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FAIRNESS TRANSPARENCY/DISCLOSURE ACCOUNTABILITY
Checks and Balances Audits
1. Internal 2. External
ADB Project TA 3696-PAK "Regulation for Corp. Gov." 2
BUT WHAT IF:
FRAUD/DECEIT/LIES OPAQUENESS/LACK OF DISCLOSURE
• • UNTIMELY INCOMPLETE
CONFLICTS OF INTEREST SUBSTANDARD ACCOUNTING PRACTICES SINGULAR CONTROL LACK OF SHAREHOLDER RESPONSIBILITY NO REGULATION OR ENFORCEMENT
ADB Project TA 3696-PAK "Regulation for Corp. Gov."
Gov. Stock Exchanges. and SECP: Disclosure should be disclosed…on web sites ADB Project TA 3696-PAK "Regulation for Corp." 4 .Disclosure RECOMMENDATION to Companies.
Gov." 5 .Corporate Disclosure Policy— Basic Shareholder Rights Immediate disclosure of material information Response to unusual market activity Clarification of rumors Dealings by directors Note on ―Interlocking Directorates‖ ADB Project TA 3696-PAK "Regulation for Corp.
to Exchanges BEFORE dissemination. review need for trading halts – Before news to media. or news that may materially effect market price – To Exchange. Gov. CEO." 6 . by Director. during non-trading hours RECOMMENDATION: during non-trading hours. ADB Project TA 3696-PAK "Regulation for Corp. business decisions. or executive (xxvi) – To Company Secretary within 4 days of transaction – ―Closed period‖/Insider trading • Results.Immediate disclosure of material information--Code • Buying or selling of company‘s shares.
" 7 .WINNERS GOOD PRACTICES LOSERS BAD PRACTICES Shareholders Stakeholders Management Directors Company Exchanges SECP Government/Economy Shareholders Stakeholders Management Directors Company Exchanges SECP Government/Economy ADB Project TA 3696-PAK "Regulation for Corp. Gov.
Gov.Immediate disclosure of material information—ACT-UP Elements • Accurate • Complete • Timely • UP-to-date ADB Project TA 3696-PAK "Regulation for Corp." 8 .
and CEO (in Annual Report) – Including Stock options (off balance sheet) – Severance pay." 9 . Gov. bonuses. Executives. service contracts • Compliance with Code of Corp. Gov. – Need to explain non-compliance – Web site postings ADB Project TA 3696-PAK "Regulation for Corp.Other (Immediate) Disclosures • Related Party Transactions – Personal/Company Loans – Personal/Company Purchases/sales • Remuneration Package of Directors.
Disclosure and Other Recommendations • Board approves related party transactions • Form Remuneration Committee…NEDs • Company must explain ANY noncompliance with Code • Company. Gov." 10 . and SECP to post on web sites the compliance statement and explanations for non-compliance ADB Project TA 3696-PAK "Regulation for Corp. SE.
Disclosure Policy--Response to unusual market activity and clarification of rumors • • • • • Material or not material? Immediate Response Refute or confirm or clarify Research if necessary Registered person as source? ADB Project TA 3696-PAK "Regulation for Corp." 11 . Gov.
Continuous Disclosure Requirements
Sufficient notice for shareholders meetings Pre-emptive rights Quarterly and annual accounts reporting Compliance with accounting standards Fixing of book closure dates Whistleblowers…tips from public and professionals
ADB Project TA 3696-PAK "Regulation for Corp. Gov."
Continuous Disclosure (cont.)
• For Equitable Treatment of Shareholders • To Protect Share(Stake/Policy)holders‘ Rights • At Annual Meetings
– Notices – Voting
• In Annual Report
– Accounting practices
ADB Project TA 3696-PAK "Regulation for Corp. Gov." 13
Shareholders‘ (Customers‘) Complaints
• Written complaint to company
• At annual meeting…heard? Satisfied? • Complaint to Stock Exchange
– Satisfactory response? – Arbitration?
• Complaint to SECP
– Satisfactory response?
• Court system remedy
ADB Project TA 3696-PAK "Regulation for Corp. Gov." 14
Stock Exchange should be contacted (same time as SECP?) • RECOMMENDATION: SECP Brochure on web site re: Customer Complaints and Resolutions ADB Project TA 3696-PAK "Regulation for Corp. accepted or rejected by customer? • If not accepted by customer.Initiation of Customer Complaint Investigations • Company (Broker) compliance officer • Written complaint with documentation • Response from Company. Gov. or resolved." 15 .
