Corporate Governance Week 10 BUSN9229D Saib Dianati

Learning Objectives >To understand what is meant by corporate governance >To understand the main principles of corporate governance >To understand the role of the Board of Directors in corporate governance. >Theoretical explanation for corporate governance 2

What is Corporate Governance about? 3

Corporate Governance Framework A system of corporate governance controls is implemented on behalf of shareholders to discourage managers from pursuing objectives that fail to maximise shareholder wealth 4

The parties to corporate governance >governing body (e.g. Australian Securities and Investment Commission, Australian Stock Exchange, Corporate Governance Council) >CEO >Board of directors >Management >Shareholders >Stakeholders (customers, suppliers, employees, lenders and the community at large) 5

Corporate Governance >‘ the framework of rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. It encompasses the mechanisms by which companies, and those in control are held to account. Corporate governance influences how the objectives of the company are set and achieved, how risk is monitored and assessed, how performance is optimised. >Good corporate governance structures encourage companies to create value and provide accountability and control systems commensurate with the risks involved’ (ASX CGC 2007, p.3) 6

Good Corporate Governance >Monitor and assess risk >Optimise performance >Create value >Provide accountability (ASX CGC 2007) 7

The ASX Principles of Corporate Governance 1.Lay solid foundations for management and oversight. 2.Structure the board to add value 3.Promote Ethical and Responsible Decision making 4.Safeguard Integrity in Financial Reporting 5.Make timely and balanced disclosure 6.Respect the rights of shareholders 7.Recognise and manage risk 8.Remunerate fairly and responsibly 8

1. Lay solid foundations for management and oversight. Organisations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. Boards should provide strategic guidance and oversee management. The division of roles and responsibilities between the board and management should provide a bal­ance of authority so that absolute power does not rest with any single individual. 9

2. Structure the board to add value The board needs a range of skills and understanding, to be of sufficient size and have an appropriate level of commitment to fulfil its responsibilities and duties. The board must be able to deal with various business issues and have the ability to review and challenge management performance. The board should consist mostly of independent directors, have an independent chairperson, and the key roles such as chairperson and chief executive officer should not be shared. 10

3. Promote Ethical and Responsible Decision making Organisations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. Organisations should also publish their position on members of the board and employees trading in com­pany shares and associated products. 11

4. Safeguard Integrity in Financial Reporting Organisations should implement procedures to independently verify and safeguard the integrity of the company's financial reporting. This can be achieved through the formation of an audit committee and the use of skilled, independent external auditors. 12

5. Make timely and balanced disclosure Organisations should develop written policies and procedures that promote the timely and balanced disclosure of all material matters that concern them. These policies and procedures should ensure that all investors have access to timely information and that the organisation's announcements are clear, factual and balanced. 13

6. Respect the rights of shareholders Organisations should respect the rights of shareholders and help shareholders to exercise those rights. Organisations can help shareholders exercise their rights by effectively communicating information that is understandable and accessible and encouraging shareholders to participate in general meetings. 14

7. Recognise and manage risk Organisations should establish a system of risk oversight and management and internal control. Organisations should be continually identifying, assessing, moni­toring and managing risk, and informing investors of changes to risk. 15

8. Remunerate fairly and responsibly Organisations should ensure that remuneration is sufficient and reasonable and that the relationship between remuneration and performance is clear. Organisa­tions should ensure that they are adequately remunerating directors and employees to attract those who have the necessary skills to enhance company performance. 16

The parties to corporate governance >governing body (e.g. Australian Securities and Investment Commission, Australian Stock Exchange, Corporate Governance Council) >CEO >Board of directors >Management >Shareholders >Stakeholders (customers, suppliers, employees, lenders and the community at large) 17

Theoretical models of corporate governance >Agency Theory : Managers of companies are wealth maximisers and will consider their own welfare over and above those of shareholders 3 Agency Problems >Maximise wealth at the expense of shareholders >Focus on short term performance at the expense of long term growth >Difference between managers’ and shareholders’ attitudes to risk >Corporate Governance help overcome these 3 agency problems 18

Theoretical models of corporate governance >Stakeholder Theory : shareholders are only one of many potential stakeholder groups – all stakeholders are impacted upon and also impact on the corporation >Corporate governance is one of the key strategies to help an organisation understand, respond to and relate to different stakeholder relationships. 19

Theoretical models of corporate governance >Stewardship Theory: rejects the view of Agency Theory – decisions are not only driven by economic considerations >Managers wishes to do a good job, be a good steward of corporation’s resources >Shareholders and their returns are best served by empowering management >Corporate Governance structure - more power to management 20

Theoretical models of corporate governance >Resource Dependency Theory : firm’s level of success depends on its ability to control external resources >Corporate governance: The board and its individual member’s skills and contacts are essential 21

Theoretical models of corporate governance >Which Theory? >Agency Theory – Dominant one >All these theories play a role in determining what should be appropriate corporate governance structure 22

Board of Directors >Major players in Corporate Governance System >Formulate the organisation's strategy, develop policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organisation to its owners and other stakeholders. 23

Why companies need to have a board of directors >The board of directors is the ultimate decision making body of an organisation > It is responsible for major investment, financial and operation policies and strategic directions of the company. > Provides important supervisory role of company executive management > Central cog in an organisation’s corporate governance strategies and practices > Sets the corporate governance tone of the organisation. 24

Corporate Governance Mechanisms >Board Structure: Independent, Female directors, Diversity, CEO- Chairperson Duality >Board Size (larger/smaller) >Board committees (Remuneration committees, Audit committees, nomination committees)

Is it working? >Despite increasingly stringent legislation, excessive top management compensation has continued unabated in the last few years. >CFO pay varies widely, from less than $600,000 to more than $60 million. 26

Ethical Corporate Culture >shared set of norms, values, and practices about appropriate behaviour in the workplace >values of senior management and the benefits of setting an ethical tone >develop and enforce a written code of corporate conduct >good ethics is good for business and and may lead to good business 27

Corporate Codes >an authoritative statement of values and principles designed to set a minimum standard of acceptable behaviour and guide organisational members in resolving ethical conflicts. 28

Business leaders must walk the talk >Employees learn acceptable behaviour through the subtle reading of signals demonstrated by the actions and reactions of senior management >stems from the firm's values – see slide 29 for examples of values 29