4. History of Corporate Governance by M.H.M.Faizer

5. The two dimensions need to be in balance !
ENTERPRISE
GOVERNANCE
Dimensions
Dimensions
The two dimensions need to balance !
Dimentions
(Conformance)
(Performance)
CORPORATE
GOVERNANCE
BUSINESS
GOVERNANCE
(Conformance)
(Performance)
The two dimensions need to be in balance !

6. Enterprise Governance
Defined as the set of responsibilities & practices exercised by the board & executive management with the goal of providing strategic decision, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that organizations resources are used responsibly.

7. Corporate governance & Performance governance
CG covers issues such as board structures & roles, internal controls & executive remuneration. The performance dimension focuses on helping the board to make strategic decisions; understand its appetite for risk and its key drivers of performance.

8. Corporate Governance is necessary but not sufficient for success
Corporate Governance is necessary but not sufficient for success. Bad governance can ruin a company but cannot on its own ensure success hence the need for enterprise governance.

9. Treadway & COSO (USA)
Issued a report on fraudulent financial reporting in 1987 which confirmed the role & status of Audit committees (a listing requirement) with a majority of non executive directors
Frame work for internal controls

10. Cadbury, Greenbury & Hampel (UK) 1980/90’S
Integrity – honest, balanced and complete financial reporting
Accountability – directives to set up by FRC, the stock exchange & accountancy profession
The code was based on three principles
Openness – subject to commercial confidentiality
Integrity – honest,balanced and complete financial reporting
Accountability- directors to provide quality information & shareholders to exercise their powers.

11. Cadbury (contd)
Report on financial reporting & accountability of corporate governance
Responsibility of Executive & Non Executive directors
Case for Audit committees
Principal responsibilities of Executive & Non Executive Directors
Links between shareholders, board & auditors

12. Greenbury (Jan 1995)
Initiative of CBI (Confederation of British industry)
Emphasis on determining directors pay
Role of Non Executive Directors

13. Hampel (Nov.1995) Initiative of FRC, Stock Exchange, the CBI & CCAB
Review Cadbury & propose amendments
Review greenbury & propose
amendments
Review role of directors
Address the roles of shareholders & auditors in the CG
The committee produced a “ Combined Code”

14. Combined Code Directors Directors remuneration Accountability & Audit
Relations with shareholders

15. Directors Balance of Executive & Non Executive Directors
Clear division of responsibilities between Chairman & CEO
Appointments be formal, rigorous & transparent
The Board evaluate its own performance on an annual basis
Re- election at regular intervals

16. Directors’ Remuneration
Remuneration necessary to recruit & retain directors
Significant portion of Executive Directors’ pay should be performance related
Policy on remuneration to be clear & transparent
No director should be involved in determining his/her remuneration

17. Accountability & Audit
Board is responsible for presenting a balanced and understandable assessment of the company’s financial position & prospects
Board is responsible to maintain a sound system of internal controls to safeguard company’s assets & S/H investments
Financial reporting
Relationship with external auditors

18. Benefits of Corporate Governance
Reduces risk – it provides a mechanism to review risk. It helps to reduce the risk of fraud
Stimulates performance – it institutes clear accountability & effective links between performance & rewards.
Improves access to capital markets- corporate governance is seen as protecting shareholders rights.
Enhances the marketability of goods & services – it creates confidence among the shareholders, customers & suppliers, etc…
Improves leadership – appointments of NED’S
- wider pool of knowledge
Demonstrating transparency & social accountability

19. Corporate governance in South Asia

20. Bangladesh Market Capitalization USD 3.8 Billion (6.8% of GDP )
277 Securities listed in DSE
198 Securities listed in CSE
49 Banks & 28 Non Banking Institutions
44 State owned enterprises
(60 Privatized )