Exchange Investigations: Sources of Customer Complaints • Determine Source: – – – – Trading Practices Sales Practices Operational Written • Research history of Brokerage Firm – Note repeat complaints ADB Project TA 3696-PAK "Regulation for Corp. Gov." 16 .
Customer Complaints…Review Documents in Firm‘s Files • • • • • • • Customer files. new account information Account statements Commission reports Broker or trader files Advertising files Correspondence files Complaint files ADB Project TA 3696-PAK "Regulation for Corp." 17 . Gov.
Exchange Investigation Report • • • • • • Gather evidence Copies rather than originals Document in report. facts and findings Resolve…write to customer. or Refer to Justice or Courts System ADB Project TA 3696-PAK "Regulation for Corp. Gov." 18 . or Refer to SECP.
Continuous Disclosure (cont. Gov. lawsuits – Going concern ADB Project TA 3696-PAK "Regulation for Corp.) Need to Explain • Financials – Discrepancies or significant deviations in accounting practices or results – Lack of dividend declaration or payment – Significant tax liabilities • Shareholdings and Transactions • Operations: Past and Future – Significant risks." 19 .
" 20 . not potential investors or others.Defects in Annual Reports (Meetings) • Shareholders‘ meetings only once a year • Information presented reaches investors too late • Management may only be required to provide info on agenda points • Only shareholders. admitted to shareholder meetings Therefore need for continuous disclosure ADB Project TA 3696-PAK "Regulation for Corp. Gov.
along with list of shareholders – List of shareholders." 21 . public info? – Web site? ADB Project TA 3696-PAK "Regulation for Corp. Gov.Responsibility For Financial Reporting and Compliance • CEO and CFO must sign financial statements – Personal liability? • Company Secretary to furnish compliance certificate to registrar.
Gov.? • Investigations of discrepancies or significant notes in annual reports ADB Project TA 3696-PAK "Regulation for Corp.Regulatory Practices for Continuous Disclosures • SE/SECP monitoring of annual meetings • Whistleblowers? • Review of annual reports – Capable? • Reliance on auditors – Trained – Understanding of Capital Markets/Corp. Gov." 22 .
Gov.CIS Disclosure Issues • Is a CIS required to exercise voting rights? • Who should make decisions about voting and other rights attached to CIS? • Should a CIS provide information to its investors about how its rights as a shareholder will be exercised? – Questions above from IOSCO ADB Project TA 3696-PAK "Regulation for Corp." 23 .
" 24 .CIS Guidelines and Practices • • • • Act in best interests of CIS investors Publish voting records Disclose conflicts of interest Vote according to investment objectives of CIS – Financial considerations – Social objectives ADB Project TA 3696-PAK "Regulation for Corp. Gov.
" 25 . Gov.CIS Regulatory Techniques • Require regular disclosure of individual company holdings of CIS • Prospectus disclosure of top holdings • Limit CIS investing to a certain % in a company • Prohibit CIS investing for control of a company • Limits amount of CIS-group investing. again relating to control ADB Project TA 3696-PAK "Regulation for Corp.
g. nature of exposures. comparing risk to return • Funding liquidity risk. replacement values…disclosure on non performing loans • Reserve adequacy and loss development ADB Project TA 3696-PAK "Regulation for Corp." 26 .Insurance Company Risk Disclosure Issues • Disclosures of exposure to financial risk and how it is managed • Market or trading risk.. Gov. e. including funding provided by largest creditors • Credit risk.
Gov." 27 .Role and Need of Independent External Auditors(Code) • • • • • • • Rating by ICAP Compliant with Code of Ethics Directors recommend appointment No other services Rotate auditors (or partner?) every 5 years No prior affiliation or relation (2 years) Partner to attend AGM ADB Project TA 3696-PAK "Regulation for Corp.
Enforcement Actions on NonCompliant Disclosures
• Stock Exchanges or other intermediaries to take enforcement action • SECP to take enforcement action • What actions?
– Imposition of sanctions or penalties
• publication of non-compliant companies and sanctions administered?
ADB Project TA 3696-PAK "Regulation for Corp. Gov."
