Corporate Governance – Principles, Policies and Practices 3e Chapter 2 Governance and management

Governance and management in which we recognise: Definitions of corporate governance The scope of corporate governance The significance of constitutions for corporate entities The difference between governance and management The performance and conformance aspects of governance Alternative board structures.

Governance and management Definitions of corporate governance Definitions vary according to the perspective of the user operational relationship stakeholder financial economics Societal.

Governance and management Defining corporate governance – operational Corporate governance is the process by which companies are directed and controlled - Cadbury Report 1992 and OECD 1999.

Governance and management Defining corporate governance – relationship The relationship among various participants in determining the direction and performance of corporations. The primary participants are the shareholders, the management and the board of directors - Monks and Minow 2001 The corporate governance structure specifies the distribution of rights and responsibilities among the different participants in the organization – such as the board, managers, shareholders and other stakeholders – and lays down the rules and procedures for decision- making - OECD 2002.

Governance and management Defining corporate governance - stakeholder Corporate governance is the process by which corporations are made responsive to the rights and wishes of stakeholders - Demb and Neubauer, 1992.

Governance and management Defining corporate governance – financial economics perspective Corporate governance deals with the way suppliers of finance assure themselves of getting a return on their investment - Shleifer and Vishny, 1997.

Governance and management Defining corporate governance - societal The whole set of legal, cultural, and institutional arrangements that determine what (public) corporations can do, who controls them. How that control is exercised, and how the risks and return from the activities they undertake are allocated Blair, 1995 Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. Cadbury, 2000

Governance and management Defining corporate governance – overall Corporate governance is the exercise of power over a corporate entities - Tom Clarke, 2004

The spheres of Corporate Governance Figure 2.1: The scope of corporate governance

Governance and Management Every corporate entity needs a constitution THE MEMBERS Shareholders in a limited company Members of the profession in a professional body Club members in a sports, arts or other private club Registered members in a trades union Members of academic bodies Voting members of other corporate entities THE CORPORATE ENTITY Limited liability company Professional organisation Sports, arts or other club Trades union University or college Other corporate entities

Governance and Management Incorporating a joint stock limited liability company Companies Registrar Memorandum - name of company - objectives - registered office - share capital - liability of shareholders limited Articles of Association - detailed rules for running the entity - Table A

Governance and Management Types of limited liability company Private companies limited by shares Private companies limited by guarantee (Private unlimited companies) Public companies offer to general public in UK title XYZ Plc prospectus needed to offer shares.

Governance and Management Other forms of incorporation Savings and loans association, building societies Co-operatives: supplier (Canada), customer (UK) State corporate entities Federal National Mortgage Association (Fannie Mae) QUANGOs Quasi-autonomous non-governmental organisation Not for profit entities e.g. Charities, sports associations, arts and cultural societies Trust law, friendly societies law, charities law etc.

Governance and Management The essence of governance Figure 2.3: The board and management

Governance and Management Management involves an organisational hierarchy

Governance and Management Governance is different from management governance management

Governance and Management Board Structure INED ED Investment Manager Co. Secretary (Compliance Officer) General

Governance and Management Management runs the business: The board ensures that the business is well run and running in the right direction.

Governance and Management Wherever management is separate from ownership or membership, organisations need governing Public listed company – board of directors Small/medium company - board of directors Subsidiary/associate/joint venture – board Company limited by guarantee University, college – council, governing body Charity, club, hospital – board, committee Quasi-governmental bodies– council, committee, board Family firm Many corporate governance ideas are universal and can be applied to any governing body (contrast organisations where management and governance are in the same hands – sole traders, small partnerships).

Governance and Management The basic board processes Outward looking Strategy formulation Accountability Supervising executive activities Policy making Inward looking Past and present focused Future focused

Governance and Management Outward looking Providing Accountability Strategy Formulation Approve and work with and through the CEO Inward Monitoring and Supervising Policy Making Future Past and present focused focused Governance and Management

Governance and Management The conformance and performance roles of the unitary board conformance performance

Governance and Management Guidelines for a board strategy seminar or workshop Careful planning, well in advance, is essential Agree a time when all directors can attend Fix a location where all directors can participate Define the objectives clearly, for example: - to explore the strategic situation - to discuss the implications - to consider alternative strategies - to determine the next steps to be taken (but not to take strategic decisions immediately) All directors must be fully informed about the objectives All directors should be supportive of the event All directors need briefing with relevant data in advance.

Governance and Management Guidelines for a board strategy seminar or workshop (continued) Do not hold the event in the board-room (the board-room culture is decision orientated) Decide who is going to run the event (this need not be the chairman) Decide whether other people should be invited to participate (senior executives to brief the directors, external experts to give briefings, experts to contribute to process) At the first session establish the ground-rules - this is not a board meeting to make decisions, but a free- ranging exchange of views and insights - strategic decisions will not be made - call for imaginative contributions however unusual - discourage negative comment ('we tried that - it won't work', 'no good for us') The output of the strategy session should be an agreed list of next actions, and who is responsible for taking them and by when.

Alternative board structures All executive board Majority executive board Majority non-executive board All non-executive board Supervisory board Two-tier board Board structures around the world Some complex structures.

The all-executive board Figure 2.9: The all-executive director board

The majority-executive board Figure 2.10: The majority executive director board

The majority non-executive board Figure 2.11: The majority non-executive director board

Directors and board architecture Board structure exercise: ED NED INED TOTAL MCM 3 8 11 BCOM 6 Excel Technology 4 1 Esprit Holding 5 2 10 Giordano 7 Percentage

Directors and board architecture Two-tier board Figure 2.13: The two-tier or supervisory board

Governance and management We have considered definitions of corporate governance the scope of corporate governance the significance of constitutions for corporate entities the difference between governance and management the performance and conformance aspects of governance alternative board structures.