21. Bangladesh contd….. Awareness was low (2002) but now…..
Legal framework : company’s Act 1994
SEC Act 1993

22. Corporate Governance Initiatives
Bangladesh Bank directives
National Taskforce on corporate governance
Code of corporate governance
SEC guidelines
Role of World Bank & Asian Development Bank
In 2002, Bangladesh Enterprise Institute examined the current state of corporate governance & practices in South Asia
(OECD Principles of Corporate governance as benchmark )

23. India
Securities scam involving large no of banks leading stock market crash in 1992
Initiative from confederation of Indian industry (1998) (voluntary code – only 20% of companies followed.
Therefore intervention by the regulators Eg; securities & exchange board & Ministry of company affairs
15,000 listed companies
23 registered stock exchanges but only two matters
Bombay stock exchange & National stock exchange
SEBI Corporate governance guidelines (1999)
(Substantial aspects of SEBI Code are mandatory)

24. Sri Lanka
Numerous company failures specially finance companies in late 1980’s & 1990’s
Taskforce set up in 1992 by ICA followed by a committee in 1996
Code of best practice on CG – 1997 by ICA
Setting up of the SL Accounting & Auditing Standards (ICL) Act No 15 of 1995
SEC – to develop standards of financial reporting

25. Sri Lanka Contd….
1997 – Initiated by Institute of Chartered Accountants together with
Colombo Stock Exchange
Securities Exchange Commission
Ceylon Chamber of Commerce
Institute of Directors of Sri Lanka
( voluntary best practice code)
Listed companies, unit trusts, fund management companies, finance companies, Banks, insurance companies were expected to adopt the code.
( Primarily based on Cadbury Report)

26. Sri Lanka Contd… Areas Covered Effectiveness of the board The Chairman
Non – Executive Directors
Professional Advice
Directors’ Training
Directors Responsibilities for Financial Statements
Compliance Report
Internal Controls
Committee structure for Board

27. Sri Lanka Contd…. Code of best practice on Audit Committees (2002)
Initiated by ICL
A separate code covering Audit committees was introduced
Based on the combined code (UK)

28. Sri Lanka Contd… Areas Covered Effectiveness of the board The Chairman
Non – Executive Directors
Professional Advice
Directors’ Training
Directors Responsibilities for Financial Statements
Compliance Report
Internal Controls
Committee structure for Board

29. Sri Lanka Contd…. Code of best practice on Audit Committees (2002)
Initiated by ICL
A separate code covering Audit committees was introduced
Based on the combined code (UK)

30. SL Contd… Revision of Corporate Governance Code 1997 In 2003
Applicability to all companies under companies Act
Functions of the board – revisited
Disclosure of major transactions
Introduced performance evaluation

31. Sri Lanka contd Guidelines for listed companies
(Audit or Audit Committees)
In 2004
Deals mostly with external Auditor related issues
(Qualification & appointment, power, Remuneration, Rotations, conflict of interest).
Audit committees, Financial reporting requirements

32. Further Revision (code of best practice)
In 2006
To include latest developments of the combined code (UK) & NYSE listed co. manual, Singapore, Malaysia, India etc..
Specific new inclusions:
Code of ethics for directors & senior managers
Specific board related Disclosures
Audit committee aspects are strengthened
Director Independence criteria is specified

33. Major Corporate Collapses
UK : The Maxwell publishing group
BCCI
Marconi
USA : Enron
World Com
Tyco
Germany : Berliner Bank
Babcok
Australia : OneTel
Ansett Airlines

34. Lessons of Experience
Lesson i : Corporate Governance cannot be introduced in isolation from a range of other reforms. Nor can these reforms achieve all their objectives without CG initiatives
Lesson ii : The need to monitor the trends in different sectors of the market so as to try & avoid a “perfect storm”
Lesson iii : need for range of players to improve CG.

35. Lesson iv : a degree of “stick” may be needed with “carrots” of increased investment & performance
Lesson v : critical importance of company & contract laws & efficacy of the legal system.

36. Thank You ! mhm_faizer@yahoo.com