1. ACC704 TOPIC 8: CORPORATE GOVERNANCE REFORM IN THE UK AND US

2. Factors Influencing Corporate Governance Reform
RECAP
COMPANY
SHAREHOLDERS
AGENT

3. Factors Influencing Corporate Governance Reform
The student shall be able to compare and contrast between the approaches to corporate governance reforms in the UK and US is generally acknowledged as a world leader in corporate governance reform
Spectacular cases of corporate failure and scandals in late 1980s and early 1990s (e.g. Maxwell case 1992) created an incentive for corporate governance reform in the UK

4. The Maxwell Affair 1991
Empire founded mainly on two publicly quoted companies – Maxwell Communication Corporation and Mirror Group Companies
Maxwell stole 727 million pounds from pension funds of two listed companies and company assets

5. Issues of Corporate Governance
Lack of segregation of positions of power – Robert Maxwell was both Chief Executive and Chairman of Maxwell Communication Corporation from 1981 to 1991
Non-executive directors were reputable people that helped to give the company an aura of respectability – (Like govt. officials and King’s Mistress in South Sea Company 1720)
Issue central to corporate governance was that of ethics.
No amount of corporate governance checks, balances, codes of practice or even regulation can change a person’s character
In 1969 Department of Trade and Industry found that in their opinion, Maxwell was not a person who could be relied on to exercise proper stewardship of a publicly quoted company
Nevertheless Maxwell rose from the ashes and went on to set up another business concern

6. Approach to Reform
Robert Maxwell, aka the Bouncing Czech, demonstrated that you can have a lot of fun in publishing ... especially if you are using other people's money and are not inhibited by ethics or concern about legality. Leopards do not change their spots
Ian Robert Maxwell was born in Czechoslovakia in 1923 as Jan Ludwik Hoch into a poor Yiddish-speaking Jewish family in the small town of Slatinské Doly (now Solotvino, Ukraine) in the easternmost province of pre-World War II Czechoslovakia. He moved to the UK in 1940 and fought with the British during the War, changing his name at that time.
Maxwell was elected to the UK Parliament in 1964 as a Labour member.
In 1969 he was severely censured by the English High Court as unfit to run a public company after a failed attempt to sell Pergamon to US finance group Leasco.
In 1973 a report by the UK Department of Trade & Industry declared that he was "not a person who can be relied on to exercise proper stewardship of a publicly quoted company".
Bizarrely, he was able to borrow enough money to repurchase Pergamon in 1974 and British Printing Corporation (BPC) (1980) and Mirror Group Newspapers (MGN) (1984).

7. Mechanisms of Corporate Governance Considered
Aligning managers’ interests with shareholders
Role of institutional investors that held about 70% of shares in listed companies.
Fiduciary responsibility of directors imposed by company law (Fiduciary: Of or relating to a holding of something in trust for another).
Company’s Act regulations on directors’ transactions
Stock Exchange “model code” on directors’ share dealings
“City Code” on takeovers and mergers
Voluntary corporate governance codes of practice

8. Mechanisms of Corporate Governance Considered
What to do?
Provide a series of corporate governance policy documents and codes of best practice in the UK.
How to do it?
Create committees to operate against business ethics environment involving consultations with important stakeholders.

9. Cadbury Report 1992
This report was compiled on the basic assumption that the existing implicit system of corporate governance in the UK was sound. Hence many of the recommendations merely made explicit a good implicit system.
In response to type of abuse of power in the Maxwell case
Cadbury Report and Cadbury Code – covering three broad areas of board of directors, auditing and shareholders
Stock Exchange rules included “statement of compliance” with the Cadbury Code
All listed companies had to state in their annual reports whether or not they had complied with Stock Exchange Code in all respects. “Comply or explain”.

10. CORPORATE AGENCY GOVERNANCE THEORY
Cadbury Report 1992
CORPORATE AGENCY
GOVERNANCE THEORY
SHAREHOLDERS
COMAPNY
AGENT

11. Greenbury Report 1995
In response to public and shareholder concerns about directors’ remuneration.
“Fat cats” – Directors who orchestrated huge remuneration packages for themselves.
Did not recommend reduction in remuneration
Provide a means of establishing a balance between directors’ salary and their performance.

12. Hampel Report 1998
Produced a Combined Code covering both corporate governance and directors’ remuneration.
Represented interest of company directors more than those of shareholders.
Pension fund trustees were especially targeted. Told to adopt a more long-term approach to institutional investment.

13. Turnbull Report 1999
Was established specifically to address the issue of internal control
Formalized an explicit framework for internal control in companies   
Higgs Report 2003
Was concerned mainly with the role and effectiveness of non-executive directors
Tyson Report 2003
To examine ways in which companies could broaden the gene pool of board membership recommended by Higgs Report
Found that diversity in backgrounds, skills and experience of non-executive directors enhanced board effectiveness

14. Was concerned with the role and responsibilities of audit committees
Smith Report 2003
Was concerned with the role and responsibilities of audit committees
Relationship between external auditor and companies they audit
Role and responsibilities of audit committees

15. Codes of Best Practice
At least half the board of directors should comprise independent non-executive directors
Company’s CEO should not be the chairman as well except in exceptional circumstances
Board’s chairman should be independent at appointment
Boards should undertake formal and rigorous evaluation of their own performance
Institutional investors should avoid box ticking when assessing investee companies’ corporate governance
Companies should adopt rigorous, formal and transparent procedures when recruiting new directors
Non-executive directors should only be reappointed after six years service, following “a particularly rigorous review”.

16. Role of Boards in Corporate Governance
Unitary and two-tier board structures
Unitary boards include both executive and non-executive directors
Two-tier boards – Management board that includes only executive directors and Supervisory board that includes only non-executive directors
Higgs Report recommended that non-executive directors needed to have integrity and high ethical standards, sound judgement, ability and willingness to challenge and probe on issues as well as strong inter personal skills
Ideal – no crooks, no cronies, no cowards
Hampel and Cadbury Report stipulated that non-executive directors should comprise not less than one third of the board

17. Role of Boards in Corporate Governance
Splitting the role of chairman and chief executive
There should be a balance of power between board members such that no individual could gain “unfettered” control of the decision-making process
Splitting the role of chairman and chief executive can reduce agency problems
Could be wishful thinking

18. Role of Institutional Investors in Corporate Governance
Types of Institutional Investors
In UK – four main types: Pension funds, Life insurance companies, Unit trusts and Investment trusts
Institutional investor activism can align management interests with those of shareholder groups.
Example: In Fiji we have the Fiji National Provident Fund and Unit Trust of Fiji, FHL, BSP.

19. Role of Institutional Investors in Corporate Governance
Transformation of institutional ownership
 In UK individual ownership of shares declined from 54% in 1963 to less than 18% in 1993
In UK by 1993 institutional ownership had risen to 62% of ordinary shares.
Institutional ownership surpassed 50% in 1992
Fiji – similar FNPF (GPH)

20. Role of Institutional Investors in Corporate Governance
Institutional investor activism
Growth of shareholder activism which has accompanied the growth of institutional investment in the UK has affected corporate governance significantly.
Ownership of shares can no longer be viewed as a passive activity – buying and selling shares as if they were gamblers
They are no longer traders but responsible owners

21. ACC704
End of Topic 8