Best Practices: Exchange Sanctions for NonCompliance of Listing Rules
• • • • • • • • Warning, non-public Public statement of facts Temporary halt of trading (issuer‘s request) Temporary suspension of trading, with explanation to market Delisting, or cancellation of listing Fines against companies and/or directors Criminal sanctions…by SECP or Criminal Code Or...‗Black list‘/Defaulters‘ Counter?
ADB Project TA 3696-PAK "Regulation for Corp. Gov." 29
Continuous Disclosure Elements: ACT-UP
• • • • Accurate Complete Timely UP-to-date
ADB Project TA 3696-PAK "Regulation for Corp. Gov."
e. a due diligence guide or ―Statement of Ethics and Business Practices‖ (viii. Gov.a) ADB Project TA 3696-PAK "Regulation for Corp.Corporate Governance Practice Regulatory Framework • Statutory laws and regulations • Code of corporate governance • Standards of best practices." 31 .g.
" 32 . Gov.) • • • • • • Top…Down From Government Laws To SECP Regulations To Institutions‘ Rules To Intermediaries‘ Policies and Procedures To Boards‘…Management‘s…Employees‘ Codes and Practices To Individual actions…ethics ADB Project TA 3696-PAK "Regulation for Corp.Regulatory Framework (cont.
ETHICS WHAT IS ETHICS? .
duties. and responsibilities of directors Related party transactions Insider trading Prompt and adequate disclosures Fair treatment of minority shareholders ADB Project TA 3696-PAK "Regulation for Corp. Gov.Corporate Governance Structure Role of chairman." 34 . chief executive officer. non executive directors and audit committees Roles.
" 35 . Gov.Role of Chairman • Elected by Directors – Executive? • CEO? – Non-executive? • Presides over meetings of the Board • Ensures minutes of meetings recorded ADB Project TA 3696-PAK "Regulation for Corp.
Company Secretary. Gov." 36 . and head of Internal Audit • Runs the day to day business of Company • Disclose good and bad developments ADB Project TA 3696-PAK "Regulation for Corp.Role of CEO • Chairman? Director? • Appointed and remunerated by Board of Directors • Appoints CFO.
Role of NEDs • Transparency – Representation of minority shareholders? • Impartial checks and balances – No threat of job security • Majority on Audit and other committees…for NBFIs – Board investment committee – Remuneration committee ADB Project TA 3696-PAK "Regulation for Corp." 37 . Gov.
Gov.Role of Audit Committee • • • • • • • NEDs mostly Quarterly meetings Recommend to Board external auditors Determine measures to safeguard assets Review announcements prior to publication Oversight of quarterly. annual finc‘l statements Considers major findings of internal investigations and management‘s responses • Monitors internal control system ADB Project TA 3696-PAK "Regulation for Corp." 38 .
e.g. consulting? ADB Project TA 3696-PAK "Regulation for Corp.External Auditors • KEYS: – Independent – Board (Audit Committee) Oversight – Understanding • External auditors work for the shareholders. Gov.. not for management – Other conflicting services." 39 .
and Responsibilities of Directors • • • • • • • ―Direct‖ company in meeting its goals Independent? NED? Broker-related? Annual Statement of Ethics and Practices Appoints and monitors management Disclosure of information to shareholders Review control issues of Audit Committee Appoints external auditors ADB Project TA 3696-PAK "Regulation for Corp." 40 .Roles. Duties. Gov.
" 41 .Significant Issues for Board Decisions and Review • • • • • • • Annual and long term business plans Budgeting Internal reports. Gov. including cases of fraud Internal and external audits and financials Joint venture or distributor agreements Material regulatory review notices Significant liability claims or judgments ADB Project TA 3696-PAK "Regulation for Corp.
Gov.Keys to Board Effectiveness: • • • • • • Communications Information Expertise Experience Independence Effective senior management Recommendation: Board Manual ADB Project TA 3696-PAK "Regulation for Corp." 42 .
Supervisory Board • Split Board • Board for operations of company • Another board for shareholders rights and protections • Specialized boards • Interrelated • ACT-Up Information ADB Project TA 3696-PAK "Regulation for Corp. Gov." 43 .
or – At ‗lower than market‘ rates or prices • Disclosure • Approvals needed? By Board? Shareholders? ADB Project TA 3696-PAK "Regulation for Corp. executives • May be legitimate or – At ‗higher than market‘ rates or prices.Related Party Transactions • Transactions with/for company subsidiaries. directors." 44 . Gov.
