Professional Documents
Culture Documents
Basisofcorporategovernance
Corporate governance has been driven by many forces
acting together, namely;
The increased number of corporate scandals and their
size
ByKendhoo
Basisofcorporategovernance
Basisofcorporategovernance
The corporate codes developed under pressure from
the above problems in different countries were
different because the areas of emphasis were different
practices
The fact that certain large organizations are dependent
The
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Principlesbasedapproach
PrinciplesbasedorRulesbasedCG?
UK code
approach:
AdvantagesofPBA:
They are applicable over jurisdictions
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DisadvantagesofaPBA
It can be vague and broad
burdened small entities with costs that they cannot bear, but a
principles based approach is unlikely to be that burdensome
is evidence that after SOX USA stock exchange became less attractive to
investors and investees
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Rulesbasedapproach
AdvantagesofaRBA:
It is easier to monitor and enforce
RBA
Disadvantages ofRBA
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HistoryofcodedevelopmentinUK
The development of corporate codes were in the form of various reports by committees that
were later combined together to make it a code by the stock exchange. It started in the UK and
the Singapore Code is an adaptation of the UK code
There will be areas not covered by the law and will not
be covered
The Hampel Report (1998): clarified the principles laid down and recommended comply or
explain
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sorerelationsbetweenboardandauditors
Someoftheprovisionsofthereportwere:
Theboardcompositionwithindependentdirectorsandseparationofchairand
CEO
Importanceofregularboardmeetingsandthatmajordecisionsshouldbeleftto
theboard
Lengthofdirectorsservicecontractandtheneedtodiscloseremuneration
Importanceofauditcommittee
Financialstatementsshouldpresentabalancedandunderstandableassessmentof
theentity
Additionalstatementsshouldbemadeaboutgoingconcernandinternalcontrols
bythedirectors
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comply or explain
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CorporategovernanceinUSA:
CorporategovernanceinUSA
There are no principles that govern corporations in the
USA however there are laws that focus on specific
issues related to corporate life
TheENRONscandal
Enron, from outside, was a well managed giant company that made lots of
profits
Ineffective corporate governance: the CEO was followed like a god and
Insider trading at large scale, which was led by the information asymmetry
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CorporategovernanceinUSA:
CorporategovernanceinUSA:
Governmentresponse
Governmentresponse
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Audit committee and auditors should have good relations and discuss
judgmental issues
presents fairly the operations and financial condition of the issuer. If ever a
mistake had to be corrected, CEO and CFO will have to forfeit their bonuses
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CorporategovernanceinUSA:
CorporategovernanceinUSA:
TheeffectandCriticism
TheeffectandCriticism
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InternationalCorporateGovernanceCodes
There is an effort all over the world to harmonize
financial standards and corporate governance in order
to enable smooth flow of finance and capital cross
borders
Accounting Standards have been harmonized to a
great extent and this trend can be seen in the
Corporate Governance Framework too
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InternationalCorporateGovernanceCodes:
OECDguidance
Organization
and effectively
Take into account stakeholder other than shareholders
OECD guidance
ICGN guidance
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InternationalCorporateGovernanceCodes:
InternationalCorporateGovernanceCodes:
ICGNguidance
International Corporate Governance Network reported
in 2005
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Roleandresponsibilitiesoftheboardofdirectors
Singapore code lays out the basic principle that there should be an
effective board that will lead the organization and take overall
responsibility for the success or failure of the organization
DetailedprovisionsoftheSingapore
CodeonboardMatters
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TwotierBoard
Onetierboardandtwotierboards
In Singapore we have one tier boards however in many
eastern European countries there are two tier boards.
