Corporate governance

• Discuss developments in Anglo-American corporate governance since the ‘90s

• Review international standards for corporate responsibility and accounting.

• Discuss corporate accountability in relation to bribery and corruption

Learning Objective

• Organizations are run by managers not shareholders.

• Corporate governance – systems put in place to monitor the managers and ensure that the organizations obligations are met.

• Since 1990’s increasing attention on CG due to scandals such as Enron.

• Corporate governance is also an issue for government companies and public private partnerships.

Introduction

• The agency effect assumes that people are at heart untrustworthy. The managers of a company have a duty to work for the owners benefit. Managers have control over information and can use this for their own advantage e.g. large pay packages.

Introduction

• Failure of large corporations harm society. E.g RBS, Olympus.

• Positive organizational ethics VS psychopaths (no conscience, empathy or concern for others)

• Improving organizational performance.

Reasons for corporate governance

• To check the corporate governance performance of a company. Go tohttp://finance.yahoo.com/q/pr?s=MSFTHere you can see the corporate governance score for Microsoft on the right of the page. To understand the score click on the link below or go to.http://issgovernance.com/quickscoreChoose a company that you are interested in and find their corporate governance score by typing its name into the "get profile for" search box near the top of the page.

Question

Table 7.1 Organisational principles and human behaviour

Table 7.2 A selection of studies analysing corporate governance and corporate performance (Continued)

Table 7.2 A selection of studies analysing corporate governance and corporate performance (Continued)

Table 7.2 A selection of studies analysing corporate governance and corporate performance (Continued)

Figure 7.1 Significant recent reports and developments in corporate governance

• Cadbury committee – increased use of non executive directors to counter the agency effect and splitting the roles of the CEO and chairperson.

• Greenbury committee – failed to deal with the issue of executive pay. Stock options for executives misused.

• Hampel committee – ‘combined code’ for listing on London stock exchange. Board of directors responsibility for relations with stakeholders but responsible directly to shareholders.

Developments in corporate governance

• Sarbanes-Oxley Act – Specific responsibilities on CEO and CFO on signing accounts. Limiting auditors “other accounting services”

• Myners’ committee – Institutional investors should be more active.

• OECD principles – Similar to UK combined codes.

• Higgs and Smith committee – Non-executive directors(NED) and Audit committees.

Developments in corporate governance

• 1. The majority of Enron's board were NED’S so is that really effective?

• 2. NEDs spend less time than executive directors, does that not mean more power for executive directors?

• 3. The vast majority of NED’s are executive directors at other companies. Are they trustworthy?

• Generally developments in CG have been mainly focused on disregard for shareholders with little reform.

As yet unanswered questions about NEDs

Table 7.3 Average increases in the remuneration of the directors of the FTSE 100 companies for 2000–2 compared with movements in the FTSE 100 share index over the same period

Figure 7.2 Other interesting developments in corporate governance that have not impacted upon UK and USA stock exchange listing requirements.

Table 7.5 Fatalities as a result of injuries at work in the UK.

• “Corporate governance is concerned with holding the balance between the economic and social goals and between individual and community goals.. The aim is to align as nearly as possible the interests of individuals, corporations and society. “

The King report on CG- South Africa

• Standards set a minimum benchmark of behavior against which organizations can be compared and judged.

• Organizations often receive a badge.

• Organizations need to show their customers that they behave in a corporately responsible way.

International standards in CG

• Global Reporting Initiative- Economic, Social, Environmental Factors.

• Accountability 1000 - quality assurance standard bases on systems e.g. planning and auditing.

• Social Accountabilty 8000 – recent standard for corporate behavior.

• Ethics compliance management system – a code of ethics and a code of conduct- process orientated.

International standards

• CG needs to be driven by active shareholders who hold their company to account.

• Many investors with small shareholdings = little influence.

• Issues like executive remuneration, board elections, environmental issues have attracted shareholder activism.

• Resolutions at general meetings or voting against initiatives or talking to the media.

• Institutional investors – issues with interest and executive networks

Shareholder activism

• How to judge how bad a bribe is

1. Does the briber gain an unfair advantage?

2. Is the amount of the bribe greater than what is customary for gifts etc?

3. Is it illegal?

4. Does it cause a loss of trust in society?

Governance, Bribery and corruption

• Demand side approach – Change the climate in countires where bribery is widespread so that people do not ask for bribes.

• Supply-side – Encourage companies to act with integrity and refuse to pay bribes. This approach is more popular.

• UK bribery act 2010 – all companies operating in the UK which pay bribes are subject to prosecution. Failing to prevent an agent from bribing is also an offence. ‘Facilitation payments’ also banned. Hospitality allowed.

Reducing bribery

• Corporate manslaughter act 2007 – – Special offence of corporate killing– Only when corporations conduct fell below what was ‘reasonably

expected’– Caused by ‘Management failure’– Individuals can still be liable for killing.

Corporate Manslaughter

• Corporate mens rea – not that any individual in the company could have foreseen the harm but rather that in a properly structured and organized company the risk should have been obvious.

• Health and safety – Work accidents.

• Council of Europe proposal – assumes guilt of the accused and the accused should show evidence of its due diligence.

Corporate manslaughter

• What is the main difference between anglo-american corporate governance and South African?

• Compare 2 international standards of corporate governance.

• What are the strengths and weakness of the Corporate manslaughter act, the council of Europe proposals and the application of ‘mens rea’?

Questions

• Visit the following webpages and read the recent news

• http://www.ecgi.org/

• www.icgn.org

• http://www.bbc.com/capital/story/20140416-cowardly-corporate-lions

Internet tasks