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Creating the great business leaders

Control Management System

Topic #12
good
Corporate Governance and Board of Director
good coorporete = banyak faktor yang menunjang
Lecture : Team Teaching
 Fakultas Ekonomi dan Bisnis
School Economics and Business

Corporate
Governance

2 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business LEARNING OBJECTIVES
Telkom University

❑ Understanding
❑ Laws and Regulations
❑ The Sarbanes-Oxley Act (SOX).
❑ Boards of directors
❑ Audit Committees
❑ Compensations Committees

3 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business CORPORATE GOVERNANCE : UNDERSTANDING
Telkom University
❑ The term corporate governance refers to the sets of mechanisms and processes
that help ensure that companies are directed and managed to create value for
their owners while concurrently fulfilling responsibilities to other stakeholders
(e.g. employees, suppliers, and society at large).
❑ Corporate governance effects vary considerably across countries. It practices in all
countries are influenced by what is thought to be “best practice.”
❑ Corporate governance systems and management control systems (MCSs) are
inextricably linked.
❑ A MCSs focus takes the perspective of top management and asks what can be
done to ensure the proper behaviors of employees in the organization.
❑ The corporate governance focus is on controlling the behaviors of top
management

4 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
Changes in corporate governance mechanisms and practices will usually
have direct and immediate effects on MCS practices and their
effectiveness.
◼ Primarily because of the major business scandals that were uncovered
in the early 2000s – including Enron, WorldCom, Tyco, Parmalat, and
Royal Ahold,
◼ the mismanagement, misreporting, and fraud that contributed
significantly to the 2008 financial crisis
◼ interest in corporate governance has skyrocketed

5 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business LAWS AND REGULATIONS
Telkom University

❑Corporations are legal entities. They are subject to the laws and regulations
of the government jurisdictions in which they operate and those of the stock
markets on which their shares are traded.

❑Corporate governance approaches and mechanisms is divided into two

orientations:

➢ The Anglo-American system that focuses on the primacy of shareholders

as the beneficiaries of fiduciary duties,
➢ The Continental European/Japanese system that has a broader concern
for the rights of other stakeholders.

6 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business LAWS AND REGULATIONS
Telkom University
❑The legal system in the United States creates a fiduciary obligation for managers and
directors to act in the best interest of shareholders.

➢ The directors, the elected representatives of the shareholders, are charged with
overseeing the actions of management.
➢ The primary goal of the owner is to maximize the value of the corporation.
➢ Value creation is a long-run, future-oriented concept.

❑The US federal government began regulating financial markets and their participants (e.g.
corporations, securities exchanges, brokers, dealers, and advisors) after the stock market
crash of 1929.

❑The US Congress passed the Securities Acts of 1933 and 1934 that, among other things,
created the Securities and Exchange Commission (SEC), the agency primarily responsible
for enforcement of US federal securities laws.

7 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
❑ The Continental European/Japanese system of governance is aimed at ensuring that the
corporation is managed for the good of the enterprise, its multiple stakeholders, and
society at large.
❑ One important effect of this legal difference is in the composition of the boards of
directors.
Large German corporations, for example, are required to have a two-tier board
structure, one that provides strategic oversight and another that provides operational
management oversight
❑ All corporations are bound also by the rules and regulations of the stock exchange on
which their shares are traded: the New Stock Exchange (NYSE) and NASDAQ in the
United States, the London Stock Exchange (LSE) in the United Kingdom, or Deutsche
Börse in Germany, maintain extensive sets of rules to regulate their listed companies, to
prevent manipulative practices, and to promote fair principles of trade

8 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business The Sarbanes-Oxley Act (SOX).
The US Congress passed the Sarbanes-Oxley Act (SOX) auditors in July 2002. SOX
◼ University
Telkom
imposed new requirements on corporations listed in the United States and their
auditors

◼ The explicit goal of SOX was to improve the transparency, timeliness, and quality of
financial reporting

◼ SOX has had effects beyond US borders. All companies registered with the SEC must
comply with SOX whether their headquarters are based in the United States or abroad
• The external auditing industry, became highly regulated by the federal government. SOX
created the Public Company Accounting Oversight Board (PCAOB) and gave it the
authority, with oversight from the SEC, to set auditing standards and to monitor
auditors’ actions
• The members of audit committees of companies’ boards of directors are required to be
independent and financially literate.
9 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School of Economic and Business

Telkom University
• Senior company managers, usually the CEO and CFO, are required to certify that
they had reviewed their company’s quarterly and annual financial statements;

Internal Control :
✓ One of the most significant provisions
✓ Legal requirement (Sarbanes-Oxley) : “Good internal controls”
✓ Formal evaluation (Section 404 mandated) : The effectiveness of a company’s
internal controls by both management and the company’s external auditor and
formal written opinions

A deficiency in internal control (major):

➢ The existence of a single material weakness
➢ It could result in a material misstatement of a company’s actual financial
situation

10 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Boards of Directors
Telkom University
Boards of directors have a fiduciary duty to foster the long-term success of the corporation for
the benefit of shareholders and particularly debt holders (when insolvency is threatened)

Basic fiduciary duty is deemed to have multiple elements (in US) :

1. Duty of care – duty to make/delegate decisions in an informed way;
2. Duty of loyalty – duty to advance corporate over personal interests;
3. Duty of good faith – duty to be faithful and devoted to the interests of the corporation and its
shareholders;
4. Duty not to “waste” – duty to avoid deliberate destruction of shareholder value.