The upper tier thus consists of the supervisory board
and the lower tier consists of the executive board
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TwotierBoard
Disadvantagesofthetwotierboard
Itislikelytobecostlier
Thesupervisorytierisremovedfromthebusinessandits
executives
Decisionmakingbecomesdifficultasmoreandmore
stakeholderswithconflictinginterestareallowedtoparticipate
Therepresentativesdoesnothavetobespecialistsorexperts,
hencereducingtheircontribution
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Onetierboard
Advantagesofatwotierboard:
Thereisastrongerindependentelement
Thereisfairrepresentationfromshareholdersandemployees
Thegapbetweentheboardsmakecollusionandconflictof
interestsminimal
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Onetierboard
ThechairmanandtheChiefExecutiveOfficer
Advantages
Costsless
Thelessrepresentativeswehavelessconflictswehave
Nonexecutivesarerequiredtobeofhighqualityand
independent
Disadvantages
Thereisnorepresentationfromtheemployeesor
shareholders
Independentmaybecompromisedbyworkingtooclose
Independenceisnotapparentasinatwotierboard
Allcommitteeswillhavetobetakenoutofarelativelysmaller
board
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RoleoftheChairman
Chairman is the person who runs the board. He has a
pivotal role in making the board effective
He should be a person of personal charisma and ethics
The Code emphasizes the importance of this
separation by requiring any relationship between
chairman and CEO be disclosed
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ThechairmanandtheChiefExecutiveOfficer
ThechairmanandtheChiefExecutiveOfficer
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ThechairmanandtheChiefExecutiveOfficer
ThechairmanandtheChiefExecutiveOfficer
RoleoftheCEO
The code does not specify many roles for the CEO
however gives the responsibility of running the
business to the executive directors
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Sizeoftheboard
The code says that the size of the board should be such that it
is possible to make effective decisions
Code does not prescribe a certain number but research has
shown that the average number of eight to ten is effective.
More than thirteen is seen excessive
The size of the board is an objective issue and should be
justified based on the operations of the company and the
need for directors
Balance
The code prescribes the composition of the board to be
balanced between age, expertise, duration of service, etc.
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Thekeyissuesregardingcompositionoftheboard
Thekeyissuesregardingcompositionoftheboard
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RoleoftheCEO
Some of the apparent roles thus would be:
Managing the resources of the business in the best interest of
the organization and its stakeholders
Building a team of experienced competent managers
Properly maintaining the internal controls of the
organization
Executing the strategies of the board, monitoring and
controlling the work
When in any circumstance the CEO and the chair is the same
person, a lead independent director should be elected. This
can happen when they have close family ties or are in the
executive team. The lead independent director would be
required to be available for shareholders to contact when the
CEO, CFO or chairman is not available or is inappropriate to
contact them
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Independentdirectors
Code strongly recommends that there should be a
strong independent element in the board
It prescribes onethird independent directors.
Independence is determined by looking at many
factors
It is said that a director should not have a relationship
with the company, a related company, an officer or
perceived to have a relationship with any of them
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Thekeyissuesregardingcompositionoftheboard
Independentdirectors
Some factors to look at when considering independence:
Employed by the company currently or in the past three
years
Immediate family member employed by the company whose
remuneration is determined by the remuneration committee
for the past three years
A director or immediate family member has accepted
compensation from the company in the past one year for
services except for services in the board
Director or family member being a substantial shareholder of
the company or its subsidiary (5% or more)
Director or family member is in the executive office of a
company from which or to which payments were received in
the current or past year. An amount of over $200,000 is
considered substantial. Payment is considered when favorable
conditions have been accorded and not retail, general
transactions
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TherolesofNEDs
Strategy:challengingcreativelyandconstructivelyto
thestrategiesproposedintheboard
Risk:satisfyoneselfthattheproceduresforfacingrisk
arewelllaid
Scrutiny/performance:monitortheprogressofthe
managementinachievingtheobjectivesofthe
organization
People:nominating,remuneratingandsuccession
planning
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Independentdirectors
Boardskillsandmeetings
Thekeyissuesregardingcompositionoftheboard
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BoardPerformance
Accesstoinformation
The code says that it is the responsibility of the chairman to make sure
