AF3S116/AF3H116 Global Governance, Risk and Ethics

AF3S34 Corporate Governance in Financial Institutions

7: International corporate governance

Caroline Carr
Comparison of corporate governance in
UK listed companies with that of:
Germany
France
China
Russia
Malaysia

This week …
Presents essential statutory regulations for
management and supervision of German
listed companies
Contains internationally and nationally
recognised standards for good and
responsible governance
Aims to promote trust of global investors,
customers, employees and general public
A dual board structure prescribed by
German law

German Corporate Governance

Code (2014)
Code clarifies obligations of Management
and Supervisory Boards (SB) – two tier
system
Purpose is to promote sustainable value
creation and business longevity
If between 500 and 2,000 employees then
SB must compose 33% - 50% employee
representatives

Boards in Germany
Uses “shall” ie companies shall do …
Allows deviations but disclosure required –
fits with ‘comply or explain approach UK
adopted
Reviewed annually against national and
international business developments
Developed with public consultation
Principles-based
Influences on German Code: Cromme
Commission (2002); amended 2005

The Code …
Ownership generally concentrated – where
single shareholder owns at least 20%
Large companies controlled by government
and unions – not always related to good
governance
2009: 83% German companies with
stakeholder-oriented governance (just 17%
shareholder oriented) thus job security
more important than dividends

Possible governance issues

Stakeholder and shareholder governance
systems: comparative advantages and
specific agency risks
Hoffstetter (2005) says system selection
should be left to ‘markets as final
arbitrators’ thus ‘challenge is to devise
regulatory frameworks within which the
open competition between different forms
of ownership structures can take place
without distortion’

Ownership and governance

AFEP-MEDEF Corporate Governance Code
(2008)
The Middlenext Corporate Governance
Code (2009)
Different code depending on size but codes
similar
Influences:
◦ First Vienot Report 1995
◦ Second Vienot Report 1999
◦ Bouton Code 2002

Two codes in France

Principles-based system
Both codes based on ‘comply and explain’
approach
Unitary structure most widely used
One or more employee representatives if
employees own 3% or more of share
capital

General overview
Approx 75% have stakeholder governance
system (similar to Germany but compared
to just 25% in UK and 20% in US – 2009)
Job security more important than
dividends
Ownership concentration: widely held
60%; with family control and pyramid
control sharing 40%

Ownership of French listed

companies
Listed companies
◦ From Jan 2011, if under-represented, must
appoint one in next GM with director
appointment on agenda
◦ By Jan 2014, each gender represented by 20%
rising to 40% by Jan 2017
Unlisted companies
◦ From 2020 each gender represented by at least
40% of board (based on previous 3 year position
eg +500 employees, Revenues or Balance Sheet
+EUR50m)

Gender restrictions on Board

No obligation to appoint independent
directors but corporate governance best
practice advises
Unitary structure: all executives on board
Dual structure: Management board -
executives; Supervisory board - non-
executives

Non-executive directors?
Improved significantly with move towards private
enterprise and capitalism (OECD)
In 2006 rated 44 out of 49 in terms of corporate
governance (Lui, 2006)
Four stages of development:
◦ 1949-1983: SOE dominated economy
◦ 1984-1993:Beginning of separation between state and
enterprise
◦ 1994-2005: start of modern enterprise structure, including
first passage of Company Law
◦ 2006 onwards: continued governance and legislation growth
to balance asymmetry between state shareholders and
individual shareholders

Corporate governance in China

Concentration of state ownership
Lack of independence among board
members
Insider trading (nepotism and guanxi –
move from relation-based to rules-based)
False financial disclosure
Immature capital markets

Corporate governance issues

More than one-third of board members
must be INEDs
At least one accounting professional
To qualify as INED must attend course
and pass certification exam
Can only serve two terms of 3 years - but
not best practice widely recognised

Independent non-executives
Dual board structure
Disclosing information is legal obligation
for listed companies – provides lawful
foundation of its principles ‘openess,
fairness and impartialness’
High standards of accounting and auditing
– joint declaration signed with IASC –
indicates substantial convergence

Information disclosure
Characterized by a high degree of
concentration of ownership and the leading
role of majority shareholders, frequently
including the state, in company management
Low level protection of shareholder rights, the
nominal nature of board of directors and lack
of bodies responsible for internal control,
independent of executive management
(KPMG, 2013)

Corporate governance in Russia

‘The charter’ expounds standards of
corporate governance
‘The Code of Corporate Conduct’ –
describes governance practices
Limited use of NEDs
Challenge: to improve investor confidence
in Russian capital market thus
development of new Russian Corporate
Governance Code 2013

Key governance documents

Pre-1997/8 Asian financial crisis
◦ Privatisation of SOEs
Introduced 1983
Accelerated 1991
Rapid growth of corporate sector
Insider system
◦ Ownership concentration
◦ Cross-holdings
◦ Participation of owners in management

Malaysia
Comprehensive laws relating to corporate
governance
◦ E.g.Comapnies Act 1965 based largely on UK
Act 1948
But:
shareholder participation passive
Some reform eg.
◦ Kuala Lumpur stock exchange listing
requirements amended to embrace audit
committees
◦ Directors Code of Ethics

Malaysian corporate governance

Reform after crisis
◦ Goverment-led initiatives
In common with other East Asian countries
◦ Formation of new governing bodies
High level Finance Committee on Corporate
Governance (HLFC)
◦ Minority Shareholders Watchdog Group
◦ Malaysian Code on Corporate Governance
(2000)
Based on Anglo-American model

Post-1997/8 crisis
Malaysian Code on Corporate Governance
◦ Recommendations not legally binding
◦ Compliance voluntary
◦ Incorporated into Malaysian stock exchange’s
listing requirements
 Comply or explain
 Narrative account of how principles of Code
applied to structures and processes
 Statement of effectiveness of internal controls
 Mandatory accreditation of directors

Key points
Soloman
Mallin
Country corporate governance code
Search:
◦ FINDit
◦ Find Database
◦ Business Source Premier

Coursework sources (for second

country)
Solomon, J. (2010) Corporate Governance
Accountability (Third Edition) Chapters 7
&8
Tricker, B. (2012) Corporate Governance
(Second Edition) Chapter 17
Mallin, C. A. (2010) Corporate
Governance (Third Edition) Chapters 10 -
14

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