• Purchase of assets at greater than fair market value • Loans at less than market interest rates ADB Project TA 3696-PAK "Regulation for Corp. Gov. • Exchanging property for similar property in a nonmonetary transaction. • Making loans with no scheduled terms for when or how the funds will be repaid. • Selling real estate at a price that differs significantly from its appraised value.Related Party Indicators • Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction." 45 .
ADB Project TA 3696-PAK "Regulation for Corp.• Evaluate the company's procedures for identifying and properly accounting for related party transactions. • Request from appropriate management personnel the names of all related parties and inquire whether there were any transactions with these parties during the period. Gov." 46 Determining the Existence of Related Parties (Auditing Procedures) .
Gov.Identifying Transactions With Related Parties 1. (SECP or SE to) Provide audit personnel performing segments of the audit or auditing and reporting separately on the accounts of related components of the reporting entity with the names of known related parties so that they may become aware of transactions with such parties during their audits." 47 . ADB Project TA 3696-PAK "Regulation for Corp.
Review conflict-of-interests statements obtained by the company from its management. Review the minutes of meetings of the board of directors and executive or operating committees for information about material transactions authorized or discussed at their meetings. Gov. 3.Identifying (continued) 2." 48 . ADB Project TA 3696-PAK "Regulation for Corp.
and lenders for indications of previously undisclosed relationships. Review the extent and nature of business transacted with major customers.Identifying (continued) 4. Review accounting records for large. borrowers. paying particular attention to transactions recognized at or near the end of the reporting period." 49 . or nonrecurring transactions or balances. suppliers. ADB Project TA 3696-PAK "Regulation for Corp. Gov. unusual. 5.
2. ADB Project TA 3696-PAK "Regulation for Corp. executed copies of agreements. contracts. Examine invoices.Examining Identified Related Party Transactions 1. and other pertinent documents. such as receiving reports and shipping documents. Obtain an understanding of the business purpose of the transaction. Gov. Determine whether the transaction has been approved by the board of directors or other appropriate officials." 50 . 3.
" 51 .Examining (continued) 4. including guarantees and other significant data. 5. Gov. Confirm transaction amount and terms. ADB Project TA 3696-PAK "Regulation for Corp. with the other party or parties to the transaction. Inspect evidence in possession of the other party or parties to the transaction.
Payments for services at inflated prices ADB Project TA 3696-PAK "Regulation for Corp. Engaging in business deals (such as leases) at more or less than market value 4. Agreements under which one party pays expenses on behalf of another party 2." 52 . Identification of an unidentified related party 5. Gov. Circular arrangements between related parties 3. Inadequate disclosures 6.Potential Related Party Indicators 1.
Gov." 53 . Sale of securities 8. Unusual. material transactions. Sales without substance 9. particularly close to quarter or year-end ADB Project TA 3696-PAK "Regulation for Corp.Indicators (continued) 7.
savings or similar plan provided by the client] was. in any sales. direct or indirect. Gov. transfers. purchases.Sample Related Party Questionnaire 1. Have you or any related party of yours had any interest." 54 . a party? ADB Project TA 3696-PAK "Regulation for Corp. leasing arrangements or guarantees or other transactions since [Beginning of period of audit] to which the company [Or specify and pension. retirement. or is to be.
purchases. Do you or any related party of yours have any interest. in any pending or incomplete sales. guarantees or other transactions to which the company is. transfers. direct or indirect." 55 . leasing arrangements. Gov.Questionnaire (continued) 2. a party? ADB Project TA 3696-PAK "Regulation for Corp. or is to be.
The answers to the foregoing questions are correct to the best of my knowledge and belief DATE SIGNATURE ADB Project TA 3696-PAK "Regulation for Corp. Gov." 56 . Have you or any related party of yours been indebted to the company at any time since [Beginning of period of audit]? Please exclude amounts due for purchases on usual trade terms and for ordinary travel and expense advances.Questionnaire (continued) 3.
