Professional Documents
Culture Documents
Chapter II
Chapter Objectives:
familiar
with
corporate
governance
reporting
and
its
Key Terms
Corporate governance
Effectiveness
Corporate governance rating
Oversight board
External governance
Mechanisms
Integrated aspect
Internal governance
Transparency
Mechanisms
Oversight
Stakeholder aspect
Remuneration
Shareholder
Shareholder aspect
Stakeholder
Definition of Corporate
Governance
The process affected by a set of legislative,
regulatory, legal, market mechanisms, listing
standards, best practices, and efforts of all
corporate governance participants, including the
companys
directors,
officers,
auditors,
legal
counsel, and financial advisors, which creates a
system of checks and balances with the goal of
creating and enhancing enduring and sustainable
shareholder value, while protecting the interests of
other stakeholders.
Aspects of Corporate
Governance
In the post-SOX era, Corporate Governance further evolved to the
integrated aspects of meeting both compliance requirements and
promoting a strategic business imperative. There are three
aspects: shareholder aspect, stakeholder aspect, and an
integrated aspect.
Shareholder Aspect
This aspect is based on the premise that shareholders provide
capital to the corporations that exists for their benefit.
Stakeholder Aspect
Stakeholders are now becoming more engaged in a company
performance on a variety of economic, governance, ethical,
social and environment issues.
Integrated Aspect
Modern corporate governance emphasizes BOTH financial
aspects of increasing shareholders value AND an integrated
approach that considers the rights and interests of all
stakeholders.
Corporate Governance
Structure
What are the other principles corporate governance structure should be developed on?
- Value-adding philosophy
- Ethical conduct
- Accountability
- Shareholder democracy and fairness
- Integrity of the financial reporting
- Transparency
- Independence
Corporate Governance
Functions
OVERSIGHT FUNCTION. The board of directors should provide strategic advice
to management and oversee managerial performance, yet avoid micromanaging.
MANAGERIAL FUNCTION. The effectiveness of this function depends on the
alignment of managements interests with those of shareholders.
COMPLIANCE FUNCTION. The set of laws, regulations, rules, standards, and
best practices developed by state and federal legislators, regulators, standardsetting bodies, and professional organizations to create a compliance framework
for public companies in which to operate and achieve their goals.
INTERNAL AUDIT FUNCTION. Assurance and consulting services to the
company in the areas of operational efficiency, risk management, internal
controls, financial reporting, and governance processes.
LEGAL AND FINANCIAL ADVISORY FUNDTIONS. Legal advice and assists the
company, its directors, officers, and employees in complying with applicable laws
and other legal obligations and fiduciary duties.
EXTERNAL AUDIT FUNCTION. External auditors lend credibility to the
companys financial reports and thus add value to its corporate governance
through their integrated audit of both internal control over financial reporting and
financial statements.
MONITORING FUNCTION. Shareholders, particularly institutional shareholders,
empowered to elect and, if warranted, remove directors.
Listing Standards
Best Practices
SARBANES-OXLEY ACT Of
2002
Corporate Governance
Rating
National and international organizations, including
Institutional Shareholder Services (ISS), the Corporate
Library, Standard & Poors, Moodys Investment Service, Core
Ratings, Governance Metrics International (GMI), and Glass
Lewis & Co., have developed and published variations of
corporate governance ratings that are often used by
shareholders in assessing their stock returns and
bondholders in determining the costs of lending.
Corporate Governance
Reporting
Corporate Governance Reporting (CGR) entails assessing the
quality and effectiveness of the organizations corporate
governance and reporting findings to interested stakeholders,
including the board of directors, executives, auditors, regulatory
agencies, and shareholders.
Corporate Governance Reporting:
(1) Disclose all relevant information about the effectiveness of the
companys corporate governance
(2) Focus on the companys sustainability performance
(3) Provide transparent information about the companys
performance and its impacts on all stakeholders
(4) Assess the companys responsiveness to the needs of its
stakeholders.
Global Convergence in
Corporate Governance
There are no globally accepted corporate governance reforms and
best practices. Differences are mainly driven by the countrys
statutes, corporate structures, and culture. Country statutes could
pose challenges for regulators in adopting corporate governance
reforms and financial reporting disclosures for home companies, as
well as multinational corporations. The United States and the UK,
for example, operate under common law, which tends to give more
antidirector privileges to minority shareholders compared to
countries under code law (e.g., Germany), in the sense that
regulators allow too many or too few rights to minority
shareholders.
Conclusion
Corporate governance participants must structure the process
to ensure the goals of both shareholder value creation and
stakeholder value protection for public companies.
The corporate governance structure is shaped by internal and
external governance mechanisms, as well as policy interventions
through regulations.
Corporate governance mechanisms are viewed as a nexus of
contracts that is designed to align the interests of management
with those of the shareholders.
The effectiveness of both internal and external corporate
governance mechanisms depends on the costbenefit trade-offs
among these mechanisms and is related to their availability, the
extent to which they are being used, whether their marginal
benefits exceed their marginal costs, and the companys corporate
governance structure.
Conclusion
There are three aspects of corporate governance: the shareholder
aspect, the stakeholder aspect, and the integrated aspect.
Corporate governance structure should be based on the principles of
value-adding philosophy, ethical conduct, accountability, shareholder
democracy and fairness, integrity of financial reporting, transparency,
and independence.