the board and should attend all meetings. He should be acting under
the guidance of the chairman
which evaluation can be carried out and these criteria should not be
changed until it is justifiable due to change in circumstances
Along with these performance criteria share price trends for the last
five years should be compared with the Strait Times index and peer
performance
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BoardPerformance
BoardPerformance
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The culture in the board room and ethical values that govern the board
Some firms have taken these findings seriously and have started to take
Like Cable and Wireless that conducts a wide range of meetings with
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BoardPerformance
Another problem is the outcome of such evaluation and
Legalandregulatoryissuesthatgovernthe
boardotherthanthecode
AspurportedbytheCityEquitableInsuranceCompanyLimited1925,
boardhasadutyofcaretothecompanyanditsshareholders
contractsofdirectors
on these issues are very brief and are almost useless for the
users of information
However, of done well, evaluation of performance is likely
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RetirementandrotationissuggestedbybestpracticeofCGwhere
directorssubmitthemselvestoreelectionandrenomination
Therulesarespecifiedintheconstitutionofthecompany:
AlldirectorsresignatthefirstAGM
AtsubsequentAGMsonethirdoftheDirectorsretire
Ifthevacancywasnotfilledinthemeetingthenhewillbedeemed
reappointedunlessitwasresolvednottofillthevacancyinthemeeting
ortheresolutiontoreappointwaslostinthemeeting
NewappointeeswillberecommendedbytheNCandshareholderswill
vote
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Legalandregulatoryissuesthatgovernthe
boardotherthanthecode
The reason behind the shorter service contract is the cost involved in
disqualified under CA
voting
DetailedprovisionsoftheSingapore
CodeontheCommittees
friend.
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Theauditcommitteeanditsrole
Theauditcommitteeanditsrole
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Theauditcommitteeanditsrole
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Theauditcommitteeanditsrole
AC should make sure that the work done during the year and members of the AC
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Nominationcommitteeanditsrole
Nominationcommitteeanditsrole
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Nominationcommitteeanditsrole
TheroleoftheNCcanbesummarizedas:
Evaluatingtheneedsoftheboard,size,structureandconsidering
therequiredbalanceintheboardintherecruitmentprocess.The
requirementprocessshouldbedisclosedintheannualreports
Whenrenominatingadirectorconsiderationshouldbegiventothe
pastperformance
Makingsurethatdirectorssubmitthemselvestorenomination
everythreeyears
NCisresponsiblefortheperformanceevaluationthatweconsidered
inpartfourofthistext
NCshouldevaluatetheindependenceoftheindependentdirectors
everythreeyears
NCshoulddetermineifthedirectorsaregivingenoughtimeforthe
workinthecompany
NCshouldkeeparecordofthekeyinformationaboutthedirectors
andtheyshouldbedisclosedandupdated
ThereisaroleforsuccessionplanningfortheNC
Astatementshouldbegivenonitsactivitiesduringtheyear(Higgs
Report)
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comprises of
majority of
independent
whom,
with
the
chairman,
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Nominationcommitteeanditsrole
The board at Enron was an example of all the bureaucracy.
company officials and when they did not provide them just
ignored the facts
Solomon brothers is a success story despite setbacks in the
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Riskcommittee
Riskcommittee
A risk committee is not recommended by the
provisions of the Code in Singapore
However many companies in practice appoints an
auditing and risk committee to extend the
responsibilities of the AC to include that of the risk
committee
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Remunerationandthecode
Remunerationandthecode
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Codeonremunerationcommittee
There should be a formal and transparent process for
remuneration of directors
No director should be involved in the decision of their
own remuneration
A remuneration committee consisting entirely of
NEDs should be selected, majority of whom, including
the chairman, should be independent. [Higgs report
says that the remuneration of NEDs is a problem for
EDs]
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Remunerationandthecode
Remunerationandthecode
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Remunerationandthecode
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Otherissuesregardingremuneration(notfrom
thecodebutbestpractice)
The key elements of directors remuneration
Base salary that is specified in the contract which has no relation to the
performance
Pensions
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Benefits in kind
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Problemswiththeremunerationcommittee
Problemswiththeremunerationcommittee
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Settingperformancecriteriaandtheproblemswiththem
Settingperformancecriteriaandtheproblemswiththem
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Otherissues
Otherissues
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