To carry out their responsibilities, boards must :

➢ independent and accountable to shareholders
➢ exert their authority for the continuity of executive leadership with proper vision and values.

11 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Boards of Directors (BOD)
Telkom University
Boards :
➢ are given ultimate control over management
➢ responsible for the selection and evaluation of the corporation’s chief executive
officer (CEO),
➢ ensure the quality of senior management
➢ should review and approve the corporation’s long-term strategy and important
management decisions (the design of compensation plans

BOD have two main control responsibilities :

1. safeguard the equity investors’ interests,
2. protect the interests of other stakeholders (employees, suppliers, customers,
competitors, and society)

12 Creating the great business leaders

 Fakultas Ekonomi dan Bisnis
School of Economic and Business Boards of Directors (BOD)
Telkom University
Among other things,
BOD help ensure fair financial reporting, fair compensaion, fair competition, protection of
the environment, and proper conduct of business by the corporation overall.

Some basic principles how to structure their activities and how to act :
1. must comply with the relevant laws and regulations.
2. should try to follow what they believe to be best practice.

To carry out their responsibilities effectively, some issues are delegated to board
committees (depend on the needs of the company’s industry), such as :
◼ audit committee,
◼ compensation committee, and
◼ nominating and governance committee.
13 Creating the great business leaders
 Fakultas Ekonomi dan Bisnis
School of Economic and Business Audit Committees
Telkom University
◼ Audit committees provide independent oversight over companies’ financial
reporting processes, internal controls, and independent auditors

◼ Audit committees :
➢ establish procedures for handling complaints regarding accounting, auditing,
and internal control matters
➢ establish procedures for the confidential, anonymous submission by employees
of concerns regarding questionable accounting practices.
➢ responsible for the appointment, compensation, retention, and oversight of the
work of the external auditor
➢ Partner of the external auditors to discuss and address the quality of the
company’s accounting principles

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Audit Committees
Telkom University
Audit committees generally assume the board’s responsibilities relating to :
◼ the organization’s financial reporting …> provide assurance that the company’s
financial disclosures are reasonable and accurate
◼ corporate governance….> provide assurance that the corporation
- is in compliance with pertinent laws and regulations
- is conducting its affairs ethically
- is maintainin effective controls against fraud and employee conflicts of
interest
◼ control practices, monitor the company’s management and internal control
systems that are designed both to safeguard assets and to employ them to
achieve established goals and objectives.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Audit Committees
Telkom University
Audit committees ascertain to do the following:
◼ Gain support and direction from the entire board of directors.
◼ Use agendas and follow formal work programs
◼ Have at least three members, but not too many more
◼ Ensure that the committee is comprised of the “right” individuals.
◼ Meet at least four times per year, including a pre-audit meeting and a post-
audit meeting
◼ Send a clear instruction to the independent auditor that the board of directors,
as the share- holder’s representative, is the auditor’s client and that
management is not. (This is a legal requirement of Sarbanes-Oxley.)
◼ Review all financial information; review interim, as well as annual, financial
reports.

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Audit Committees
Telkom University
Audit committees ascertain to do the following (cont’ed) :

◼ Discuss with the independent auditor their qualitative judgments about the
appropriateness of the organization’s accounting principles and financial
disclosure practices.
◼ Go beyond a “check-the-box” orientation to compliance with legal
requirements.
◼ Be proactive
◼ Secure access to resources as needed

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 Fakultas Ekonomi dan Bisnis
School of Economic and Business Compensation (Remuneration) Committees
Telkom University
Compensation committees :
◼ deal with issues related to the compensation and benefits provided to
employees, particularly top executives
◼ rely on the company’s human resource function for staff support.
◼ the design of compensation plans can raise many complex issues such as
performance measures, types of compensation (e.g. cash and stock options)
and compensation structures (e.g. performance thresholds and vesting
provisions), external and internal compensation equity, and legal and tax
considerations
Much criticism is currently being directed at compensation committees :
◼ the large compensation, severance, and/or retirement packages
◼ the weak links in many companies between rewards and performance.
Beginning in 2018, public companies are required to report the ratio of CEO
companies to median employee pay.
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Fakultas Ekonomi dan Bisnis
School Economics and Business

Thank You

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