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Governance in Practice by Duyen-Tho Nguyen (Part A. Corporate Governance…
Governance in Practice
by Duyen-Tho Nguyen
Part A. Corporate Governance Success Factors
1. Mitigating the risk of financial failure
Common cause of corporate failure
Poor strategic decisions
Greed and the desire for power
Overexpansion and ill-judged acquisitions
Dominant CEOs.
Failure of internal controls.
Ineffective boards.
GFC was a result of:
Remuneration:
2 major issues
remuneration linked to excessive risk-taking; short-term performance;
total remuneration amount (residual loss agency cost)
Wilful Blindness
situations where individuals seek to avoid their legal liability by deliberately putting themselves in a position where they are unaware of facts
Poor risk management
a lack of expertise of some boards of directors in understanding and effectively managing complex financial instruments
Board practice
Appointment of Directors
Capable directors, properly appropriate are vital
A person currently disqualified from managing a corporation cant be a director
appointment is strongly influenced by the board and nomination committee
Election of directors
Staggered:
preservation of memory and consistent of decision making; a 3-year cycle: 1/3 of directors are required to resign and can be re-elected.
Destaggering:
placing all directors up for election each year
Performance evaluation
ASX principles suggest periodic review and disclose if that review has been done
Departure
resign from the position, not stand for re-election; shareholder should know the reason of any resignation
Removal:
of a director can only be done by shareholder.
3 way (p.229) & 2-strikes rule
Disqualification
Defined commercially unacceptable behaviour/ legally wrongdoing
responsibility for certain civil wrongs
financial market misconduct
responsibility for multiple insolvencies
significant dishonest actions and corporate crimes
civil and criminal wrongs in relation to anti-competitive conduct
1. Disqualification may be ‘automatic’:
no need a formal declaration; period of 5 years;
is declared bankrupt, criminal offences breaching laws CG
2. An order of the court:
20 years; civil wrong, lead to civil penalties
Ethics of disqualification:
: aims to act as a deterrent to would-be offenders and helps protect the public from exposure to persons who may reoffend
2. Diversity — fairness and performance
Diversity
unlawful to discriminate on certain prohibited grounds
Adopting diversity
create an environment to embrace diversity as a culture
Executive remuneration and performance
whether payments effectively achieve future performance?
Non-Executive Directors
Executive Directors and Other Senior Executives
place more independence on remuneration committee
Performance-Based Remuneration
= Fixed + At Risk; to motivate future performance; may include clawback terms
Disclosure, Transparency and Remuneration
a remuneration report to be included within the annual directors’ report to shareholder; Nobody can set income for himself.
Compliance with the corporate Act
directors must comply with the Act;
compliance with accounting standards; provide notes if not compliance with the standards; not engage earning management (window dressing).
Auditing the financial statement
Board must understand independent audit roles and audit regulation.
3. Improving corporate governance
Risk management
maximise opportunities and minimize losses;
Auditors must obtain an understanding of the internal control; and report material weaknesses to the board on a timely basis
Independence of the Chair
Chair and CEO should not be exercised by one person
Continuance of CG
it is a constantly evolving process rather than something that has already been finalised
4. Governance issues in the non-corporate sector
Government body
experienced fraud
Charity and not for profit
Part B: Operational Obligations and Oversight
5. The legal system
Civil law countries:
detailed legislative prescriptions
Common law countries
many laws originated through the court system
Most important laws:
employees rights
contracts
negligence
property
ownership rights
arrangement of these rights when a company is insolvent
The economy & legal sys:
laws to protect fair competition, open financial markets, consumer rights
Laws Leading to Criminal Penalties
A criminal:
a person found guilty after being charged with a crime; beyond reasonable doubt; criminal intent;
- Criminal sanctions
: fines and/or jail sentences
Proof, Penalties and Redress — Criminal and Civil
Penalties: offenders pay to goverment fund; aims to punish the wrongdoer; called fine in criminal cases;
Redress: offenders pay to victim
Laws with Civil Outcomes and Penalties
a civil case: 2 parties argue; the stronger will win
proof based on the
balance of probabilities
compensation/ redress to the victim;
civil wrongdoers are punished -> to pay pecuniary penalty
Legal compliance and governance
avoid breaking laws -> save time and money
enhance its biz operations by focusing on positive business purpose
6. Obligations to employees
Occupational health and safety
Fair pay and working conditions:
minimum wages and conditions
Family and leave entitlements
7. Protecting the goods and services market
to suppress or deter anti-competitive practices; -> efficient and competitive
Workable competition
Sufficient buyers and suppliers
No dominant traders; new trader can enter the market without artificial barriers
No price conclusion
Customers can freely choose suppliers
Nobody has political/ legal advantage
Competition and stakeholders
customers and the economy get hurts by lack of competition.