" 57 . Gov.Insider Trading • • • • • Material information Non-public Insider use or passed on Significant gains Trading in securities or derivatives prior to public news or announcements ADB Project TA 3696-PAK "Regulation for Corp.
unusual (‗outside-of-pattern‘) activity ADB Project TA 3696-PAK "Regulation for Corp.Insider Trading Detection Techniques • Surveillance of unusual trading activity." 58 . either by price movement or share volume – By Exchange – By SECP • Review ―insider‖ activity prior to public news • Again. Gov.
" 59 .trading – – – Report intent to trade Report trade Arrangement with Depository Material Non-public • Determination by Company if info: – – • Prohibit or report trades ADB Project TA 3696-PAK "Regulation for Corp. Gov. pre.Company Policy and Procedures to Deter Insider Trading • General Company Policy.and post.
Confidential) Information • • • Files containing information should be sealed.. Gov. and have restricted access Telephone conversations or meetings discussing confidential information should be conducted in private whenever possible Confidential information should be communicated to others on a need-to-know basis only.g." 60 . ADB Project TA 3696-PAK "Regulation for Corp. if information is needed to perform duties. Non-Public (i.How Companies Can Restrict Access to Material. e..e.
In appropriate cases.Companies Restricted Access (continued) • Visitors should not be permitted to wander through the Company‘s offices and should be escorted to and from the reception area. ADB Project TA 3696-PAK "Regulation for Corp. Secretaries and receptionists should generally avoid responding to inquiries from outsiders. code names should be used in confidential documents being prepared or used within the office." 61 • • . Gov.
" 62 . Gov.Fair Treatment of Minority Shareholders • • • • • • Ownership structure Transparency of ownership Concentration and influence of ownership Shareholder Meetings Ownership rights Equitable treatment of shareholders of same class ADB Project TA 3696-PAK "Regulation for Corp.
Preferential allocations Best price or execution Wash trades Marking the close Churning Misappropriation of funds/securities ADB Project TA 3696-PAK "Regulation for Corp. Gov." 63 .Self Dealing Issues • • • • • • • Trading ahead or ―frontrunning‖ Cherry picking.
Investigation Techniques • Review documents – Internal – External • Interview – Harmed parties or whistleblowers – Suspected violators – Supervisors • Report facts and findings ADB Project TA 3696-PAK "Regulation for Corp. Gov." 64 .
" 65 . Gov.Initiation of Investigations • Trading irregularities discovered through surveillance • A customer complaint filed against a member • A member complaint against another member • Financial or other reports or calculations that are inaccurate. or even not filed on time • Discovery of alleged trader or sales practice violations • Prior problems or violations with follow-up inspections ADB Project TA 3696-PAK "Regulation for Corp.
Investigation and Enforcement • Enforcement Objectives – – – – – – Protect shareholders/policy holders Promote investor confidence Encourage broad and active participation in the market by all investors Punish wrongdoers/level playing field Remedy ‗harm‘ to investors Deter (prevent) illegal conduct ADB Project TA 3696-PAK "Regulation for Corp. Gov." 66 .
ADB Project TA 3696-PAK "Regulation for Corp.e.Basic Elements of Enforcement Program • • • • • Investigate possible violations of the securities laws vigorously but fairly Recommend and implement enforcement proceedings where warranted Remedy harm to investors Punish wrongdoers and impose sanctions that correspond to misconduct Refer matters to other authorities (i." 67 . Gov. justice minister) for follow-up action as appropriate..
Gov. or documents are not removed beyond the jurisdiction of the regulator Preserves the “element of surprise” Press inquiries…all to be referred to supervisors or the delegated press relations person…to develop a standard response to press inquiries regarding ongoing investigations ADB Project TA 3696-PAK "Regulation for Corp.Reasons that Investigations Should be Private and Non-public • • • • • Preserve integrity of the investigation Protects the reputation of innocent market participants and others Ensures that securities. funds." 68 .
