L4 - Corporate Governance

2/14/2016
CorporateGovernance
A company that is well governed is one that is
accountable and transparent

to its shareholders and other stakeholders,
such as employees, creditors, customers and
society at large
CORPORATEGOVERNANCE
ByKendhoo
MNUBusinessSchool/ACC235/2016S1/Kendhoo
CorporateGovernance
CorporateGovernance
Corporate governance is the means by which

companies are directed, administered and
controlled
Good
corporate
governance
enables
companies to create value (through
entrepreneurialism, innovation, development
and exploration) and provides accountability
and control systems commensurate with the
risks involved
It influences how the objectives of the

company are set and achieved, how risk is
monitored
and
assessed,
and
how
performance is optimised
Corporate governance is a key element in

improving organisational performance and
sustainability as well as enhancing stakeholder
confidence
2/14/2016
CorporateGovernance
CorporateGovernance
Embedding sustainable development within
corporate governance requires companies to
identify and understand their environmental
and social impact and responsibilities and to
act accordingly
The process involves using the knowledge and

experience of the leadership and others in the
business to establish:
Responsibilities of whom and in relation to which
issues?
Accountabilities to whom are those with
responsibilities accountable and how?
CorporateGovernance
CorporateGovernance
There is a
clear link between governance

and
financial,
ethical
and
sustainability
issues
that
traditional accounting, reporting
and audit do not effectively
capture
Checks and balances what systems of supervision,

control and communication
flows are required? 6
Governance must draw not just on financial

but also on social and environmental
accounting, reporting and audit to understand
the full scope of a firms activities and
performance and to establish an integrated
approach to sustainability
2/14/2016
Corporategovernanceandthefinancialcrisis2008/09
wherediditallgowrong?
The 2008/09 financial crisis can, to an extent,

be attributed to failures and weaknesses in
corporate governance
When corporate governance mechanisms
were put to a rigorous test, they failed; they
did not protect against excessive risk taking
and irresponsible behaviour
Getting governance wrong is not a small

matter that can be dismissed lightly
These failures have contributed to recession,
the collapse of large businesses, widespread
redundancies, consumer mistrust, and a
fundamental recasting of the relationship
between the state and financial institutions
10
First, it was clear that dysfunctional boards did not

fully understand the risks and impact associated
with the strategies and activities they approved
The lack of appropriately qualified non

executive directors also contributed to the
problem, as the broad range of skills and
knowledge required to fully understand the
complex financial and nonfinancial factors that
influence organisational performance were not
available
So what were the governancerelated reasons for

the current turmoil?
Neither did they understand these activities and

risks in relation to sustainability
Furthermore, in many cases, boards did not provide
adequate
monitoring
of
implementation,
accounting, reporting and audit
11
12
2/14/2016
Dysfunctional boards are symptomatic of the

irresponsible ownership that has contributed to
the financial crisis; powerful shareholders did
not play an active enough role in improving
governance
The Cooperative Bank has emerged relatively

unscathed from the current financial crisis,
causing Jonathon Porritt, chairman of the UKs
Sustainable Development Commission, to
suggest that,
As a result, new ownership and governance

models are being considered or in some cases,
such as RBS and Lloyds TSB, being forced upon
companies
at the very least, the relative resilience of this

business model should prompt both Treasury and
the sectors regulators to think again about
alternative ownership and governance structures
in the financial services sector
13
14
The investor community has also failed in its wider

role
Remuneration systems that have encouraged short

term thinking and unsustainable risk taking at the
expense of longer term sustainability are also
symptomatic of failed governance
It failed to engage actively enough or push hard

enough for meaningful reform, and certainly did not
identify and reward examples of success sufficiently
Now that investors have been reminded how crucial
adequate governance is and what failure can mean,
they need to use their weight to influence change
15
Bonuses awarded for shortterm annual performance,

with limited consideration of the impact on longer
term performance, encouraged employees to act in
ways that undermined the efficient and sustainable
functioning of markets
Ineffective governance allowed large mismatches
between risk assessment, incentives and internal
controls
16
2/14/2016
It is clear that risk assessment procedures

have not worked; they have not always looked
at the right things, or assessed them in the
right way
Corporate governance failings were certainly not

the only cause but they were a significant
contributor to the current financial crisis and
recession
Taken together, these issues contributed to

the recent large scale business failures
17
It has become clear that corporate governance

