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Corporate Governance
Beijing Jiaotong University Xiao Xiang

13718909938 xlxx@sina.com
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Two Years of Falling Shareholder Value

Public Pressure

Phase 1
An Emerging Problem

Phase 2
Growing Public Concern

Phase 3
An International Crisis

Phase 4
Political Action

Enron/Andersen
Scandals leading to bankruptcy

The Bubble Bursts

Collapse of Telecoms Technology and Media Yet more scandals Summer 2003

SEC Investigations
WorldCom Wall Street Accounting

President Bush involved

Sarbanes-Oxley Act CEOs certify accounts Executives go to jail Autumn 2004
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Winter 2002

Spring 2004

The biggest stock market crash in U.S. History

Since the peak in early 2000 at $15 trillion Market Capitalisation has fallen by around $7 trillion (46%)
Investors have lost nearly half of their lifes savings and pensions * compared with GDP
Source: The Economist September 7th 2002, p14
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 In China, there are also some bussiness especially list company such as Lantian ,Zhengbaiwen, Yinguangxia, Maikete etc, the big shareholder cheat the small shareholder and invade a lot of their interests, some companies are bankrupt finally, nearly all the investments of small shareholder are lost.
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Summer 2005
Corporate Governance has become a major global political issue The Technology Bubble burst Shareholders Losses Executive Greed Loss of Confidence in the Stock Exchange High Risk Strategies
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US gets tough on directors

Fines of $5m and 20 years in jail are the penalties for directors wilfully producing a false certificate for the accounts of their companies.
Daily Telegraph, 2nd December 2002, p35

Corporate governance is more and more important !

Corporate Governance
If management is about running the business

Governance is about ensuring that it is run properly

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Antiquity
Ancient Greek and Latin roots means to steer

He that governs sits quietly at the stern and scarce is seen to stir

Modern
"Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals.

The aim is to align, as nearly as possible, the interest of the individuals, corporations and society"

Sir Adrian Cadbury 1999

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"Business prosperity cannot be commanded. People, teamwork, leadership. enterprise, experience and skills are what really produce prosperity. There is no single formula to weld these together, and it is dangerous to encourage the belief that rules and regulations about structure will deliver success"

The Hampell Report 2000

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Governance reforms should be put in place before a crisis, when a corporation is doing well
Pound 2000 Harvard Business Review on Corporate Governance

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 Corporate governance is
Used in corporations to establish order between the firms owners and its top-level managers,It focuses on the conduct of, and relationships between, the board of directors, managers and the company shareholders.

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 Corporate governance is

A relationship among stakeholders used to determine and control the strategic direction and performance of organizations,Concerned with identifying ways to ensure that strategic decisions are made effectively
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Concepts of Corporate Governance

Accountability Accountability Transparency Transparency Openness or Responsibility Integrity Risk management
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MAIN CONTENTS
Chapter1: Capitalism, Free Enterprise, and The Corporation Chapter2: The Legal Obligations Of Directors Chapter-3: Board Organization Chapter-4: Board Selection
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MAIN CONTENTS
Chapter-5: The Mystique of Board Meeting. Chapter-7: CEO Compensation Chapter8:Board-Management Relationship Chapter10: Dealing With External Pressure Other chapters belong to selfstudy
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ASSESSMENT
Examination 50% focus on the course pack Case Study & Presentation50% group number: 3-4 members Presentation: last two classes ,15% Written Report : Due Date: One week after the presentation 35% Length: at least 2500 words
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Chapter1

Capitalism, Free Enterprise, and The Corporation

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 The societies of the developed countries of the twenty-first century live in unprecedented prosperity.

free enterprise competition

capitalism

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Free enterprise
Adam Smith first wrote in 1776 (Wealth of Nation) that :

An invisible hand of selfinterest

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It will create a total environment in the best interests of the many when each of us acts to maximize our own individual interests.
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 Free enterprise brings to the

economies the sustained energy of competition, in which the creative minds of countless individuals are unleashed to pursue their individual best interests, the more unfettered by regulation the better.
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An invisible hand of selfinterest

individuals attempt to pursue interests

competition
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Competition:
The competitive environment leads to a survival of the fittest regimen that, over time, weeds out the weakest competitors and promotes survival of the most successful.
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 capitalism
modern capitalism, in which the capital of many investors can be united to provide the large

amounts of investment capital needed to fund extensive projects and massive enterprises

