CHAPTER 06 -

CORPORATE
GOVERNANCE
APPROACH

GV hướng dẫn: Mai Thị Phương Thảo

 CONTENTS

6.1 6.2 6.3 6.4

Rules and
principles based Sarbanes-Oxley Governance International
approaches to (SOX) structures convergence
corporate
governance
6.1 RULES AND PRINCIPLES BASED
APPROACHES TO CORPORATE
GOVERNANCE
1 2

Rules-based Principles-based
approaches approaches
6.1 RULES AND PRINCIPLES BASED
APPROACHES TO CORPORATE
GOVERNANCE
1

Rules-based
approaches
 1. Rules-based approaches

• A rule-based approach: is based on the view that companies must

be required by law to comply with established principles of good
corporate governance
• In the rules-based approach, there will be legal requirements for
companies to follow the rules laid down. There will be legal
consequences if the board fails to follow the requirements
mentioned in the Act.
• A rules-based approach instills the code into law with appropriate
penalties for transgression.
6.1 RULES AND PRINCIPLES BASED
APPROACHES TO CORPORATE
GOVERNANCE
2

Principles-based
approaches
 2. Principles-based approaches

• A principle-based approach: requires the company to adhere to

the spirit rather than the letter of the code.
• In the principles-based approach, the board can adhere to the best practices
laid out, while having some space for flexibility based on different
circumstances.
• A principles-based approach requires the company to adhere to the spirit
rather than the letter of the code.
Difference between Rules-Based Approach and Principles-
Based Approach
Against a rule-based approach
• Exploitation of loopholes-the exacting nature of the law lends itself to the
seeking of loopholes;
• Flexibility is lost-there is no choice in compliance to reflect the nature of
the organization, its size or stage of development;
• Checklist approach-this can arise as companies seek to comply of all
aspects of rules and start “box-ticking’.
• Regulation overload
Some of the benefits and challenges of a principles-based
approach
6.2 SARBANES-OXLEY (SOX)
 6.2 Sarbanes-Oxley (SOX)

In 2002, following a number of corporate governance scandals such as

Enron, tough new corporate governance regulations were introduced in the
US by SOX.
• SOX is a rules-based approach to governance.
• SOX is extremely detailed and carries the full force of the law.
• SOX includes requirements for the Securities and Exchange
Commission (SEC) to issue certain rules on corporate governance.
• It is relevant to US companies, directors of subsidiaries of US-listed
businesses and auditors who are working on US-listed businesses.
6.2 Sarbanes-Oxley (SOX)
Measures introduced by SOX
6.2 Sarbanes-Oxley (SOX)
Internal control statement (s404)
The requirement is that a company's published annual
report should include an internal control report of
management that contains:
(1) A statement of management's responsibility for
establishing and maintaining adequate internal control over
financial reporting for the company.
(2) A statement identifying the framework used by
management to conduct the required evaluation of the
effectiveness of the company's internal control over
financial reporting.
6.2 Sarbanes-Oxley (SOX)
Internal control statement (s404)

(3) Management's assessment of the effectiveness of the

company's internal control over financial reporting as of the
end of the company's most recent fiscal year
(4) A statement that the audit firm that audited the financial
statements included in the annual report has issued an
attestation report on management's assessment of the
company's internal control over financial reporting.
6.2 Sarbanes-Oxley (SOX)
Key effects of SOX
• Personal liability of directors for mismanagement and
criminal punishment
• Improved communication of material issues to shareholders
• Improved investor and public confidence in corporate US
• Improved internal control and external audit of companies
• Greater arm's length relationships between companies and audit
firms
• Improved governance through audit committees.
6.2 Sarbanes-Oxley (SOX)
Negative reactions to SOX
• Doubling of audit fee costs to organizations
• Onerous documentation and internal control costs
• Reduced flexibility and responsiveness of companies
• Reduced risk taking and competitiveness of organizations
• Limited impact on the ability to stop corporate abuse
• Legislation defines a legal minimum standard and little more.
6.3 GOVERNANCE STRUCTURES
6.3 Governance structures
Family structures

A family structure exists where a

family has a controlling number of
shares in a company. This has
potential benefits and problems for
the company, and the other
shareholders involved.
6.3 Governance structures
Family structures
6.3 Governance structures
Insider-dominated structures

• This is an extension of the same idea. Insider-dominated

structures are where the listed companies are dominated by
a small group of shareholders.
• Maybe family owned.
• Maybe banks, other companies or governments.
6.3 Governance structures

Insider-dominated structures
6.4 INTERNATIONAL CONVERGENCE
6.4 International convergence

• Harmonization and liberalization of financial markets

• Towards international standards in business practices to sit
alongside the global shift in applying International
Accounting Standards (IASs).
 6.4 International convergence

Two organizations have published CG codes intended to

apply to multiple national jurisdictions.
• The Organization for Economics Cooperation and
Development (OECD)
• The International CG Network (ICGN)
6.4 International convergence
 6.4 International convergence

Organization for Economic

Cooperation and Development
(OECD): is an international
organization composed of the
industrialized market economy
countries, as well as some developing
countries, and provides a forum in
which to establish and coordinate
policies.
 6.4 International convergence

6 Objectives of the OECD principles:

• Represent the first initiative.
• Intended to assist OECD and non-OECD governments.
• Focus on publicly-traded companies, both financial and non-financial
• Represent a common basis.
• Are intended to be concise, understandable and accessible.
• Are not intended to be a substitute initiatives to develop more detailed
'best practice' in corporate governance.
6.4 International convergence

6 Content of the OECD principles:

• Ensuring the basis for an effective corporate governance
framework.
• The rights of shareholders and key ownership functions.
• The equitable treatment of shareholders.
• The role of stakeholders in corporate governance.
• Disclosure and transparency.
• The responsibilities of the board.
6.4 International convergence

International Corporate
Governance Network (ICGN):
represents investors, companies,
financial intermediaries,
academics, and other parties
interested in the development of
global CG practices.
 6.4 International convergence

5 Objectives of the ICGN principles:

• Highlight corporate governance elements.
• Mainly focus on the governance of corporations.
• Encourage jurisdictions to address certain broader corporate and
regulatory policies in areas.
• Are drafted to be compatible with other recognised codes of corporate
governance.
• The ICGN believes that improved governance should be the objective of
all participants.
 6.4 International convergence
8 Content of the ICGN principles:
• Corporate objective shareholder returns.
• Disclosure and transparency.
• Audit.
• Shareholders' ownership, responsibilities, voting rights and remedies.
• Corporate boards.
• Corporate remuneration policies.
• Corporate citizenship, stakeholder relations and the ethical conduct of
business.
• Corporate governance implementation.
6.4 International convergence

Limitations
• All codes are voluntary and are not
legally enforceable unless enshrined
in statute by individual countries.
• Local differences in company
ownership models may mean parts
of the codes are not applicable.
CHÂN THÀNH CẢM ƠN CÔ VÀ CÁC
BẠN ĐÃ LẮNG NGHE