models need changing
Enhanced governance practices should be seen as
integral to an overall solution aimed at restoring
confidence
to
markets,
developing
a
sustainability approach to business and
protecting us from future crises
18
Corporategovernance andsustainability
Corporategovernanceandsustainability
The trajectories of corporate governance and

sustainability are meeting headon and new
demands are being placed on companies and
their leadership
Corporate governance is concerned with holding the

balance between economic and social goals and
between individual and communal goals
The governance framework is there to encourage the
efficient use of resources and equally to require
accountability for the stewardship of those resources
The aim is to align as nearly as possible the interests of
individuals, corporations and society
SirAdrianCadbury,CorporateGovernanceOverview,1999WorldBankReport
19
20
2/14/2016
Corporate governance is on the radar screens of

corporations, regulators and stakeholders as never
before
The trajectories of corporate governance and

sustainability are meeting headon and new
demands are being placed on companies and
their leadership
With the business media dominated by corporate

activities such as the subprime mortgage lending
crisis, carbon trading schemes and the collapse of
many high profile organisations including Lehman
Brothers and Enron, the role of companies in society is
under evergreater scrutiny
Global companies are subject to increasing demands
from activists, employees and investors to behave in a
sustainable manner, taking into account important
social, environmental and ethical issues
21
While certain sustainability concerns are core to
success, they do not always lend themselves to
discussion and debate within governance
frameworks that focus on financial indicators and
controls
For example, the financial lens of the audit
committee may not fully focus on some of the
important nonfinancial issues associated with
sustainability
In recognition of these limitations
approaches to governance are evolving
new
23
Regulation (such as the King II report) and the

materiality of sustainability issues are forcing
organisations to integrate such concerns more
fully into governance structures
22
The increasing importance of sustainability
issues is now recognised by many companies,
but for such issues to truly become integrated
into strategy, operations and performance,
they need to be embedded in governance
systems
The key to successfully embedding
sustainability in governance is getting the right
issues into the mix and getting the right voices
heard
24
2/14/2016
These need to be given due consideration and

not treated as a mere side issue
Mainstream
governance
conversations
have
traditionally focused on legal and risk issues, finances,
management structures, individual competencies,
leadership and independence
This requires aligning the strategic direction of

the organisation with strategic environmental
and social goals and ensuring governance
oversight mechanisms understand and play
their role in maintaining that focus
Yet todays governance issues, related to sustainability,

all operate beyond mere legal requirements and focus
on process innovations that engage key knowledge
brokers through softer forms of governance that take
account of values and principles
Sustainability is gradually reshaping the
organisations approach corporate governance
25
way
26
THEROLEOFBOARDS
THEROLEOFBOARDS
The board needs to realistically evaluate the

nature and significance of the sustainability
issues facing the company, as well as where
sustainability needs to be considered in
relation to issues such as succession planning
and performance evaluation
Boards are a crucial component of governance

structures and, as with other governance
mechanisms, need to embrace sustainable
development
27
There is a need to ensure that boards have the

ability to lead with integrity and possess the
right skills to make difficult decisions and
manage risk
28
2/14/2016
THEROLEOFBOARDS
THEROLEOFBOARDS
The voices of wider stakeholders clearly need

to be included in the governance process
But, clearly there is a need to look beyond

employee representatives alone and to carefully
select nonexecutive directors with sustainability
related expertise in areas such as the
environment, health and safety, consumer
relations or human resources, as well as those
from nonbusiness backgrounds who can bring
valuable perspectives into the boardroom
Employee representatives have participated in

boards for a number of years; perhaps the
most well known cases are in Germany and
Japan
29
THEROLEOFBOARDS
Nonexecutive directors need the right blend of
skills, experience and personal qualities to enable
them to advise, monitor and challenge effectively
Organisations need to be encouraged to cast the
net widely in seeking such people and to develop a
deeper understanding of what skills are required
The board needs to realistically evaluate the
nature and significance of the sustainability issues
facing the company, as well as where sustainability
needs to be considered in relation to issues such
as succession planning and performance
evaluation
31
These skills and perspectives can enable