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 Governance
Without an effective system of governance there would be chaos in human affairs. It is governance that brings order out of the chaos. When individuals live together in communities, there must be rules and laws about how they relate to each other , because conflict among individuals and groups is inherent in the human condition.
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Governance
Various rules

Keep order of the free enterprise, Competition, and capitalism

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Chapter2 The Legal Obligations Of Directors

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Shareholder are owner

While every state has a similar statute empowering the board of directors to govern and manage the affairs of the corporation, the

shareholders ultimately control

the affairs of the corporation because they elect and can replace the board of directors.
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Shareholders statutory right

approve major transactions or decisions, such as mergers, the sale of assets, or dissolution of the company. In situations where the majority of stockholders of a corporation disagree with a significant action or actions of the board, the stockholders almost always win, but it may take some time.
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 WHO IS RESPONSIBLE FOR GOVERNING THE AFFAIRS OF A CORPORATION?

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board of directors !
State law dictates the establishment of boards of directors for most corporations. And shareholders empowering the board of directors to govern and manage the affairs .

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boards perform the actions

hiring, evaluating, and firing the CEO; exercising oversight of CEO actions; advising on and consenting to major decisions and policies, typically developed by the CEO; and reviewing results.

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The major duties of directors are The fiduciary duty The duty of loyalty and the duty of fair dealing The duty of care The duty not to entrench The duty of supervision Let us examine these duties in turn.
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 The basic one and central one is fiduciary duty

acting in the best interests of those whom the director represents

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fiduciary duty

enhancing profits

enhancing Shareholder value

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 The duty of loyalty and the duty of fair dealing

The basic principle of this duty of loyalty is that the director should not use his or tier corporate position to make a personal profit or gain other personal advantages.'
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The duty of care

in general, requires a director to

act in the best interests of the corporation and with the care

reasonably expected of "an ordinary prudent person." The director also has the duty to be informed and to make necessary inquiries to arrive at this state.
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 The Duty Not to Entrench

Fulfilling the duty not to entrench depends more on following good business practices in evaluating the corporate performance and the performance of management and the board than on complying with the law.
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The Duty of Supervision

is an element of the duty of care; it deals with the effectiveness with which directors exercise their oversight responsibilities. The duty of supervision addresses what directors should know about the operations of management, how they should come to know it.
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 Balancing the interests of shareholders with those of other stakeholders or social causes. Interested parties have concluded that as long as the organization's intentions are widely and publicly known, investors should be

personally accountable for any consequences of investing in the company.

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Dealing with Hostile Takeover Offers

Boards may act to block hostile takeover bids for the corporation when, after having considered carefully what is in the best interest of the corporation and shareholders, they make the judgment that the takeover may jeopardize the viability of the corporation.

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 INDEMNIFICATION OF DIRECTORS It is a general practice for corporations to indemnify directors against liability for their legal actions. This means that the directors are not personally liable for any damages that may result from legal acts of the board to the extent that there are corporate assets to cover any awards to plaintiffs.
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CASE 1

Joint venture board What should he do?

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Discussion
The case raises some important issues about the governance of joint venture companies:
the structure of a joint venture

board;

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Discussion
the need to differentiate issues for the joint venture board and those of the shareholders; Importance of cross-cultural sensitivity when facing corporate governance conflicts.
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1. Board Structure

In a 50/50 joint venture, with an equal number of directors from each partner, there is always the potential for deadlock.
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no independent directors ,

1. structure

the MD comes from one of the partner companies (as is frequently the case, certainly in the early years of many ventures) the potential for conflicts of interest arise.
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Structure solution
Adopt Independent directors. the joint venture head not to be a member of the joint venture board, but rather to attend meetings in a non-voting capacity. That way the joint venture head can genuinely represent the interests of the joint venture company without facing any conflict of interests.
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2. Legal right
The revision of the joint venture agreement could not properly be resolved at the level of the joint venture board. needs to be discussed at the level of the shareholders. Chinese perception that business relationships need to be based on trust and personal, rather than contractual, relationships.
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solution
They should call for a meeting of the shareholders if the joint venture agreement is to be re-considered.
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3. cross-cultural issues
Wolff, is acting in what he sees as the best interests of the Litchfield group. But he seems totally insensitive to the Chinese concern not to lose face.

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Sensitivity where venture partners come from different cultures is vital.

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