" 69 . Gov.Investigations: Criteria and policy considerations • • • • Allocation of resources…own staff? Outside auditors or inspectors? Nature of conduct…with intent to harm? Unintentional? Size of harm or losses to investors and markets Supervisor and management involvement and ongoing oversight ADB Project TA 3696-PAK "Regulation for Corp.
family members or business associates. this theory may change during investigations) ADB Project TA 3696-PAK "Regulation for Corp. broker or others…note.g. or others (e. relationship of trader to company. Gov. trader..Develop Theory of the Case • • Possible motives for conduct Benefits and relationships to promoter." 70 .
traders." 71 . promoters.Develop Investigative Plan • • • • • Define scope and objectives of investigation Identify issuers. and time period Investigation should seek to develop facts and evidence to support each element of an alleged violation Many cases are largely based on circumstantial evidence Identify necessary documents and witnesses ADB Project TA 3696-PAK "Regulation for Corp. Gov.
offering circulars. lists of attendees Notes or summaries of meetings and telephone conversations ADB Project TA 3696-PAK "Regulation for Corp." 72 . agendas.Issuer and Company Documents • • • • Periodic reports. including meeting minutes. Gov. prospectuses. and other disclosure Press releases and promotional materials Documents related to Board of Directors and other meetings.
" 73 .Decision to Initiate Proceedings or to Close the Investigation • • • • • • • • Criteria and policy considerations Allocation of resources Impact on investors and the market Other Preparation of recommendation Supervisor and management oversight Criminal and other accompanying proceedings Possible settlement ADB Project TA 3696-PAK "Regulation for Corp. Gov.
" 74 . Gov.Publicity Considerations • Issue press release after public proceedings initiated • Announce enforcement proceedings on (SE/SECP) website ADB Project TA 3696-PAK "Regulation for Corp.
Basis for Appropriate Sanctions • • • • • • • • • Statutory authority Policy considerations Seriousness of misconduct Nature of misconduct Repetitive or continuous Single instance Amount of monetary damage Likelihood of future misconduct Previous violations ADB Project TA 3696-PAK "Regulation for Corp." 75 . Gov.
Caution • Over regulation may cause great expense in time. and personnel • Public companies consider ‗privatizing‘ • Private companies to seek private financing • Stress general ethics and conduct • Costs to accomplish – Rotation of auditors…rather than rotation of partner ADB Project TA 3696-PAK "Regulation for Corp." 76 . money. Gov.
Gov. January 2003 (UK) • Council of Institutional Investors 2002 (US Pension Funds) • IOSCO Technical Committee Report.Recent International Laws and Reports • Sarbanes-Oxley Act of 2002 (US) • Higgs Report. October 2002 ADB Project TA 3696-PAK "Regulation for Corp." 77 .
Sarbanes-Oxley Act • Prohibits most company loans to directors and executives • CEO and CFO now criminally liable for financial misstatements • Real time reporting (within 2 days) • Whistleblower protections • Public Company Accounting Oversight Board ADB Project TA 3696-PAK "Regulation for Corp. Gov." 78 .
Gov." 79 . NEDs • Board evaluated by Board Review Committee • At least one member of Audit Committee to have recent and relevant experience • Disallowing ex-CEOs as Chairmen ADB Project TA 3696-PAK "Regulation for Corp.Higgs Report • Chairman and CEO separate individuals • At least 50% of Board.
" 80 . and compensation committees…independent directors • A corporation should disclose information necessary for shareholders to determine whether each director qualifies as independent ADB Project TA 3696-PAK "Regulation for Corp. nominating.Council of Institutional Investors • All directors should be elected annually via confidential ballots counted by independent tabulators • Audit. Gov.
IOSCO Technical Committee Statement of principles to guide securities regulators requiring: • Transparency and disclosure by listed entities. • Independence of external auditors." 81 . and • Need for public oversight of the audit function ADB Project TA 3696-PAK "Regulation for Corp. Gov.
" 82 .. Gov..And Finally. • • • • Disseminate information Educate Instill ethical behavior Partner and transformation ADB Project TA 3696-PAK "Regulation for Corp.
Gov.CASE STUDY How Leeson Broke Barings…Issues: – – – – – – Employee actions and profits (?) Management and supervision activities Accounting and audits practices Board disclosures and (non-) actions Regulatory (non-) actions Ultimate shareholder questions ADB Project TA 3696-PAK "Regulation for Corp." 83 .
e. Exchange or Commission) Audit Committee/auditors ADB Project TA 3696-PAK "Regulation for Corp." 84 .. Gov.Leesen/Barings: Role Play Split into Individual Smaller Groups comprised of: – – – – – Board of Directors Shareholders CEO/Management Regulator (i.
or body as the main cause of Barings going down 2. Gov.Leesen/Barings: General Questions 1." 85 . Why was the position not detected or investigated? 3. Choose 1 person. group. Describe some types of Risk associated with this situation ADB Project TA 3696-PAK "Regulation for Corp.