companies to evaluate key strategic sustainability
issues more comprehensively and monitor their
performance more effectively
30
THEROLEOFBOARDS
Expert stakeholder advisory panels can also
help bridge the gap between an organisations
wider stakeholder engagement and its
governance, by bringing experts together with
senior management
Companies are increasingly using expert
panels to advise how to respond to emerging
social and environmental issues in a way that
is strategically aligned to the organisations
business model
32
2/14/2016
KingReport
THEROLEOFBOARDS
The existence of a committee responsible to
the board allows specific issues to be explored
in more depth than is possible at board level,
while ultimate responsibility remains with the
board as a whole
Where these panels exist it is crucial that they
are credibly integrated into the traditional
governance structures
33
onCorporateGovernanceforSouthAfrica
King II is the abbreviated name for the King
Report on Corporate Governance for South Africa
published 2002
It followed a 1994 report commonly known as
King I
Companies listed on South Africas JSE Securities
Exchange have to comply with King II
34
KingReport
KingReport
It is a set of principles
The board must ensure that an assessment of

the processes and outcomes of key risks is
undertaken annually
It does not determine a detailed course of

action
It states that the board is responsible for the
process of risk management and that it must
decide the companys appetite and tolerance
for risk
35
And,
importantly,
risk
management
information should be disclosed annually
36
2/14/2016
KingReport
It sets out the following seven characteristics of good
corporate governance:
discipline (a commitment to adhere to proper behaviour)
transparency (ease with which an outsider can analyse a
company)
independence (use of mechanisms to prevent conflicts of
interest)
accountability (decisionmakers must be accountable for
decisions)
responsibility (for behaviour allowing for corrective action
and for mismanagement)
fairness (systems must be balanced)
social responsibility (awareness and response to social
issues)
37
Remunerationandincentives
Remuneration and incentives, while not often

thought of as a sustainability concern, would
benefit from being viewed through a
sustainability lens
Remuneration needs to be considered in terms of
pay equity and pay differentials as well as in
relation to the way in which it influences
unacceptable risk taking
Shortterm performancerelated pay is seen by
many as central to many of the problems,
particularly within the banking system, that
caused the global financial crisis
39
There is growing pressure to redesign
corporate regulation and governance to
emphasise the importance of longterm
sustainability in relation to remuneration
practices
38
It would be useful to have further
clarification
of
sustainabilityrelated
responsibilities from the board level through
to the executive committee, including
whether and how remuneration includes
incentives
based
on
sustainability
performance
AlcoaStakeholderPanel,2008
40
10
2/14/2016
There is growing pressure to redesign corporate

regulation and governance to emphasise the
importance of longterm sustainability in relation
to remuneration practices
They need to be based on longer term

performance characteristics and encourage
decision making that will advance the
sustainability of organisations, incorporating
both financial and nonfinancial metrics
Central to this is the need to dismantle incentives

which have led to shorttermism and an
undermining of corporate ethics
Incentives clearly need to encourage sustainable
behaviour
41
Including sustainability issues in the creation

of new remuneration and incentive structures
will give a greater focus to these issues at both
a strategic and daytoday level
42
While clearly a more fundamental review of

remuneration practices is needed, there is
evidence of an existing trend towards longer
term incentives
The same report also suggests that two thirds of

companies surveyed had adopted a balance
scorecard linking nonfinancial performance to
rewards, and across the FTSE, just 20% of
companies relied solely on financial metrics to
judge executive remuneration
A report by PWC in 2007 found that there has

been a continued emergence of bespoke
longterm incentive plans designed for specific
business circumstances
43
Increasingly executive bonuses will depend on

nonfinancial performance, with customer
satisfaction, employee engagement and health
and safety ranking as the most commonly
considered issues
44
11
2/14/2016
PanelsandCSRGovernanceatBritishTelecom
BT has had a CSR leadership panel for several years
PanelsandCSRGovernanceatBritishTelecom
The purpose of the panel is to encourage innovation

and leadership on sustainability and corporate
responsibility
The panels primary contact is with the BT CSR team

but links into the BT board and presents to them at
least once a year when the BT board discusses
corporate social responsibility strategy, performance
and risks
The panel consists of external and independent

thought leaders in the fields relevant to both
sustainable development and BTs strategy and
operations
The panel keeps the board informed of emerging issues

and changing stakeholder expectations that may affect
its duties
It meets four times a year and has a remit which

includes advising on key areas of performance and
strategy
In addition the panel provides an annual independent

comment on BTs social and environmental
performance within the nonfinancial report
45
Questioning the suitability of

nonexecutive directors in
understanding the materiality
of nonfinancial issues is
crucial
46
THEROLEOFINVESTORS
THEROLEOFINVESTORS
47
Institutional investors and fund managers

