Corporate

Governance

Principles, Policies, and

Practices

THIRD EDITION

Bob Tricker

OXPORD
UNIVERSITY PRESS

Contents

ListofCaseStudies
Introduction

xv
xvii

What the book is about

xvii

Who the book is for

xvii

The basis of the book

xviii

How the book came to be written: a personal

note from the author

xviii

PART ONE Principles

1

Corporate Governance: Asubjectwhosetimehascome

All corporate entities need governing

Corporate governance is old, only the phrase is new

3
4

The early days: merchants and monopolists

The invention ofthe limited-liability Company

5
6

The Separation of ownership from Operations

Developments in the 1970s: audit committees, two-tier
boards, and corporate responsibility
Developments in the 1980s: corporate collapses

7
9
10

Developments in the 1990s: corporate governance codes arrive

Developments early in the 21st Century: reactions to
more corporate collapses

12

Corporate governance implications ofthe global financial crisis

New frontiers for corporate governance

17
20

Governance and Management

30

Definitions of corporate governance

30

The scopeof corporate governance

The significance of constitutions for corporate entities

32
38

The difference between governance and management

The Performance and conformance aspects of governance

43
45

Alternative board structures

47

Board diversity

53

15

CONTENTS
3

Theoriesand Philosophiesof Corporate Governance

59

The agency dilemma

59

Agency theory

61

Transaction cost economics

64

Stewardship theory

65

Resource dependency theory

68

Managerial and dass hegemony

Psychological and organizational perspectives

68
69

The societal perspective: stakeholder philosophies

70

Enlightened shareholder theory

Differing boundaries and levels: Systems theory

71
72

A subject in search of its paradigm

74

The Governance Partnership: Investors, companies, and directors

84

Shareholder rights
Shareholder stewardship and activism

84
86

Shareholder Information

90

Different types of director

Directors' legal duties and rights

92
96

The board leadership role of the chairman

98

The corporate officers

99

The Regulatory Framework

107

Legislation, regulation, and corporate governance codes

107

Corporate regulation in the United States

108

Corporate regulation in the United Kingdom

Corporate regulation in other countries

115
123

Codes from international agencies

Codes from institutional Investors

128
131

Company codes
Codes for the public and voluntary sectors
The importance of compliance: corporate governance reports

134
136
138

Principles or prescription: the governance debate

139

Models of Corporate Governance

147

How context and culture affect corporate governance

147

The US rules-based model

The UK/Commonwealth principles-based model
The Continental European two-tier model
The Japanese business network model

149
150
151
152

CONTENTS
The Asian family-based model

154

Corporate governance: convergence or differentiation?

Institutions necessary for successful corporate governance

155
158

PART TWO Policies

7

10

165

Functions ofthe Board

What the board does

167
167

Balancing the board's Performance and cpnformance roles

Board committees: functions and authority

178
179

Delegating board functions to management

Corporate transparency

182
187

The Governance of Corporate Risk

The US COSO integrated framework for enterprise risk management (ERM)

194
195

The global financial crisis: a new emphasis on corporate risk

Levels of risk: the conceptof enterprise risk management

196
197

Responsibility for risk profiling, risk strategy, risk policy, and risk supervision
Identifying types of risk

198
200

Riskanalysis
Risk recognition and assessment

204
206

Risk evaluation
Risk management Information systems
Risk transfer

208
210
210

Corporate Social Responsibility and Sustainability

The concept of corporate social responsibility (CSR)

219
219

Changing expectations in the governance of organizations

Enlightened shareholder value (ESV)

222
224

CSR strategies and policies

225

The CSR competency framework

Balancing corporate responsibilities

225
228

Sustainability and the triple bottom line

Communication with stakeholders: integrated reporting
The United Nations Global Reporting Initiative

231
232
234

The Governance of Listed Companies

Ownership of listed companies
Shareholder rights

242
242
244

CONTENTS

11

12

Shareholder activism and the role of institutional Investors

246

Shareholder relations

248

Disclosure of substantial shareholdings and directors' interests

249

The governance of complex corporate structures

250

Block-holders and universal ownership

256

Dual-Iisted companies

257

Dual-class shares

258

Listings on alternative stock markets

259

The Governance of Private Companies and

Other Corporate Entities
The governance of private companies
The governance of family-owned companies