Back Office) Board of Directors Shareholders Stakeholders (i.e. employees) ADB Project TA 3696-PAK "Regulation for Corp. debtors.e..Leesen/Barings: General Questions (continued) 4. Describe some mistakes or fatal errors in judgment made by: – – – – – – – Management and Supervision of Barings Internal Audit CEO Operations (i." 86 . Gov.. creditors.
4. Gov." 87 . 3. 6. 2. 5. and why? What corporate governance principles or practices were NOT applied by (or for) your group? What corporate governance principles and practices should have been applied? What the regulators could have/should have done? Complete the sentence describing the „Lessons Learned by Leeson Broking Barings‟: “This could have been prevented if ………………” ADB Project TA 3696-PAK "Regulation for Corp. What went wrong.Leesen/Barings: Individual Group Questions 1.
" 88 .Leeson/Barings Case Study • Leesen Keys: – – – – Resultant losses. huge positions Hid losses Dual roles as trader/bookkeeper ADB Project TA 3696-PAK "Regulation for Corp. Gov. bad decisions Did not arbitrage.
Gov.Leesen/Barings Case Study • Management and supervision – – – – – Checks and balances. reviews Customer positions Trader positions Questions Reports and reporting ADB Project TA 3696-PAK "Regulation for Corp." 89 .
Gov.Leesen/Barings Case Study • Accounting and Audit Practices – Actions of internal auditors – Findings of external auditors – Audit or Risk Committee practices ADB Project TA 3696-PAK "Regulation for Corp." 90 .
Leesen/Barings Case Study • Board disclosures and actions – Questions on losses – Questions on profits – Disclosure to shareholders ADB Project TA 3696-PAK "Regulation for Corp. Gov." 91 .
Gov.Leesen/Barings Case Study • Regulatory actions – – – – – Position limits Inquiries Report reviews Hedging Capital considerations ADB Project TA 3696-PAK "Regulation for Corp." 92 .
" 93 .Leesen/Barings Case Study • Shareholder actions and questions – – – – Risks Disclosure Strategies Remuneration ADB Project TA 3696-PAK "Regulation for Corp. Gov.
Has the board approved these policies? 5." 94 .Leesen/Barings Case Study: 13 (Shareholder) Questions 1. Gov. What is the company‟s philosophy towards financial risks? 2. How can the board foster a risk management culture within the firm? ADB Project TA 3696-PAK "Regulation for Corp. Who formulates the firm‟s guidelines and policies on the use of financial instruments? 4. Do (supervisory) board members understand the financial instruments the company uses or owns (particularly derivatives)? 3.
Is there a (position/value) limit in place? ADB Project TA 3696-PAK "Regulation for Corp. What type of financial instruments may the firm use? 9. How does the board ensure the integrity of the risk management system? 7.13 Questions (continued) 6." 95 . Gov. How are these financial instruments valued? 10. Is there a separation of duties between those who generate financial risks and those who manage and control these risks? 8.
13 Questions (continued) 11. Gov. What are the major risks resulting from financial instruments? 12. Are senior managers and the board of directors kept abreast of the financial exposures facing the company at any one time? 13." 96 . As a shareholder. how much information on the financial risks of the company can I reasonably expect? ADB Project TA 3696-PAK "Regulation for Corp.
Senior management involvement 3." 97 . Segregation of front and back-office 2.Leesen/Barings Case Study ISSUES: 1. Adequate capital 4. Poor control procedures Credit risk Market risk No limits ADB Project TA 3696-PAK "Regulation for Corp. Gov.
Leesen/Barings Case Study ISSUES (continued) 5. rather than checking or supervising • No attention to profitable account • Management/board entered new businesses without ensuring adequate support and control ADB Project TA 3696-PAK "Regulation for Corp. Lack of supervision…disclosure…corp. gov." 98 . Gov. Conclusions: • Management assumed positions hedged.
" 99 . Gov.CASE STUDY • Sprint and Coca Cola – – – – – Shareholder rights Disclosure Dual roles of auditors Shareholder actions Results ADB Project TA 3696-PAK "Regulation for Corp.
Martha and ImClone Sale before public news Stock decline Friend of CEO Stop/loss order? ADB Project TA 3696-PAK "Regulation for Corp.CASE STUDY • Insider Trading. Gov." 100 .
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