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Chapter 03 - Corporate Governance - Coggle Diagram
Chapter 03 - Corporate Governance
I. What is corporate governance?
Definition
Corporate Governance: A set of relationship between a company directors, shareholders, and other stakeholders (OECD 2004)
Corporate Governance: The system which organization is directed and controlled (Cadbury, 1992)
Qualities of best decision:
Integrity
Fairness
Judgement
Independence
Skepticism
Qualities ensure honest and transparent disclosures:
Transparency
Probity
Responsibility
Accountability
Innovation
Regulatory guidance
OECD - 6 broads areas in its revised principles:
Ensure effective corporate governance
Right and equitable judgement for shareholders and key ownership functions
Institutional investors, stock market, and other intermediaries
Role of stakeholders in corporate governance
Disclosure and transparency
The responsibilities of the board
International Corporate Governance Networks (ICGN) Principles: * Board role and responsibilities
Leadership and independence
Composition and appointment
Corporate culture
Risk oversight
Remuneration
Reporting and audit
Shareholder rights
II. Application of Corporate Governance around the world
Principles-based approach:
** Features: Work on a comply or explain basis
** Benefits:
Greater flexibility, potential cost savings
Applied across legal jurisdictions
Forces both boards and shareholders think about consequences of governance arrangements
** Disadvantages:
So broad
Inconsistency
Incorrectly view as voluntary
** Where to find: governing bodies of stock market have prime roles
** Examples: UK Corporate Governance Codes
Rules-based approach:
Features: Organizations are required to comply to detailed and rigid codes
Benefits:
Easier compliance as no ambiguity
Consistent minimum standards
** Disadvantages:
No deviation even illogical situation
Difficult to enforce if no explicit rules
** Where to find: Jurisdictions lay great emphasis of obeying the letter of the law
** Examples: USA Sarbannes - Oxley Act 2002
** Board responsibility:
Monitoring the CEO
Oversee strategy
Monitor risks, control systems, and governance
Monitor human capital aspects
Managing potential conflict of interest
Ensure effective communication of strategic plans
** Membership:
Size
Inside/Outside mix (Between executive and NEDs)
Diversity
** Area that CPD covers:
Strategic planning
Financial mangement
HR issues
Risk management
Legal and regulatory issues
Audit practice and procedures
II. Application of Corporate Governance around the world (cont.)
Board leadership and board committee:
Chair: run the board of directors, usually non-executives (leadership of the board)
CEO: manage the company through its executive directors (leadership of the business)
Unitary board: Single board of directors
Multi-tier board: can have 2 to 3 tiers
Board support mechanism:
Audit committee
Remuneration committee
Risk committee
Nominations committee
Role of NEDs: Strategy / People (remuneration) / Risk/ Scrutiny
Director's remuneration: Sufficient to attract, retain and motivate them.
Fixed and variable elements
Immediate and deferred elements
Long-term and short-term elements
Cash and non-cash elements
III. Impact of ownership on corporate governance
Insider system: family-owned companies (small number of dominant shareholders)
Outsider system: stock market company
Major institutional investor in the UK:
Pension fund
Insurance company
Investment and unit trusts
Venture capital organizations
Types of organizations:
Private/listed/quoted/floated/public company (1st sector)
Public sector / state controlled organizations (national, sub-national, supranational level) (2nd sector)
Charities and NGOs (3rd sector)