267
268
268

The governance ofsubsidiaryand associated companies

271

The governance of employee-owned companies

273

The governance of Joint ventures

The governance of mutuals, social enterprises, and non-profit entities

275
275

The governance of partnerships and limited-liability

partnerships

279

The governance of hedge funds, private equity,

and sovereign funds

281

The State as shareholder

287

Corporate Governance around the World

Corporate governance in China

297
297

Corporate governance in India

Corporate governance in Russia

303
305

Corporate governance in Brazil

Corporate governance in Hong Kong and Singapore
Corporate governance in South Korea: the chaebol

307
308
309

Corporate governance in Japan

Corporate governance in the Middle East and North Africa

309
310

PART TH REE Practices

13

Board Membership: Directors' appointment, roles,

and remuneration
The appointment of directors
Desirable attributes in a director

315

317
317
319

14

15

16

17

Gore competencies of a director

322

Roles that directors play

Directors' duties, rights, and powers

323
326

Directors' disclosures, service contracts, and agreements

328

Directors' remuneration

331

Board Leadership: The reality of

the boardroom
How people, power, and politics affect practice

345
345

The chairman's leadership role

Sources of governance power

346
351

Games that directors play

Board styles and the culture of the board
Business ethics begin in the boardroom

353
360
364

Corporate codes of ethics and their enforcement

Implementing corporate governance below board level

366
370

Board Activities: Corporate governance

in practice
Committees of the board
The influence of the audit committee
The role of internal audit in corporate governance

379
379
381
394

The importance of the external auditor

The significance of the Company secretary

397
401

Board Effectiveness: Building better boards

409

Making a board affective

Director orientation and director induction
Director development, training, and updating

409
411
413

Directors' liabilities and indemnity

415

Board Information
Managing meetings, agenda, and minutes
Communications with shareholders and other stakeholders
Appendix to Chapter 16: Director's induction checklist

417
422
424
430

Board Evaluation: Reviewing directors and boards

436

Assessing boards and board committees

436

Assessing individual directors' Performance

Corporate governance rating systems for companies
Corporate governance assessment systems for countries

447
450
453

CONTENTS

18

Appendix to Chapter 17: The Fannie Mae corporate

governance guidelines

461

Corporate Governance: The next thirty years

469

Today's frontiers of corporate governance

470

Beyond today's frontiers of corporate governance

477

Drivers of change

484

Appendix 1 Corporate Governance Codes around the World

495

Appendix 2 Answers to End-of-Chapter Self-Test Questions

503

Index

513

List ofcase studies

1.1
1.2
1.3

Robert Maxwell
Drexell, Burnham, Lambert
HIH Insurance

2.1
2.2
2.3

Long-term Capital Management (LTCM)

Lord Black and Hollinger International
The Sunbeam Corporation

3.1
3.2

The Walt Disney Company

Network Rail

4.1
4.2

Foreign and Colonial Asset Management plc

Enron-a classic corporate governance case

5.1
5.2
5.3

China Unicom and SOX

Marconi
Southern Cross Healthcare

6.1
6.2
6.3

Lehman Brothers Inc.-a corporate governance classic

Siemens AG
Tokyo Electric Power and the disaster at Fukushima Daiichi

7.1
7.2

Tyco International and Dennis Kozlowski

Li & Fung Ltd supply chain code of conduct

8.1
8.2

The collapse of Northern Rock bank

The BP Deepwater Horizon disaster

9.1
9.2

Foxconn and Apple

The CLP Group on governance and ethics

10.1
10.2

The Jardine Matheson Group

Alleged vote-rigging at PCCW, Hong Kong

11.1
11.2

Teletronic Riehes Ltdgovernance of a joint venture

The governance of the Co-op

12.1
12.2

China Sinopec
Yukosand Mikhail Khodorkovsky

XVI

LIST OF CASE STUDIES

13.1
13.2

News Corporation
RBS and Fred the Shred

337
340

14.1
14.2

Should Terry blow the whistle?

Libor rate rigging scandal

372
373

15.1
15.2

Waste Management
Aggressive tax avoidance

403
404

16.1
16.2

Directors' right to informationHong Kong Stock Exchange

The corporate culture at Goldman Sachs

426
427

17.1
17.2

Board failings at Olympus Japan

The collapse of HBOS bank

454
456

18.1

Explaining the structureand membership of the board

490