have a responsibility to generate longterm
value on behalf of their shareholders, the
individual savers, investors and pensioners for
whom they are ultimately working
They should insist that the companies they
invest in put sufficient resource into
developing governance mechanisms that
deliver long term value
48
12
2/14/2016
THEROLEOFINVESTORS
THEROLEOFINVESTORS
Shareholders should take governance into
account as part of their investment decision
making
Institutional investors and other shareholders
need to understand what questions they
should be asking boards
49
For example, does the board have the

knowledge and competencies necessary to
understand the sustainability implications of
the current market and does the board
composition reflect the direction of the future
strategy?
Questioning the suitability of nonexecutive
directors in understanding the materiality of
nonfinancial issues is crucial
50
THEROLEOFINVESTORS
TheBrazilianNovoMercado
Ultimately investors need to ask if the board

and individual members are delivering
The Brazilian Novo Mercado is a premium stock

market listing for shares issued by companies
that have voluntarily adopted corporate
governance
practices
and
transparency
requirements beyond those requested by law
Part of this is establishing whether governance

meets international standards
The case below indicates the reaction of
investors when the answers are not as they
wish
51
Created by the Sao Paulo Stock Exchange

Bovespa in 2001, it is based on the premise that
stock valuation and liquidity are positively
affected and assured by shareholders rights and
the quality of company information
52
13
2/14/2016
TheBrazilianNovoMercado
The primary market restricted entry to those
that met stringent standards including:
the issuance of only voting shares
a minimum of 25% of shares not controlled by
majority shareholders
12 month terms for board members
provision of statements in accordance with USGAAP
and IASGAAP
settlement of shareholder conflicts by arbitration
53
CorporateGovernanceandInvestors:
Marks&Spencer
Marks & Spencer sparked a furious reaction from
big institutional investors in 2008 after
announcing that it was combining the roles of
chairman and chief executive to keep Sir Stuart
Rose at the business until 2011
Investors reacted strongly to the decision and,
although they have since been reassured to a
certain degree, the incident highlights the ability
of investors to influence and stresses the
importance of governance to this community
54
Marks&Spencer
Marks&Spencer
The Cooperatives responsible investment

manager at the time stated
The head of equities for Legal & General, one

of the largest shareholders, emphasised the
importance of accountable governance:
The structure clearly departs from best practice.

We are also disappointed by the lack of prior
consultation with shareholders.
55
As set out in the Combined Code we believe

strongly in the separation of the roles of
chairman and chief executive, believing this
allows a much needed balance in the boardroom
and prevents the potentially damaging
concentration of power.
56
14
2/14/2016
Collaborativegovernance
Othergovernancemodels
The quality of governance is important not
only for individual companies but also for
collaborative initiatives, partnerships and
wider economic systems
Collaborative governance
New global governance
Collaborative initiatives and various types of

partnerships (including publicprivate partnerships)
are seen by many as a way to successfully address
many sustainability challenges
However, these collaborative initiatives and
partnerships do not always deliver their objectives
Underlying many of the challenges are governance
systems that fail to deliver accountable decision
making
57
Collaborativegovernance
Partnerships are supposed to create new ways for citizens,

stakeholders and interested parties to engage in the delivery of
sustainable outcomes
To ensure the governance of partnerships is effective there is a
need to create incentives for good partnership governance, to
ensure partnership governance systems gain the trust of core
stakeholders and to build the knowledge and capacity of
partnerships and their stakeholders to govern effectively
58
Newglobalgovernance
Partnership performance depends on effective governance
59
Current economic circumstances raise serious

questions as to the adequacy or perhaps even
relevance of many preconceived notions of good
corporate governance, especially those emanating
from international best practice rooted broadly in
AngloSaxon approaches that have proved lacking
There is a growing feeling that now is the right time to
forge a cooperative approach to the crisis, and to build
a stronger, more inclusive international financial and
economic governance architecture that will also
address other global challenges such as energy and
climate change, security and terrorism, and poverty
and health issues
60
15
2/14/2016
Newglobalgovernance
TheRoleofAccountants
European Commission President Barroso has

indicated that major reform is needed on the
current financial supervision and regulation
model at international level and that it
should be built on the principles of
transparency, responsibility, crossborder
supervision and global governance
61
The fundamental role of the accountant is to

provide transparency in reporting, financial
or otherwise, to shareholders and the broader
stakeholder groups who have an interest in
the performance of the business
62
The work of accountants is clearly crucial to

