corporate governance -
related legal reform
 7.4 CG assessment systems for countries

The International Finance Corporation (IFC) works with

countries which have an important potential for growth
but weak corporate governance practices.
They engage at various levels:
– Firm : corporate governance assessments and advice
– Sector : capacity building of local consulting firms,
institutes of directors, educational institutions and
stock exchanges
– Market : alignment of standards and practices,
development of corporate governance codes and
listing requirements
– Public policy and awareness:
 7.4 CG assessment systems for countries
• Group A - very high compliance
– no countries qualified
• Group B - high compliance
– e.g. Hungary, Poland, and Russia
• Group C - medium compliance
– e.g. Bulgaria, the Czech Republic, and Slovenia
• Group D - low compliance
– e.g. Georgia, Romania, and Turkmenistan
• Group E - very low compliance
– e.g. Azerbaijan, Belarus, and Ukraine