Regulating anti-competitive behavior
Abuse of Market Power:
criminal; big players are prohibited to use power to damage competition; prevent entrance of new players; prevent a person from engaging competitive conduct
mergers and acquisitions:
criminal; reduce numbers of players
agreements between competitors (cartel conduct):
criminal and civil; a contract, an arrangement, understanding between competitors
Output restriction:
reduce output to cause shortage
Allocating customers, suppliers or territories
to create artificial monopoly
Bid-rigging:
all competitor submit same price and allow 1 competitor win
Price fixing:
collude to offer same price
unilateral restrictions on supply (exclusive dealing)
(civil only)**
A single corporation decides without consent of other competitors to deal only with certain customers or geographic regions.
3 characteristics:
Not cartel conduct
On the balance of probabilities, a substantial lessening of competition in a market
Third-line forcing: a supplier forces a customers to buy another item from a third-party
Resale price maintenance
(civil/ criminal)
- vertical power; supplier stipulates that the goods it provides must only be resold at or above a certain minimum price.
2 questions:
1.The supplier specifies a minimum price? 2.The supplier takes action or attempt to enforce minimum price
Exception:
loss leading - a loss-leader is the product sold below cost price to entice resellers/ customers into a selling outlet.
A supplier is permitted to withhold supply in oder to prevent the reseller from loss leading with the supplier's products damaging the suppliers. Except for genuine sales (short-term discount, end of year, etc. )
Customers and consumers
consumers are protected even no direct contractual relationship.
Caveat emptor to consumer protection:
Let the buyers aware
Regulation and consumer protections
properly informing and not misleading consumers, goods are safe and meet standards
Courts look beyond the written contracts to protect customers
Test for unconscionable conducts in the case of ordinary domestic agreements:
Relative strength of bargaining between 2 parties
Undue influence or pressure exerted on the consumers
Misleading conduct and representations:
not engage conduct that is misleading or deceptive or likely to mislead or deceive.
Puffery:
extreme exaggeration is not misleading if do not relate to objective facts
Part C: Protecting Financial Markets and Values in Corporation
8. Role of markets
a place to trade corporation ownership rights;
complex and heavily regulated.
sensitives to information
two governing theories: efficiency of markets and investor confidence.
9. Protecting financial markets
Insider trading
must not use or disclose inside information gained from the position
Market manipulation
Churning
placing buy/ sell orders to stimulate the market.
Pools
organized groups of investors agree to buy shares and sell before the market collapse, appoint a single manager to trade as instructed on behalf of the entire pool.
Runs
a group of market participants who work together with intention to create market effects by either buying or disseminating rumors to attract new buyers.
Misuse of Fundraising Documents
directors overstates the benefits of the investment outlined in the prospectus.
Rogue trading
an authorized employee engage in an unauthorized trading for personal gains or excessive pride.
Ponzi schemes
earlier investors' returns are capital contribution of later investors
Bribery:
corporations based in UK break laws if giving bribes even outside UK.
Phoenix companies
deliberate misuse of legal protections related to limited liability. Directors/ major shareholders of a failed corporation establish a new corporation. Disqualified directors if being involved in multiple solvency.
10. Representation
minor shareholders are outside; Corporation Act provide safeguards for minority in the case of wrongdoing, inaction, abuse of power;
Roles of institutionals shareholders