effective governance, especially in relation to
its traditional focus on financial performance
and accounting integrity
To undertake this role accountants must ensure

they are familiar with the general management,
risk management, operational and reputational
aspects of the business to provide context to the
figures presented in the financial statements
The fundamental role of the accountant is to

provide transparency in reporting, financial or
otherwise, to shareholders and the broader
stakeholder groups who have an interest in
the performance of the business
63
In order to provide independent opinion on a

companys financial statements, ie their annual
report, accountants must have access to
information on all company activities which could
be material to its financial position
64
16
2/14/2016
Accountants working in a business are involved in

several of the governance mechanisms, which may
include
nominations
committees
(identifying
appropriate candidates/nonexecutive directors) for
the board, remuneration committees and risk and
compliance committees as well as the audit committee
Audit committee members are faced with

increased expectations from many groups,
including shareholders, shareholder and
governance activists, regulators, the media,
and fellow board members
The SarbanesOxley Act 2002 defines the audit

committee as a committee (or equivalent body)
established by and amongst the board of directors of
an issuer for the purpose of overseeing the accounting
and financial reporting processes of the issuer and
audits of the financial statements of the issuer
The other area where accountants working in

business currently support good corporate
governance is in decoding regulation for the
company and supporting internal integration
and adherence
65
66
Accountants bring their regulatory knowledge

and industry standard experience to their
clients to drive through best practice
Accountants bring a professional rigour in

demanding transparency; in order to maintain
professional integrity, accountants must follow
standards and procedures that will highlight
concerns
Additionally they interpret the listing

requirements relevant to their business and
legal structure
67
68
17
2/14/2016
They must make sure their risk discussions with

management are healthy and productive and
help the company and the board to prepare for
change
It is within their professional conduct to have

this role and dispute practice which is not in the
interests of the longterm sustainability of the
company and its stakeholders
Accountants are also in the best position to

provide an independent challenge to practices
they observe within a business
Aligning their thorough approach to preparing

financial statements with wider governance
reviews enables accountants to provide a full
comment on a companys annual and long term
performance
69
70
Ultimately this will provide the company, its
stakeholders and society with a truer and more
robust reflection of the business performance
and its potential impact on wider social,
environmental and ethical concerns
71
72
18

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2/14/2016

accountable and transparent

Corporate governance is the means by which

It influences how the objectives of the

Corporate governance is a key element in

The process involves using the knowledge and

clear link between governance

Checks and balances what systems of supervision,

Governance must draw not just on financial

The 2008/09 financial crisis can, to an extent,

Getting governance wrong is not a small

First, it was clear that dysfunctional boards did not

The lack of appropriately qualified non

So what were the governancerelated reasons for

Neither did they understand these activities and

Dysfunctional boards are symptomatic of the

The Cooperative Bank has emerged relatively

As a result, new ownership and governance

at the very least, the relative resilience of this

The investor community has also failed in its wider

Remuneration systems that have encouraged short

It failed to engage actively enough or push hard

Bonuses awarded for shortterm annual performance,

It is clear that risk assessment procedures

Corporate governance failings were certainly not

Taken together, these issues contributed to

It has become clear that corporate governance

The trajectories of corporate governance and

Corporate governance is concerned with holding the

Corporate governance is on the radar screens of

The trajectories of corporate governance and

With the business media dominated by corporate

Regulation (such as the King II report) and the

These need to be given due consideration and

This requires aligning the strategic direction of

Yet todays governance issues, related to sustainability,

The board needs to realistically evaluate the

Boards are a crucial component of governance

There is a need to ensure that boards have the

The voices of wider stakeholders clearly need

But, clearly there is a need to look beyond

Employee representatives have participated in

These skills and perspectives can enable

The board must ensure that an assessment of

It does not determine a detailed course of

Remuneration and incentives, while not often

There is growing pressure to redesign corporate

They need to be based on longer term

Central to this is the need to dismantle incentives

Including sustainability issues in the creation

While clearly a more fundamental review of

The same report also suggests that two thirds of

A report by PWC in 2007 found that there has

Increasingly executive bonuses will depend on

The purpose of the panel is to encourage innovation

The panels primary contact is with the BT CSR team

The panel consists of external and independent

The panel keeps the board informed of emerging issues

It meets four times a year and has a remit which

In addition the panel provides an annual independent

Questioning the suitability of

Institutional investors and fund managers

For example, does the board have the

Ultimately investors need to ask if the board